[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1678]
[[Page Unknown]]
[Federal Register: January 27, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33491; File No. SR-OCC-93-10]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Related to Cash-Settled Foreign Currency Options
January 19, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 26, 1993, The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared primarily by OCC.
On December 22, 1993, OCC filed an amendment to the proposed rule
change.\2\ The Commission is publishing this notice and order to
solicit comments from interested persons and to grant accelerated
approval of the proposed rule change.
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b)(1) (1988).
\2\The amendment was necessary to: (1) correct language in OCC's
Rule 2302 to clarify that cash-settled foreign currency options that
are in-the-money by any amount will be subject to OCC's automatic
exercise procedures; (2) conform the definition of ``expiration
date'' in Article XXII, Section 1, E(3) of OCC's By-Laws with
amendments filed by the Philadelphia Stock Exchange, Inc. in File
No. SR-PHLX-93-10; and (3) make certain typographical corrections to
the original filing.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to amend OCC's By-Laws
and Rules to allow OCC to issue, clear, and settle cash-settled foreign
currency options such as have been proposed for trading by the
Philadelphia Stock Exchange, Inc (``PHLX'').\3\
---------------------------------------------------------------------------
\3\For a discussion of the PHLX proposal, refer to Securities
Exchange Act Release No. 32685 (July 7, 1993), 58 FR 41529 [File No.
SR-PHLX-93-10] (notice of filing of proposed rule change).
---------------------------------------------------------------------------
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. 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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to amend OCC's By-Laws
and Rules to accommodate cash-settled foreign currency options such as
have been proposed for trading by the PHLX. In general, these amended
By-Laws and Rules will apply the same procedures OCC currently uses to
clear and settle transactions in existing options to the clearance and
settlement of cash-settled foreign currency options. However, unlike
OCC's procedures with respect to other foreign currency options, cash-
settled foreign currency options will be settled by requiring clearing
members to pay to or receive from OCC the amount of U.S. Dollars that
reflects the difference between the spot price\4\ and the exercise
price of the underlying foreign currency.\5\ Cash-settled foreign
currency options that are in-the-money by any amount on the expiration
date will be automatically exercised. Options not automatically
exercised will expire unexercised. Clearing members will not be
permitted to submit exercise instructions with respect to cash-settled
foreign currency options.
---------------------------------------------------------------------------
\4\The term ``spot price'' with respect to an option contract on
a foreign currency means the price, in terms of U.S. dollars, quoted
by various commercial banks in the interbank foreign exchange market
for the sale of a single unit of such foreign currency for immediate
delivery, which generally means delivery within two business days
following the date on which the terms of such a sale are agreed
upon.
\5\Currently, all OCC-cleared index options are cash-settled.
The procedures proposed for exercise settlement of cash-settled
foreign currency options are similar to the procedures for exercise
settlement of index options. Pursuant to OCC Rule 1806, index
options settle by OCC either paying to or collecting from the
exercising or assigned clearing member the difference in U.S.
dollars between the exercise price of the index option and the
exercise settlement value (i.e., the value of the index as reported
by the reporting authority designated by the options market where
the option is traded).
---------------------------------------------------------------------------
Pursuant to the proposal, the definitions of ``clearing member''
and ``option contract'' in Article I of OCC's Bylaws are amended to add
references to cash-settled foreign currency options. The definition of
``exercising clearing member'' is amended to make clear that when used
with respect to an option that is subject to an automatic exercise,
including cash-settled foreign currency options, the term refers to the
clearing member in whose account an option so exercised is carried.
Article XXII is added to OCC's By-Laws to establish By-Laws
specifically applicable to cash-settled foreign currency options.\6\
Under Section 1 of Article XXII, the spot price of the underlying
foreign currency will be determined by the exchange, or an entity
designated by the exchange, on which such options are traded.\7\
Article XXII, Section 2 clarifies that holders of cash-settled foreign
currency options have the right to receive from OCC, and writers of
cash-settled foreign currency options have the obligation to pay to
OCC, the amount of United States dollars that reflects the difference
between the spot price and the exercise price of the foreign currency
underlying such options. Section 3 of Article XXII makes provisions for
adjustments in the terms (i.e., exercise price, unit of trading, etc.)
of outstanding cash-settled foreign currency options under unusual
circumstances, \8\ and Section 4 of Article XXII makes provisions for
circumstances in which the spot price is either unavailable or clearly
inaccurate.\9\ Section 3 is similar to corresponding provisions
relating to other foreign currency options, and Section 4 is similar to
provisions relating to cash-settled index options.
---------------------------------------------------------------------------
\6\Generally, the By-Laws in Articles I through XI also are
applicable to cash-settled foreign currency options. In some cases,
the By-Laws in Article XXII replace or supplement the By-Laws
contained in Articles I through XI with respect to cash-settled
foreign currency options.
\7\For a full description of how the spot price for cash-settled
foreign currency options will be determined, refer to the PHLX
proposal, supra note 3.
\8\Section 3 provides that if the country of origin of an
underlying foreign currency should (i) issue a new currency intended
to replace its then existing currency as the standard unit of the
official medium of exchange of such country or (ii) officially alter
the exchange rate or exchange characteristics of its currency with
respect to other currencies, an adjustment panel, consisting of the
Chairman of OCC and two designated representatives of each exchange
on which the affected cash-settled foreign currency options are
traded, shall determine whether to make adjustments to the exercise
price, unit of trading, number of contracts, underlying foreign
currency, or other terms of option contracts affected by such event.
The adjustment panel will consider such factors as fairness to
holders and writers of affected option contracts, the maintenance of
fair and orderly markets for such option contracts, consistency of
interpretation and practice, and efficiency of exercise settlement
procedures.
\9\Section 4 authorizes OCC to suspend settlement obligations of
exercising and assigned clearing members and/or to fix the exercise
settlement amount for exercised contracts of an affected series in
accordance with the best information available.
---------------------------------------------------------------------------
Chapter XXIII of OCC's Rules is added to establish Rules
specifically applicable to cash-settled foreign currency options.\10\
OCC Rule 2301 prohibits clearing members from depositing the underlying
foreign currency or Treasury bills as cover in lieu of margin with
respect to cash-settled foreign currency options.\11\ Rule 2302
describes the automatic exercise procedure for cash-settled foreign
currency options.\12\
---------------------------------------------------------------------------
\10\Generally, the Rules in Chapters I through XII also are
applicable to cash-settled foreign currency options. In some cases,
the Rules in Chapter XXIII replace or supplement the Rules in
Chapters I through XII with respect to cash-settled foreign currency
options.
\11\Rule 2301 replaces Rules 610 and 612 for cash-settled
foreign currency options.
\12\Rule 2302 sets forth the expiration date exercise procedures
for cash-settled foreign currency option contracts. Under Rule 2302,
a cash-settled foreign currency clearing member shall be
automatically deemed to have properly and irrevocably tendered to
OCC immediately prior to the expiration time on the expiration date
an exercise notice with respect to each cash-settled foreign
currency option contract listed in the report made available to the
clearing member pursuant to Rule 806(a), the Exercise and Assignment
Activity Report, that has an exercise price below the spot price in
the case of a call or above the spot price in the case of a put.
Rule 2302 replaces Rules 802 and 805 and supplements Rule 806 for
cash-settled foreign currency options.
---------------------------------------------------------------------------
Rule 2303 describes the assignment of automatic exercises of cash-
settled foreign currency options. Because all cash-settled foreign
currency options in a series that is in the money will be automatically
exercised, an assignment will be made to each short position in the
series. Accordingly, Rule 2303 contains no reference to OCC's Rule 803,
which describes the random assignment of exercise notices.\13\
Paragraph (b) of Rule 2303 states that OCC shall make available to each
clearing member with cash-settled foreign currency options an Exercise
and Assignment Activity Report on the business day following the
expiration date. This report will reflect the clearing member's
exercises of cash-settled foreign currency options and its assignments
of obligations relating to exercises of cash-settled foreign currency
options.
---------------------------------------------------------------------------
\13\The random assignment procedure described in Rule 803 is
built into OCC's exercise and assignment system. Because OCC will
use its exercise and assignment system to administer and generate
reports for assignments of cash-settled foreign currency options,
OCC, as an operational matter, will actually use the random
assignment procedure for assignments of automatic exercises of cash-
settled foreign currency options. However, the use of the procedure
will have no effect on writers or assigned clearing members because
all short positions will be assigned.
---------------------------------------------------------------------------
Rule 2304 states that the settlement date for exercised cash-
settled foreign currency options will be the day immediately following
the expiration date. Rule 2305 states that settlement of cash-settled
foreign currency options will occur by the payment of the exercise
settlement amounts from assigned clearing members to OCC and by the
payment of the exercise settlement amounts from OCC to exercising
clearing members. Under Rule 2305, OCC may net exercise settlement
amounts to be paid by a clearing member against exercise settlement
amounts to be paid to the clearing member to obtain a single net
settlement amount for cash-settled foreign currency option exercises
with respect to each account.\14\ This is consistent with OCC practices
respecting other foreign currency options. All exercise settlement
amounts will be paid within OCC's usual timeframes.
---------------------------------------------------------------------------
\14\Rule 2305 replaces Chapter IX of the Rules and supplements
Rules 502 and 607 for cash-settled foreign currency options.
---------------------------------------------------------------------------
Rule 2306 makes it clear that exercised cash-settled foreign
currency options to which a suspended clearing member is a party,
whether the clearing member is an exercising clearing member or an
assigned clearing member, generally will be settled in accordance with
the provisions of Rule 2305.\15\
---------------------------------------------------------------------------
\15\Rule 2306 supplements Rule 1104 and replaces Rule 1107 for
cash-settled foreign currency options.
---------------------------------------------------------------------------
OCC states that the proposed changes to its By-Laws and Rules are
consistent with the purposes and requirements of section 17A of the
Act, as amended, because they provide for the prompt and accurate
clearance and settlement of transactions in cash-settled foreign
currency options. The proposed changes also are consistent with OCC's
section 17A obligations to safeguard funds and securities in its
custody or control or for which it is responsible.
B. Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will 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
The Commission believes that the proposed rule change is consistent
with the requirements of section 17A of the Act and the rules and
regulations promulgated thereunder applicable to registered clearing
agencies. In particular, sections 17A(b)(3) (A) and (F) of the Act
require that a clearing agency be organized and that its rules be
designed to promote the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of funds and
securities within its custody or control or for which it is
responsible.\16\ Because OCC will apply rules and procedures comparable
to those that it has used successfully in the clearance and settlement
of transactions in other established options products, OCC will satisfy
its statutory obligations concerning safeguarding. At the same time,
OCC will provide clearance and settlement facilities for an innovative
product to the foreign currency market. Cash-settled foreign currency
options should provide investors with an additional means to hedge
foreign currency portfolios against short-term market risk, should
facilitate transactions in foreign currency options, and should
contribute to the maintenance of fair and orderly markets. OCC's
clearance and settlement of such options should promote their prompt
and efficient clearance and settlement.
---------------------------------------------------------------------------
\16\15 U.S.C. 78q-1(b)(3) (A) and (F) (1988).
---------------------------------------------------------------------------
OCC also has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after the
date of publication of notice of the filing in the Federal Register.
The Commission finds good cause for so approving because accelerated
approval will permit OCC to coordinate its clearance and settlement of
cash-settled foreign currency options with the PHLX's listing of cash-
settled foreign currency options, which are proposed for February 7,
1994. The Commission believes that because OCC will be applying
procedures which have proved to be efficient and safe in the past,
accelerated approval is justified. Furthermore, no negative comments
were received when the Commission published notice of filing of the
PHLX proposed rule change.\17\
---------------------------------------------------------------------------
\17\Supra note 3.
---------------------------------------------------------------------------
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 from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the above-referenced
self-regulatory organization.
All submissions should refer to File No. SR-OCC-93-10 and should be
submitted by February 17, 1994.
V. Conclusion
For the reasons stated above, the Commission finds that OCC's
proposal is consistent with section 17A of the Act.\18\
---------------------------------------------------------------------------
\18\15 U.S.C. 78q-1 (1988).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\19\ that the proposed rule change (File No. SR-OCC-93-10) be, and
hereby is, approved.
\19\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\20\
---------------------------------------------------------------------------
\20\17 CFR 200.30-3(a)(12) (1992).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1678 Filed 1-26-94; 8:45 am]
BILLING CODE 8010-01-M