[Federal Register Volume 59, Number 101 (Thursday, May 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12891]


[[Page Unknown]]

[Federal Register: May 26, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34088; File Nos. SR-OCC-94-01 and SR-ICC-94-01]

 

Self-Regulatory Organizations; The Options Clearing Corporation 
and The Intermarket Clearing Corporation; Order Approving Proposed Rule 
Changes Relating to the Cross-Netting of Foreign Currency Options and 
Futures

May 19, 1994.
    On January 18, 1994, The Options Clearing Corporation (``OCC'') and 
The Intermarket Clearing Corporation (``ICC'') filed proposed rule 
changes (File Nos. SR-OCC-94-01 and SR-ICC-94-01) with the Securities 
and Exchange Commission (``Commission'') pursuant to section 19(b) of 
the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the 
proposals appeared in the Federal Register on March 3, 1994, to solicit 
comment from interested persons.\2\ No comments were received by the 
Commission. This order approves the proposals.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 33666 (February 23, 
1994), 59 FR 10193.
---------------------------------------------------------------------------

I. Description of the Proposal

A. Cross-Netting Under Previous Rules

    Under OCC and ICC rules, a joint clearing member (i.e., a clearing 
member which is a clearing member of both OCC and ICC) may elect to 
cross-net its OCC exercise and assignment settlement obligations in 
OCC-cleared foreign currency options (``OCC obligations'') with its 
delivery obligations in ICC-cleared foreign currency futures (``ICC 
obligations'') on the same foreign currency. Cross-netting occurs when 
OCC obligations settle on a date that also is a delivery date for ICC 
obligations. Because such dates coincide only one day each month, 
cross-netting is performed only one day each month.
    Previously, a joint clearing member that had elected to settle by 
cross-netting selected either OCC or ICC as its designated clearing 
organization (``DCO'') and settled its cross-netted obligations with 
its DCO in accordance with the rules of the DCO. (OCC and ICC have 
virtually identical rules regarding the settlement of foreign currency 
obligations.) The DCO, in turn, performed its ordinary clearance and 
settlement activities and acted as agent for the other clearing 
organization in settling the cross-netted obligations.\3\
---------------------------------------------------------------------------

    \3\For a more detailed description of cross-netting, refer to 
Securities Exchange Act Release No. 24781 (August 6, 1987), 53 FR 
30268 [File No. SR-OCC-86-14].
---------------------------------------------------------------------------

    The agreement by one clearing organization to act as agent for the 
other was contained in the Mutual Agency Agreement for Foreign Currency 
Settlement (``Mutual Agency Agreement'') between OCC and ICC. The 
Mutual Agency Agreement set forth the rights and obligations of OCC and 
ICC in effecting cross-netted settlements and the effect of the default 
of a joint clearing member on such rights and obligations.

B. Cross-Netting Under Newly Approved Rules

    ICC no longer desires to be a cross-netting DCO; therefore, OCC and 
ICC are eliminating the ability of a joint clearing member to select 
ICC as a DCO. These rule changes will have no effect: (1) On the basic 
procedures under which cross-netted obligations are settled or (2) upon 
any joint clearing member because no joint clearing member currently or 
has ever selected ICC as its cross-netting DCO.
    To accomplish the rule changes, OCC and ICC are amending OCC Rule 
1605(c) and ICC Rule 1205(c). The two rules deal with the cross-netting 
of foreign currency obligations and are being modified to state that 
henceforth joint clearing members can only designate OCC to act on 
their behalf with respect to cross-netting settlement. OCC and ICC also 
are deleting from OCC By-Laws Article XV, Section 1 and from ICC Rule 
1202 the term and definition of ``designated clearing organization.''
    OCC and ICC are replacing the existing Mutual Agency Agreement with 
the Agreement for Cross-Netting Foreign Currency Settlements (``Cross-
Netting Agreement''). The Cross-Netting Agreement, which is based on 
the Mutual Agency Agreement, has been drafted by OCC and ICC to 
implement the above-described rule changes. Specifically, the Cross-
Netting Agreement provides that: (1) OCC and ICC will furnish a form 
notice by which a joint clearing member may elect to cross-net its OCC 
and ICC obligations and which will provide that only OCC will effect 
the cross-netted settlements; (2) OCC agrees to act as agent for ICC in 
effecting cross-netted settlements with a joint clearing member; and 
(3) neither OCC nor ICC will change its rules relating to the margining 
and to the settling of foreign currency obligations without the consent 
of the other. The Cross-Netting Agreement also sets forth settlement, 
default, indemnity, and termination procedures. Those procedures are 
basically unchanged from the Mutual Agency Agreement except for 
modifications made to reflect that only OCC can effect cross-netted 
settlement.

II. Discussion

    The Commission believes that the proposal is consistent with the 
Act and particularly with Section 17A of the Act.\4\ Section 
17A(b)(3)(F) of the Act\5\ requires that the rules of a clearing agency 
be designed to assure the safeguarding of funds in the custody or 
control of the clearing agency or for which it is responsible. The 
proposed modifications to the OCC and ICC rules, in essence, eliminate 
a cross-netting option that has never been used. Accordingly, the rule 
changes should have no significant effect on either OCC's or ICC's 
ability to safeguard securities or funds.
---------------------------------------------------------------------------

    \4\15 U.S.C. 78q-1 (1988).
    \5\15 U.S.C. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

III. Conclusion

    For the reasons discussed above, the Commission believes that the 
proposal is consistent with the requirements of the Act, particularly 
those 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, 
\6\ that the above-mentioned proposed rule changes (File Nos. SR-OCC-
94-01 and SR-ICC-94-01) be, and hereby are, approved.

    \6\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------

Johnathan G. Katz,
Secretary.
[FR Doc. 94-12891 Filed 5-25-94; 8:45 am]
BILLING CODE 8010-01-M