[Federal Register Volume 59, Number 119 (Wednesday, June 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15141]


[[Page Unknown]]

[Federal Register: June 22, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34219; File No. SR-93-17]

 

Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Conversion of Delivery Versus Payment Authorization Process 
to an On-Line System

June 15, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934, (``Act''),\1\ notice is hereby given that on October 15, 1992, 
The Options Clearing Corporation (``OCC'') file with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
primarily by OCC. On November 12, 1993, OCC submitted an amendment\2\ 
so that the proposed rule change would file pursuant to section 
19(b)(3)(A)\3\ instead of section 19(b)(2) of the Act.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\15 U.S.C. 78s(b)(1) (1998).
    \2\Letter from James C. Yong, Vice President and Deputy General 
Counsel, OCC, to Jerry W. Carpenter, Branch Chief, Division of 
Market Regulation, Commission (November 10, 1993).
    \3\15 U.S.C. 78s(b)(3)(A).
    \4\15 U.S.C. 78s(b)(2).
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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 allow OCC to convert 
its Delivery Versus Payment (``DVP'') authorization process to an on-
line system. The changes proposed herein will require OCC's clearing 
members to submit DVP authorization instructions to OCC via electronic 
means and, thereby, will eliminate the use of paper DVP authorization 
forms and the need for clearing members to make physical delivery of 
such forms to OCC's offices.

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 and 
discussed any comments it received on 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

    DVP authorization is an alternate settlement procedure for the 
settlement of foreign currency options and cross-rate foreign currency 
options.\5\ Pursuant to the DVP authorization process, a clearing 
member's approved DVP bank guarantee to OCC's agent bank delivery on 
the exercise settlement date of either a designated quantity of foreign 
currency against payment of a specified sum of U.S. dollars or a 
specified sum of U.S. dollars against delivery of a designated quantity 
of a foreign currency. The current DVP authorization process is a batch 
system which begins on the first business day following exercise when a 
clearing member brings a completed multipart DVP authorization form to 
the OCC operations window on the business day following exercise.\6\ 
Following submission of the DVP form to OCC, the clearing member must 
wait until notified by OCC that the DVP instructions have been 
accepted. OCC accepts DVP instructions after verifying that the form 
has been filled out correctly and that the DVP amounts are valid.
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    \5\Currently, the DVP authorization settlement procedures are 
not in effect for cross-rate foreign currency option exercises.
    \6\Currently, OCC maintains offices in Chicago and New York. 
Clearing members located in cities other than Chicago and New York 
send the DVP authorization form to OCC's Chicago office via 
facsimile and later send the hard copy form.
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    Once the DVP instructions have been accepted, OCC returns a copy of 
the form to the clearing member. Upon receiving the accepted DVP form, 
the initiating clearing member must deliver a copy of the accepted DVP 
form to its own agent bank. OCC transmits the DVP instructions to its 
own agent bank through an electronic communications link. In addition 
to transmitting the DVP information via computer, OCC sends a hard copy 
DVP log to its agent bank.
    On the second business day following exercise, the clearing 
member's DVP agent bank must send a SWIFT or tested telex message to 
OCC's agent bank guaranteeing payment of dollar and/or foreign currency 
settlement amounts to OCC's agent bank or OCC's correspondent bank. On 
the third business day following exercise, OCC's agent bank must 
confirm to OCC that the guarantee message from the clearing member's 
DVP agent bank was received. OCC receives confirmation from its agent 
bank via facsimile. On the fourth business day following exercise, the 
clearing member's DVP agent bank must make an irrevocable transfer of 
U.S. dollars and/or foreign currency to the designated OCC agent bank 
or OCC's correspondent bank in the country of origin.
    The current DVP processing system is a manually intensive and time 
consuming process. Accordingly, OCC is proposing to convert the DVP 
authorization process to an on-line system. OCC is proposing to 
accomplish this goal in two Phases. Phase 1 will require clearing 
members to submit DVP instructions to OCC and receive confirmations of 
acceptance from OCC via electronic means. This change would eliminate 
the paper DVP authorization form and the need for clearing members to 
physically deliver such forms to OCC. In Phase 2, OCC will propose 
changes which will allow members to submit DVP messages to their DVP 
agency banks via electronic means a well. This filing, File No. SR-OCC-
93-17, seeks to make the changes necessary to accomplish only Phase 
1.\7\
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    \7\When OCC and the banks are operationally ready to accomplish 
Phase 2, OCC will file a proposed rule change with the Commission.
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    The proposed rule change will require clearing members to submit 
and receive electronic DVP messages to and from OCC through the use of 
the Clearing Management and Control System (``C/MACS'').\8\ The on-line 
DVP instructions will contain the same information currently required 
on the DVP authorization form. Once an on-line DVP instruction is 
entered, the same verification/acceptance process currently performed 
by OCC staff will be performed through C/MACS. The clearing member will 
receive an on-line confirmation of acceptance message shortly after 
entering the DVP instruction. In addition, the clearing member will be 
able to inquire about the status of a DVP instruction by viewing an on-
line screen.
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    \8\C/MACS is a fully automated participant terminal system which 
allows clearing members to submit reports, notices, instructions, 
data, and other items directly to OCC via on-line data entry. For a 
detailed description of the operational capabilities of C/MACS, see 
Securities Exchange Act Release No. 20983 (May 22, 1984), 49 FR 
22427 [Filed No. SR-OCC-83-15] (order approving implementation of C/
MACS).
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    Once the clearing member's DVP instruction has been entered and 
accepted and OCC has completed its processing, the clearing member will 
be able to print an OCC C/MACS-generated authorization report from its 
own computer terminal. This new report will replace the DVP 
authorization form and will contain all of the information currently on 
the DVP authorization form with the exception of an OCC signature. The 
clearing member will be required to deliver the C/MACS-generated report 
to its DVP agent bank and to direct such DVP agent bank to issue a 
SWIFT or tested telex message to OCC's agent bank guaranteeing delivery 
or payment, as the case may be, in accordance with the terms of the DVP 
authorization instruction contained in the report.
    OCC will send a message to its own agent bank through an electronic 
communications link to confirm the terms of the accepted DVP 
instructions. Following receipt of the guarantee message from the 
clearing member's DVP agent bank, OCC's agent bank or correspondent 
bank will carry out its payment or delivery obligation to the recipient 
named in the DVP authorization instruction on the exercise settlement 
date.
    In general, the proposed changes to OCC Rules 1606A and 2107 will 
require clearing members to submit DVP instructions to OCC through on-
line transmissions.\9\ Other specific changes are also being made. 
Language is being added to Rule 1606A(b) to clarify that a clearing 
member's ``agent bank'' is an approved bank acting on its behalf. The 
additional language will make the language of Rule 1606A(b) consistent 
with the language of Rule 2107(b).
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    \9\Rules 1606A and 2107 set forth the DVP settlement procedures 
for foreign currency options and cross-rate foreign currency 
options, respectively.
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    Rules 1606A(c) and 2107(c) are being amended to reflect an 
operational change in OCC's DVP processing. Currently, a clearing 
member may specifically elect to apply a DVP instruction to settle all 
or part of a gross settlement obligation or a net settlement 
obligation. Under the proposed on-line system, a clearing member will 
not be permitted to elect whether its DVP instruction is applied to a 
gross settlement obligation or a net settlement obligation. Rather, the 
system will automatically apply the DVP instruction to the clearing 
member's gross settlement obligation and then adjust the clearing 
member's remaining net settlement obligation accordingly. This 
remaining net settlement obligation will then settle through the 
regular settlement procedures pursuant to Rule 1606.
    Rules 1606A(d) and 2107(d) are being amended to provide that OCC's 
confirmation of acceptance of the clearing member's DVP authorization 
instruction will be carried out through an on-line confirmation message 
from OCC to the clearing member rather than by OCC's signature on a DVP 
form. Rules 1606A(f) and 2107(f) are being amended to provide that the 
clearing member must deliver to its agent bank a C/MACS-generated DVP 
report that contains the approved DVP instructions instead of the OCC-
endorsed DVP form.
    Finally, an interpretation is being added both to Rule 1606A and to 
Rule 2107 to provide that should unusual or unforeseen circumstances 
prevent a clearing member from submitting DVP instructions by on-line 
data entry prior to any applicable cut-off time, OCC in its discretion 
may require the clearing member to submit such item by other approved 
means, including the use of hard copy forms, and/or may extend the 
applicable cut-off time.
    As part of the development of the on-line DVP system, extensive 
testing was undertaken to assess the operational impact of the new on-
line system. Based on OCC's testing of the on-line CVP system, OCC has 
determined that the implementation of the on-line DVP authorization 
process should not stress OCC's current processing systems.
    With respect to security, internal and external controls have been 
put in place to ensure the integrity of the data and the software of 
the product. Data security is maintained through security software. In 
addition, OCC's Security Administration Department develops, reviews, 
and maintains appropriate security guidelines and standards. The 
integrity of OCC's operating systems is maintained through limited 
access to central systems libraries. Physical access to OCC's systems 
is restricted to those employees that require access. Finally, on-line 
access is restricted to users with authorized log-in IDs and passwords.
    With respect to contingency procedures, OCC has adequate back-up 
procedures in place to ensure the timely continuation of DVP processing 
in the event that any problem develops with respect to the on-line 
system. For instance, if C/MACS were not functioning properly, OCC 
could permit a clearing member to enter the DVP instructions at one of 
OCC's offices or to submit hard copy forms. Furthermore, if a system 
failure were to prevent a clearing member from submitting any DVP 
instruction through on-line data entry prior to any applicable cut-off 
time, OCC could extend such cut-off time by such period as OCC deemed 
reasonable, practicable, and equitable under the circumstances.
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F)\10\ of the Act because it promotes the prompt and 
accurate clearance and settlement of securities transactions by 
substantially reducing the paperwork associated with the DVP settlement 
process. OCC believes that this first step in converting the DVP 
authorization process to an on-line system will make the system 
operationally more efficient and will reduce the time delays inherent 
in a system using paper forms. Furthermore, OCC believes that it has 
sufficiently considered capacity, security, and contingency issues in 
its development of the on-line DVP authorization system and that the 
proposed on-line DVP system should in no way pose a threat to the 
integrity or security of OCC's current processing systems.
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    \10\15 U.S.C. 78q-1(b)(3)(F).
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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 foregoing rule change has become effective pursuant to section 
19(b)(3)(A)\11\ of the Act and pursuant to Rule 19b-4(e)(4)\12\ in that 
the proposed rule change effects a change in an existing service of OCC 
that does not adversely effect the safeguarding of securities or funds 
in custody or control of OCC and does not significantly effect the 
rights or obligations of OCC or persons using the service. At any time 
within sixty days of the filing of such proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \11\15 U.S.C. 78s(b)(3)(A).
    \12\17 CFR 240.19b-4(e)(4) (1992).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington DC 20549. Copies 
of the submissions, 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 filings will also be available for 
inspection and copying at the principal offices of OCC. All submissions 
should refer to File No. SR-OCC-93-17 and should be submitted by July 
13, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15141 Filed 6-21-94; 8:45 am]
BILLING CODE 8010-01-M