[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