[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17427]
[[Page Unknown]]
[Federal Register: July 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34351; International Series Release No. 680; File No.
SR-OCC-94-05]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to Inverse Foreign
Currency Options and Inverse Cross-rate Foreign Currency Options
July 12, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 13, 1994, The Options
Clearing Corporation (``OCC'') filed 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. 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 (1988).
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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 accommodate within
OCC's existing By-Laws and Rules the clearance and settlement of
inverse foreign currency options and inverse cross-rate foreign
currency options.
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 accommodate within
OCC's existing By-Laws and Rules the clearance and settlement of
inverse foreign currency and cross-rate foreign currency options
proposed for trading by the Philadelphia Stock Exchange (``PHLX'').\2\
Trading in these inverse foreign currency and cross-rate foreign
currency options will be offered through the PHLX's customized option
facility.
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\2\For a description of the PHLX proposed rule change, refer to
Securities Exchange Act Release No. 34308 (July 5, 1994), 59 FR
35551, [File No. SR-PHLX-94-18] (notice of filing of proposed rule
change).
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As explained in the PHLX proposal, existing foreign currency option
contracts are quoted in U.S. dollars (``USDs''), premium is paid in
USDs, and the foreign currency is delivered upon exercise. The proposed
inverse foreign currency option contracts will be quoted in the foreign
currency, premium will be paid in the foreign currency, and U.S.
dollars will be delivered upon exercise. For instance, the existing
French franc (``FF'')/USD foreign currency option contract is quoted in
USD, premium is paid in USD, and FF are delivered upon exercise.
Whereas the inverse USD/FF contract will be quoted in FF, the premium
will be paid in FF, and USD will be delivered upon exercise.
The proposed inverse cross-rate foreign currency option contract
will be the inverse of existing cross-rate foreign currency option
contracts. For instance, the existing Deutsche mark (``DM'')/Japanese
Yen (``JY'') contract is quoted in JY, premium is paid in JY, and DM
are delivered upon exercise. Whereas the inverse contract, the JY/DM
contract, will be quoted in DM, premium will be paid in DM, and JY will
be the deliverable currency. The other inverse cross-rate foreign
currency contracts will be the DM/British pound (``BP'') and the JY/BP
contracts.
From a clearance and settlement perspective, inverse foreign
currency and cross-rate foreign currency options will be processed and
margined like existing foreign currency and cross-rate foreign currency
option contracts and in accordance with existing banking arrangements.
Accordingly, only a few of OCC's By-Laws and Rules need to be adjusted
to accommodate inverse foreign currency options and inverse cross-rate
foreign currency options. A description of those proposed changes
follows.
A definition of currency is being added to Article I, Section 1
(``Definitions'') of OCC's By-Laws. The proposed definition of currency
will include any standard unit of the official medium of exchange of a
sovereign government including the European Currency Unit (``ECU'').
The addition of the term currency is necessary in order to clarify that
with the addition of inverse contracts the price quote, the premium to
be paid, and the deliverable or underlying currency for a foreign
currency option contract will in some cases be in terms of USDs and in
other cases will be in terms of a foreign currency. For example,
existing foreign currency options are quoted in USDs, premium is paid
in USDs, and a foreign currency is the deliverable or underlying
currency. Whereas in the case of inverse foreign currency options, the
price will be quoted in a foreign currency, premium will be paid in a
foreign currency, and USDs will be the underlying or deliverable
currency. Accordingly, where appropriate, references to foreign
currency in OCC's By-Laws and Rules as the deliverable or the
underlying currency for a foreign currency option contract and
references to USDs as the trading currency for a foreign currency
option contract are in many cases being changed to the more general
term currency. Other references to foreign currency or to USDs are
being changed, where appropriate, to the more generic terms trading
currency, underlying currency, price, or settlement amount.
The term trading currency in Article I, Section 1 of OCC's By-Laws
is being amended. The amended definition of trading currency will be
the currency (i.e., rather than the foreign currency) in which premium
and/or exercise prices are denominated for a class of foreign currency
options or cross-rate foreign currency options. The proposed changes
will clarify that the two components of the trading currency, the
premium and the exercise price, may be either a foreign currency or
USDs. Because PHLX is proposing to offer percentage quoting for all
customized foreign currency options, the premium and the exercise price
will not longer always be in the same currency. In addition, the term
trading currency is being deleted from Article XX (``Cross-Rate Foreign
Currency Options''), Section 1 of OCC's By-Laws because that term will
be defined in Article I, Section 1. A definition of underlying currency
also is being added to Article I, Section 1, and is being deleted from
the Definition Sections of Article XV (``Foreign Currency Options'')
and Article XX.
A definition of settlement time is being added to the Definition
Section of Article XV. In order to accommodate inverse foreign currency
options, such definition will distinguish between the settlement time
for foreign currency options settling in the United States and foreign
currency options settling outside the United States. Specifically,
foreign currency options setting in the United States will settle at
9:00 A.M. Central Time (10:00 A.M. Eastern Time) on the first business
day immediately following the day on which OCC receives a report of a
matched trade with respect to such transaction from the exchange on
which such transaction was effected. Foreign currency options settling
outside the United States will settle at 11:00 A.M. local time in the
country of origin of the trading currency or at such other time as OCC
may specify on the first foreign business day in that country
immediately following the day on which OCC receives a report of a
matched trade with respect to such transaction from the exchange on
which such transaction was effected. Because of this difference in
settlement times, the definition of settlement time in Article I,
Section 1 is being amended to clarify that such time does not apply to
foreign currency option settling outside the United States.
The definition of the term class of options in the Definitions
Sections of Article XV and Article XXII (``Cash-Settled Foreign
Currency Options'') is being amended to provide that with respect to
foreign currency and cash-settled foreign currency options, a class of
options means all option contracts of the same type and style covering
the same underlying currency and having the same unit of trading and
the same trading currency. Under this amended definition, existing
foreign currency contracts covering the same underlying foreign
currency will be in one class, and the inverse contracts, which will
have a different trading currency, will be in another class. For
example, all USD/FF contracts will be in one class of options, and all
FF/USD contracts will be in another class.
Language respecting the netting scheme for foreign currency option
settlement obligations in Rule 1605 (``Allocation of Exercise
Settlement Obligations With Respect to Foreign Currency Options'') is
being amended to accommodate inverse foreign currency options.
Specifically, the proposed changes to Rule 1605(a)(2) will clarify that
netting will first occur within the same class of options (as is
currently done). However, in accordance with the proposed modifications
to the definition of class of options in order to be in the same class
the options must have the same trading currency in addition to being of
the same type and covering the same unit of trading of the same
currency. The proposed changes to Rule 1605(a)(3) will clarify that
following the netting of settlement obligations within a class, netting
will occur across classes (as is currently done) of foreign currency
and inverse foreign currency options.
The Introduction to Chapter XVI, which governs foreign currency
options, is being amended to clarify that with the introduction of
inverse foreign currency options, the rules of that chapter will be
applicable only to option contracts where either the trading currency
or the underlying security is a foreign currency and the other side of
the contract is USDs. Likewise, the Introduction to Chapter XXIII,
which governs cash-settled foreign currency options, is being amended
to clarify that with the introduction of inverse options, the rules of
that chapter will be applicable only to cash-settled option contracts
where either the trading currency or the underlying security is a
foreign currency. Finally, the Introduction to Chapter XXI, which
governs cross-rate foreign currency options, is being amended to
clarify that with the commencement of percentage quoting, premium and
exercise prices of cross-rate foreign currency options will not always
be in the same currency.
The proposed rule change is consistent with the purposes and the
requirements of Section 17A of the Securities Exchange Act of 1934, as
amended, because it will provide for the prompt and accurate settlement
of transactions in inverse foreign currency and cross-rate foreign
currency options and will provide for the safeguarding of related
securities and funds. The proposed rule change meets such requirements
by establishing a framework in which existing, reliable OCC systems,
rules, and procedures will be extended to the processing of such
inverse options.
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
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) by order approved the proposed rule change or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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, N.W., Washington, D.C. 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, N.W.,
Washington, D.C. 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-94-05 and should be
submitted by August 9, 1994.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17427 Filed 7-18-94; 8:45 am]
BILLING CODE 8010-01-M