[Federal Register Volume 59, Number 201 (Wednesday, October 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25882]


[[Page Unknown]]

[Federal Register: October 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34837; File No. SR-OCC-94-08]

 

Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Flexibly 
Structured Index Options Denominated in a Foreign Currency

October 13, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 19, 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(b)(1) (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 enable OCC to issue, 
clear, and settle new flexibly structured index options denominated in 
a foreign currency to be traded at the Chicago Board Options Exchange 
(``CBOE'').\2\
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    \2\For a detailed description of the CBOE product, refer to 
Securities Exchange Act Release No. 34203 (June 13, 1994), 59 FR 
31658 [File No. SR-CBOE-93-33] (order approving a proposed rule 
change relating to flexibly structured index options designated in 
foreign currencies).
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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

    On September 23, 1993, the Commission approved a proposed rule 
change filed by OCC which proposed to accommodate the clearance and 
settlement of flexibly structured index options.\3\ Flexibly structured 
index options exhibit virtually the same characteristics as regular 
index options; therefore, OCC establishes long and short flexibly 
structured index option positions in clearing member accounts in 
precisely the same way it currently does for regular index options. OCC 
incorporates flexibly structured index options in its premium 
settlement, margin collection, exercise notice, exercise assignment, 
and exercise/expiration statement processes without significant changes 
to those processes. Premiums and exercise prices for the flexibly 
structured index options that are currently being traded are 
denominated in United States dollars. Parties to a transaction in such 
an option may customize certain terms of the option including: the 
expiration date, the exercise style, the exercise price, the cap 
interval in the case of capped-style options, and the method to be used 
for establishing the current index value for purposes of settling 
expiration date exercises.
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    \3\Securities Exchange Act Release No. 31912 (February 23, 
1993), 58 FR 11879 [File No. SR-OCC-92-33] (order approving proposed 
rule change relating to flexibly structured index options).
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    The new flexibly structured index option product to be traded at 
the CBOE is similar to the existing flexibly structured index option 
product in that the underlying interest is an index and the parties to 
a transaction may customize certain terms of the option. However, the 
new product will have premiums and exercise prices denominated in 
foreign currencies rather than in United States dollars.\4\ 
Accordingly, this new product is being called Flexibly Structured Index 
Options Denominated in a Foreign Currency (``FX Index Options'').
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    \4\Premium and exercise prices for these non-United States 
dollars flexibly structured index options may be denominated in any 
of the foreign currencies currently underlying foreign currency 
options. Those currencies include: (1) Australian dollars, (2) 
British pounds, (3) Canadian dollars, (4) European Economic 
Community currency units, (5) French francs, (6) German Deutsche 
marks, (7) Japanese yen and (8) Swiss francs.
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    To accommodate the clearance and settlement of FX Index Options, a 
new Article, Article XXIII, will be added to the OCC By-Laws. Because 
FX Index Options are a type of index option, the OCC By-Laws governing 
index options, Article XVII, will be incorporated into new Article 
XXIII and will be made applicable to FX Index Options. In addition, 
because FX Index Options will settle in a foreign currency, certain of 
the OCC By-Laws governing Cross-Rate Foreign Currency Options in 
Article XX also are being incorporated into new Article XXIII where 
appropriate. For example, those By-Laws governing extraordinary events, 
adjustments, and the payment of premiums will be incorporated into the 
new article.
    A Chapter XXIV will be added the OCC Rules to accommodate FX Index 
Options. FX Index Options will be exercised pursuant to the rules 
governing existing index options. Accordingly, the rules governing 
exercise, assignment, allocation, and the exercise settlement date from 
Chapter XVIII, which pertains to index options, will be incorporated 
into new Chapter XXIV and will be made applicable to FX Index Options. 
In addition, the settlement procedure for FX Index Options will be the 
same as the procedure for existing index options. Exercised FX Index 
Options will be settled through the payment of an exercise settlement 
amount, which is the difference between the aggregate exercise price 
and the aggregate current index value. Accordingly, the rules governing 
exercise settlement and the exercise settlement date from Chapter XVIII 
will be incorporated into new Chapter XXIV and will be made applicable 
to FX Index Options. Because FX Index Options will settle in a foreign 
currency, certain settlement obligations of a party to a FX Index 
Option contract will be similar to the settlement obligations of a 
party to a cross-rate foreign currency option contract. Therefore, 
certain rules governing settlement obligations from Chapter XXI, which 
pertains to cross-rate foreign currency options, will be incorporated 
into new Chapter XXIV. Specifically, these include the obligation to 
set up bank accounts and the consequence of failing to pay a foreign 
currency. Finally, FX Index Options will be margined like cross-rate 
foreign currency options in that the margin requirement will be 
calculated in the applicable trading currency and then converted to 
United States dollars. Consequently, the language of Rule 2111 
governing margin requirements for cross-rate foreign currency options 
will be incorporated into new Chapter XXIV.
    Two additional changes to the OCC By-Laws and an additional change 
to OCC's Rules also will be made. Specifically, the term ``FX index 
option clearing member'' will be added to the definition of ``clearing 
member'' in Article I, Section 1 of the By-Laws. In addition, the 
reference to the term ``FLEX'' in the definition of clearing member 
will be changed to ``flexibly structured option'' in order to make that 
term more generic. Finally, OCC Rule 401 will be amended to require 
that the currency in which the option is denominated, the expiration 
date of the option contract as opposed to the month, and the cap price, 
if any, be included in the Report of Matched Trades.
    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act because it provides 
for the prompt and accurate clearance and settlement of transactions in 
flexibly structured index options denominated in a foreign currency and 
because it provides for the safeguarding of related securities and 
funds. The proposed rule change meets such requirements by establishing 
a framework in which existing OCC systems, rules, and procedures are 
extended to the processing of the new FX Index 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 approve such 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 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 also will be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to File No. SR-OCC-94-08 and should be submitted by 
November 4, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25882 Filed 10-18-94; 8:45 am]
BILLING CODE 8010-01-M