[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27564]


[[Page Unknown]]

[Federal Register: November 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34926; International Series Release No. 739; File Nos. 
SR-OCC-94-04; SR-OOC-94-05; SR-OCC-94-07]

 

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Changes Relating to Flexibly Structured 
Foreign Currency Options, Inverse Foreign Currency Options, Inverse 
Cross-Rate Foreign Currency Options, and Flexibly Structured Cross-Rate 
Foreign Currency Options

November 1, 1994.
    On April 25, 1994, May 13, 1994, and June 6, 1994, The Options 
Clearing Corporation (``OCC'') filed proposed rule changes (File Nos. 
SR-OCC-94-04, SR-OCC-94-05, SR-OCC-94-07) respectively 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 was published in the Federal Register on May 20, 1994, 
July 19, 1994, and July 20, 1994, to solicit comments from interested 
persons.\2\ No comments were received. As discussed below, this order 
approves the proposed rule changes.
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    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release Nos. 34064 (May 13, 1994), 59 
FR 26535, [File No. SR-OCC-94-04] (notice of filing of proposed rule 
change relating to flexibly structured foreign currency options); 
34351 (July 12, 1994), 59 FR 36811, [File No. SR-OCC-94-05] (notice 
of filing of a proposed rule change relating to inverse foreign 
currency options and inverse cross-rate options); and 34360 (July 
13, 1994), 59 FR 37114, [File No. SR-OCC-94-07] (notice of filing of 
proposed rule change relating to flexibly structured cross-rate 
foreign currency options).
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I. Description

    The purpose of the proposed rule changes are to allow OCC to issue, 
clear, and settle customized strike options on foreign currencies, 
flexibly structured cross-rate foreign currency option contracts, 
inverse foreign currency options, and inverse cross-rate foreign 
currency options.
    The first proposal, OCC File No. SR-OCC-94-04, enables OCC to 
accommodate the clearance and settlement of customized strike options 
on foreign currencies to be traded on the Philadelphia Stock Exchange 
(``Phlx'').\3\ Customarized strike options are a type of flexibly 
structured options where the underlying security is a foreign currency. 
Currently, the underlying security for flexibly structured options is 
an index group. Flexibly structured index options permit the parties to 
establish for each option trade the expiration date, the exercise 
style, the exercise price, the cap interval, and the method to be used 
for establishing the current index value for purposes of settling 
expiration date exercises. Customized strike options on foreign 
currencies extend to foreign currency options the ability of the 
trading parties to designate the exercise price of their choice. 
Customized strike options are available for all currently listed 
foreign currency options including cross-rate foreign currency options 
but excluding cash-spot foreign currency options.\4\ The customized 
strike option contracts also may be either American style or European 
style options and may have any expiration dates currently available 
including cross rate dates of up to three years in the future as in 
long-term options.
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    \3\Securities Exchange Act Release No. 33959 (April 25, 1994), 
59 FR 22698, [File No. SR-Phlx-(Notice of filing of Phlx's proposal 
relating to adoption of a customized strike facility for foreign 
currency options).
    \4\The following currencies currently underlie foreign currency 
option contracts: (1) Australian dollars, (2) British pounds, (3) 
Canadian dollars, (4) German Deutsche marks, (5) European Economic 
Community currency units, (6) French francs, (7) Japanese yen, and 
(8) Swiss francs.
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    To accommodate customized strike options, OCC is adding the 
definition of ``flexibly structured options'' to Section 1 of Article 
XV (``Foreign Currency Options'') which will include customized strike 
options. OCC Rule 602(b) also is being amended to broaden the 
definition of premium margin to include flexibly structured index 
options, customized strike options, and other types of flexibly 
structured options. Currently, the definition only encompasses flexibly 
structured index options.
    The term ``FLEX option'' in Section 1 (``Definitions'') of Article 
XVII (``Index Options'') is being changed to ``flexibly structured 
option'' in order to make that term more generic. For the same reason, 
all references to FLEX options in OCC's by-laws and rules are being 
changed to flexibly structured options. In addition, the definition of 
the term flexibly structured option in Section 1 of Article XVII is 
being modified to clarify that such definition is applicable only to 
flexibly structured index options. A separate definition of flexibly 
structured options applicable to foreign currency options is being 
added to Section 1 of Article XV.
    The inverse foreign currency options and inverse cross-rate foreign 
currency options proposal, OCC File No. SR-OCC-94-05, will enable OCC 
to clear and settle inverse foreign currency options and inverse cross-
rate foreign currency options. Currently, foreign currency option 
contracts are quoted in U.S. dollars (``USDs''), premium is paid in 
USDs, and the foreign currency is delivered upon exercise. Under the 
proposed rule change, inverse foreign currency and cross-rate foreign 
currency option contracts will be quoted in the foreign currency, 
premium will be paid in the foreign currency, and USDs will be 
delivered upon exercise. For example, the existing French franc 
(``FF'')/USDs foreign currency option contract is quoted in USDs, 
premium is paid is USDs, and FF are delivered upon exercise. Whereas, 
the inverse USDs/FF contract will be quoted in FF, the premium will be 
paid in FF, and USDs 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.
    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. To accommodate these new foreign 
currency options only a few changes of OCC's by-laws and rules are 
needed.
    To accommodate inverse for currency and cross-rate foreign currency 
options, a definition of ``currency'' is being added to Article I, 
Section 1 of OCC's By-laws.\5\ The term currency will clarify that the 
price quote, the premium to be paid, and the deliverable or underlying 
currency for a foreign currency option contract will sometimes have 
terms of USDs and other times have terms of a foreign currency. Due to 
this change, where appropriate in OCC's by-laws and rules the 
references to foreign currency as the deliverable or as the underlying 
currency for a foreign currency option contract and references to USDs 
as the trading currency for foreign currency option contract are being 
changed to the general term currency.
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    \5\Currency is defined as any standard unit of the official 
medium of exchange of a sovereign government including the European 
Currency Unit (``ECU'').
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    A definition of ``settlement time'' is being added to the 
definition section of Article XV to accommodate inverse foreign 
currency options. Settlement time for foreign currency options will 
distinguish between foreign currency options settling in the United 
States and outside the United States.\6\ Because of the 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 options settling outside the United States.
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    \6\Foreign currency options settling in the United States will 
settle at 9:00 A.M. Central 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 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 where the trade occurred.
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    The definition of the term ``class of options'' in the definition 
section of Article XV and Article XXII 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.\7\
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    \7\Under the 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.
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    The term ``trading currency'' in Article I, Section 1 of OCC's by-
laws is being amended. Trading currency will be currency, rather than 
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 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.
    The amendments to Rule 1605(a)(2) concerning the netting scheme 
will clarify that netting will first occur within the same class of 
options. To accommodate the changes to the definition of class of 
options, 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 of foreign currency and inverse foreign 
currency options.
    The Introduction of Chapter XVI, which governs foreign currency 
options, is being amended to clarify that Chapter XVI is 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. The Introduction of Chapter XXIII, which governs 
cash-settled foreign currency options, is being amended to clarify that 
Chapter XXIII is applicable only to cash-settled option contracts where 
either the trading currency or the underlying security is a foreign 
currency. The Introduction to Chapter XXI, which governs cross-rate 
foreign currency options, is being amended to clarify that with the 
beginning of percentage quoting at the Phlx, premium and exercise 
prices of cross-rate foreign currency options will not always be in the 
same currency.
    The flexibility structured cross-rate foreign currency options 
proposal, OCC File No. Sr-OCC-94-07, enables OCC to issue, clear, and 
settle new flexibly structured cross-rate foreign currency option 
contracts proposed for trading by the Phlx through its customized 
option facility.\8\ Under the proposal, options may be traded on any 
combination of currencies currently underlying foreign currency option 
contracts. Because these new products will be margined and settled like 
the existing cross-rate option contracts, OCC's by-laws and rules do 
not need to be revised.
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    \8\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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II. Discussion

    The Commission believes the proposals are consistent with the 
purposes and requirements of Section 17A of the Act.\9\ Specifically, 
Section 17A(a)(2) of the Act\10\ directs the Commission to facilitate 
the establishment of a national system for the prompt and accurate 
clearance and settlement of securities transactions.
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    \9\15 U.S.C. 78q-1 (1988).
    \10\15 U.S.C. 78q-1(a)(2) (1988).
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    The over-the-counter (``OTC'') market for foreign currency options 
has developed, in part, to meet the needs of brokers and investors that 
require increased flexibility for the purpose of satisfying particular 
investment objectives. OCC's issuing, clearing, and settling of 
customized strike options should bring into the national clearance and 
settlement system options transactions that otherwise would be cleared 
and settled outside the system. Thus, brokers and investors will have 
the ability to tailor options transactions to meet their specific needs 
and at the same time, will have the benefit of having those 
transactions cleared and settled through OCC with its risk analysis and 
risk reduction procedures.
    OCC has represented that flexibility structured foreign currency 
options can be treated and processed like the current foreign currency 
option products. Therefore, OCC may implement the clearance and 
settlement of flexibility structured foreign currency options with only 
minimal changes to its by-laws and rules. Since these proposed foreign 
currency products are a natural extension of the foreign currency 
products currently cleared by OCC, OCC should have little difficulty 
processing these products.

III. Conclusion

    For the reasons stated above, the Commission finds that OCC's 
proposals are consistent with Section 17A of the Act.\11\
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    \11\15 U.S.C. 78q-1 (1988).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule changes (File Nos. SR-OCC-94-04, SR-
OCC-94-05, SR-OCC-94-07) be, and hereby are, approved.

    \12\15 U.S.C. 78s(b)(2) (1988).
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    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) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27564 Filed 11-7-94; 8:45 am]
BILLING CODE 6717-01-M