[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Notices]
[Pages 158-159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32253]



[[Page 158]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35149; File No. SR-OCC-94-08]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Flexibly Structured 
Index Options Denominated in a Foreign Currency

December 23, 1994.
    On August 19, 1994, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-94-08) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act).\1\ Notice of 
the proposal was published in the Federal Register on October 19, 
1994.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 34837 (October 13, 1994), 
59 FR 52852.
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I. Description of the Proposal

    On September 23, 1993, the Commission approved a proposed rule 
change filed by OCC 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 
currently are 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.

    \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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    Recently, the Chicago Board Options Exchange (``CBOE'') amended its 
rules regarding flexibly structured index options\4\ in order to allow 
premiums and exercise prices of such options to be denominated in 
foreign currencies rather than in United States dollars.\5\ 
Accordingly, OCC is amending its By-Laws and Rules in order to clear 
and settle these options which OCC calls Flexibly Structured Index 
Options Denominated in a Foreign Currency (``FX Index Options'').

    \4\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 FLEX options designated in foreign currencies).
    \5\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, 
Article XXIII is being added to the Article of OCC By-Laws. Because FX 
Index Options are a type of index option, the OCC By-Laws governing 
index options, Article XVII, is being incorporated into new Article 
XXIII and is being 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 are being incorporated into 
the new article.
    A Chapter XXIV is being added to 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, is being incorporated 
into new Chapter XXIV. 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 are being incorporated into new 
Chapter XXIV. Because FX Index Options will settle in a foreign 
currency, certain settlement obligations of a party to an 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, are being 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 
is being incorporated into new Chapter XXIV.
    Two additional changes to the OCC By-Laws and an additional change 
to OCC's Rules also are being made. Specifically, the term ``FX index 
option clearing member'' is being 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 is 
being changed to ``flexibly structured option'' in order to make that 
term more generic. Finally, OCC Rule 401 is being amended to require 
that the currency in which the option is denominated, the expiration 
date of the option contract as opposed to the expiration month, and the 
cap price, if any, be included in the Report of Matched Trades.

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F).\6\ Section 17A(b)(3)(F) requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, and to assure the 
safeguarding of securities and funds in the custody or control of the 
clearing agency or for which it is responsible. The Commission believes 
that OCC's proposed rule change meets these requirements by 
establishing a framework in which existing OCC systems, rules, and 
procedures are extended to the processing of the FX Index Options. OCC 
should be able to implement the clearance and settlement of the FX 
Index Options without much difficulty because FX Index Options are 
similar to regular index options and cross-rate foreign currency 
options currently cleared by OCC. The Commission believes that the use 
of [[Page 159]] OCC's systems for the clearance and settlement of FX 
Index Options should facilitate promptness and precision.

    \6\15 U.S.C. 78q-1(b)(3)(F) (1988).
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III. Conclusion

    The Commission finds that the proposal is consistent with the 
requirements of the Act, particularly with Section 17A(b)(3)(F) of the 
Act, and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-94-08) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-32253 Filed 12-30-94; 8:45 am]
BILLING CODE 8010-01-M