[Federal Register Volume 60, Number 52 (Friday, March 17, 1995)]
[Notices]
[Pages 14475-14477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6574]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35472; File No. SR-OCC-95-01]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Clarifying Rules Regarding 
the Unavailability of Current Index Values

March 10, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 23, 1995, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-OCC-95-01) 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.

    \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 clarify the 
respective rights [[Page 14476]] and responsibilities of OCC and the 
options exchanges (``Exchanges'') in the event that the primary market 
for securities representing a substantial part of the value of an 
underlying index is not trading at the time when the current index 
value would ordinarily be determined or in the event that the current 
index value is unreported or otherwise unavailable for purposes of 
calculating the exercise settlement amount. The proposed rule change 
also makes certain technical changes in OCC's By-Laws and Rules 
governing index options and its proposed By-Laws and Rules governing 
Flexible Structured Index Options Denominated in a Foreign Currency 
(``FX Index Options'').\2\

    \2\For a complete description of FX Index Options, refer to 
Securities Exchange Act Release No. 35149 (January 3, 1995), 60 FR 
158, [File No. SR-OCC-94-08] (order approving proposed rule change).
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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 that 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 July 15, 1994, technical difficulties delayed the opening of the 
National Association of Securities Dealers Automated Quote System 
(``NASDAQ'') until 11:55 a.m., Eastern Time, nearly two and a half 
hours after the time trading normally begins. Prior to the delayed 
opening, however, transactions in NASDAQ listed securities occurred via 
telephone and the Instinet on-line trading system. Prices reported in 
connection with those transactions (``preopening prices'') had been 
transmitted to certain designated reporting authorities, and some or 
all of those reporting authorities used those prices in calculating 
values for certain stock indexes settling at the opening.
    An issue arose that day as to whether the Exchanges would be able 
to provide OCC with settlement values for those indexes settling on the 
opening of the market whose component securities included NASDAQ listed 
issues. The Exchanges were concerned that they would be unable to 
provide OCC with settlement values prior to OCC's exercise processing 
cut-off time.
    Fortunately, the designated reporting authorities were able to 
calculate and report the settlement values for the affected series to 
the Exchanges. The Exchanges, in turn, reported those settlement values 
to OCC in time for OCC to conduct its normal expiration processing. 
Although the Exchanges reported the settlement values somewhat later 
than usual, the late reporting did not have a significant impact on 
OCC's processing. In fact, OCC clearing member reports were not delayed 
at all.
    While the NASDAQ incident was resolved without significant impact, 
the incident prompted OCC to take a closer look at its rules respecting 
the unavailability of current index values and to consider more fully 
what steps would be taken in such a situation. Following its review, 
OCC determined that certain technical changes should be made to its 
rules to clarify the respective rights and responsibilities of OCC and 
the Exchanges with respect to the reporting of current index values and 
the determination of settlement values.
    During the NASDAQ event, OCC was prepared to exercise this 
authority had it become necessary. However, questions arose as to what 
prices OCC would use to fix exercise settlement amounts, and what the 
basis for that determination would be. OCC's proposed changes are 
intended to address those issues. OCC is proposing to amend its By-
Laws, Article XVII, Section 4, which empowers OCC to fix an exercise 
settlement amount in the event that OCC determines that the current 
index value is unreported or otherwise unavailable.
    First, the proposed rule change will make it clear that OCC has the 
authority to fix an exercise settlement amount whenever the primary 
market for securities representing a substantial part of the value of 
an underlying index is not open for trading at the time when the 
current index value (i.e., the value used for exercise settlement 
purposes) ordinarily would be determined. OCC believes that this 
authority is implicit in the language of the present By-Law because in 
such circumstances the current index value would generally be 
``unreported or otherwise unavailable.'' However, the proposed rule 
change would make it explicit.
    In addition, the proposed change assigns the responsibility for 
fixing exercise settlement amounts to a panel consisting of two 
designated representatives of each Exchange on which the affected 
series is open for trading, one of whom shall be such Exchange's 
representative on OCC's Securities Committee, and OCC's Chairman. This 
structure, which assigns the decision-making responsibility to an 
exchange-controlled panel, conforms to the way in which determinations 
with respect to adjustments to terms of FX index option contracts are 
made pursuant to Article XXIII, Section 4. The proposed change 
authorizes the panel to fix the exercise settlement amount based on its 
judgment as to what is appropriate for the protection of investors and 
the public interest including, without limitation, fixing the exercise 
settlement amount on the basis of the reported level of the underlying 
index at the close of trading on the last preceding trading day for 
which a closing index level was reported.
    Identical changes also are being made to Article XXIII, Section 5, 
which governs the fixing of exercise settlement amounts for FX Index 
Options. Under these proposed changes, the situation contemplated by 
the last two sentences of the definition of ``expiration date'' in 
Article XXIII, Section 1.E.(3) (i.e., where the primary market for 
underlying securities representing a substantial part of the value of 
an index is closed on an expiration date) will be explicitly covered by 
Article XXIII, Section 5. Therefore, the last two sentences of Article 
XXIII, Section 1.E.(3) have been deleted.
    The remainder of the proposed changes to the By-Laws are technical 
changes, primarily for the purpose of conforming those By-Laws to 
changes approved in SR-OCC-94-08.\3\

    \3\Supra Note 2.
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    OCC believes the proposed rule change is consistent with the 
requirements of the Act, specifically with Section 17A of the Act, and 
the rules and regulations thereunder because it will facilitate the 
prompt and accurate settlement of transactions in index options, 
flexibility structured index options, and FX Index Options.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will have an 
impact on or impose a burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    OCC has not sought or received comments on the proposed rule 
change. [[Page 14477]] OCC will notify the Commission of any written 
comments received by OCC.

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 OCC 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 will also be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to the file number SR-OCC-95-01 and should be submitted by 
April 7, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\4\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-6574 Filed 3-16-95; 8:45 am]
BILLING CODE 8010-01-M