[Federal Register Volume 60, Number 145 (Friday, July 28, 1995)]
[Notices]
[Pages 38880-38881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18606]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36003; File No. SR-OCC-95-07]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval on a Temporary 
Basis of a Proposed Rule Change Concerning Equity TIMS

July 21, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ (``Act''), notice is hereby given that on May 26, 1995, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which items have been prepared primarily by OCC. 
The Commission is publishing this notice and order to solicit comments 
on the proposed rule change from interested persons and to grant 
accelerated approval of the proposed rule change through May 31, 1996.

    \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 have the Commission 
extend its order granting temporary approval of OCC's use of its 
Theoretical Intermarket Margin System (``TIMS'') for calculating 
clearing margin positions in equity options.\2\

    \2\ Equity TIMS is a modified version of OCC's Non-Equity TIMS, 
which is OCC's margin system used to calculate requirements on 
options for which the underlying asset is anything but an equity 
security. Securities Exchange Act Release No. 23167 (April 22, 
1986), 51 FR 16127 [File No. SR-OCC-85-21] (order approving Non-
Equity TIMS).
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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.\3\

    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On March 1, 1991, the Commission temporarily approved a proposed 
rule change which authorized OCC to use TIMS to calculate clearing 
member margin requirements on equity options.\4\ Since its initial 
temporary approval of Equity TIMS, the Commission has extended the 
temporary approval three times.\5\

    \4\ After the Commission's approval of File No. SR-OCC-89-12 on 
March 1, 1991, OCC phased out its previous margin system, which was 
known as the ``production system,'' and since then has used Equity 
TIMS to calculate its clearing members' margin requirements on 
equity option positions. For a complete description of Equity TIMS, 
refer to Securities Exchange Act Release No. 28928 (March 1, 1991), 
56 FR 9995 [File No. SR-OCC-89-12] (order approving the use of 
Equity TIMS to calculate margin on equity options on a temporary 
basis through May 31, 1992).
    \5\ Securities Exchange Act Release Nos. 30761 (May 29, 1992), 
57 FR 24286 [File No. SR-OCC-92-15] (order extending the approval of 
Equity TIMS through May 31, 1993); 32388 (May 28, 1993), 58 FR 31989 
[File No. SR-OCC-93-06] (order extending the approval of Equity TIMS 
through May 31, 1994); and 34065 (May 13, 1994), 59 FR 26534 [File 
No. SR-OCC-94-03] (order extending the approval of Equity TIMS 
through May 31, 1995).
    Equity TIMS utilizes options price theory (i.e., an option pricing 
model) to project the cost of liquidating in the event of a ``worst 
case'' theoretical change in the price of the underlying securities, 
each clearing member's short equity option positions and long equity 
option positions on which OCC is entitled to assert a lien. This 
projected liquidation cost is then used by Equity TIMS to calculate for 
each clearing member a margin requirement to cover that cost.
    OCC has requested an additional extension so that it can complete 
its analysis of Equity TIMS. Specifically, in its discussions with the 
Commission's staff preceding the Commission's initial temporary 
approval of Equity TIMS, OCC represented that it would undertake to 
analyze the effects of including equity option volatilities over longer 
periods in determining margin intervals and would report the results of 
its analysis to the Commission.\6\ OCC recently submitted a report of 
its analysis to the Commission's staff. Accordingly, OCC seeks an 
extension of the Commission's temporary approval of 

[[Page 38881]]
Equity TIMS through May 31, 1996, so that the Commission may review and 
discuss the report and several potential changes to Equity TIMS with 
OCC.\7\

    \6\ OCC initially was delayed because it expanded the scope of 
its analysis from ten years to thirty years and had difficulty in 
obtaining an accurate data base of information covering the expanded 
period of review. OCC also determined that its analysis of equity 
options volatility would benefit from a review by an outside 
consultant, and because it took OCC some time to obtain the services 
of an appropriate consultant, its analysis was delayed further.
    \7\ OCC has not filed a proposed rule change regarding the 
potential changes to Equity TIMS; however, OCC will file a draft 
proposed rule change so that the Commission will have an opportunity 
to comment on the changes before OCC officially seeks approval of 
the changes under Section 19(b)(2) of the Act.
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    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because it will enhance OCC's ability to safeguard the 
securities and funds in its custody or control or for which it 
responsible.

(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

    No written comments have been solicited or received. 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

    Section 17A(b)(3)(F) \8\ of the Act requires the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. Additionally, Section 17A(a)(1) of the Act 
\9\ encourages the use of efficient, effective, and safe procedures for 
securities clearance and settlement. The Commission continues to 
believe that OCC's proposal to utilize Equity TIMS meets the 
requirements of the Act and that it represents an improvement over 
OCC's previous margin system in several respects.\10\ Nevertheless, 
while the Commission continues to believe that the margin methodology 
employed by Equity TIMS is basically sound, the Commission staff must 
fully analyze OCC's report to the Commission and several potential 
changes to Equity TIMS before determining whether to grant permanent 
approval for Equity TIMS.

    \8\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
    \9\ 15 U.S.C. 78q-1(a)(1) (1988).
    \10\ Supra note 4.
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    OCC has requested that the Commission find good cause for approving 
the proposal prior to the thirtieth day after the publication of notice 
of filing of the proposed rule change. The Commission finds such good 
cause because the Commission believes that OCC's use of Equity TIMS 
over the past five years has resulted in better assessments of OCC's 
risk exposure associated with the clearance and settlement of its 
clearing members' equity option positions and has resulted in 
calculations of clearing margin that more accurately reflect that risk 
exposure. Accordingly, to allow OCC to continue to use Equity TIMS 
while the Commission and OCC further examine Equity TIMS, the 
Commission finds that good cause exists for approving the proposed rule 
change prior to the thirtieth day after publication of notice of 
filing. The Commission also notes that during the four previous 
temporary approval periods, OCC has not received any adverse comments 
regarding Equity TIMS from its clearing members.

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 OCC. All 
submissions should refer to File No. SR-OCC-95-07 and should be 
submitted by August 18, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\11\ that the proposed rule change (File No. SR-OCC-95-07) be, and 
hereby is, approved through May 31, 1996.

    \11\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18606 Filed 7-27-95; 8:45 am]
BILLING CODE 8010-01-M