[Federal Register Volume 60, Number 169 (Thursday, August 31, 1995)]
[Notices]
[Pages 45507-45509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21577]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36149; File No. SR-OCC-95-10]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to the Enhancement of 
Saturday Expiration Date Processing Procedures

August 23, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 11, 1995, 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 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 proposed rule change will allow OCC to replace its present 
preliminary and final processing cycles for Saturday expiration options 
with a single real-time processing procedure.

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. The self-regulatory organization has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.\2\

    \2\ The Commission has modified the language in these sections.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Under the proposed rule change, OCC will enhance its Saturday 
expiration processing cycles by instituting a single real-time 
procedure for the updating of expiring positions of its clearing 
members. OCC's current Saturday expiration processing procedure for 
index and equity options does not provide real-time updates to clearing 
members on their expiring positions. Accordingly, two processing 
cycles, a preliminary and a final cycle, are necessary to reflect the 
results of post-trade activity (e.g., reconciliation of unmatched 
trades) affecting expiring positions and to give clearing members the 
opportunity to edit their preliminary exercise instructions in response 
to updated reports from OCC.
    OCC previously has implemented an expiration processing system for 
options expiring on business days \3\ that provides real-time updates 
to clearing members on their expiring positions thus eliminating the 
need for a preliminary and final processing cycle. OCC proposes to 
employ this same real-time system for its Saturday expirations 

[[Page 45508]]
in order to reduce Saturday expiration processing to one cycle.

    \3\ Some examples of such options include flexibly structured 
options, Quarterly-Index Expiration Options or QIXs, and foreign 
currency option contracts.
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    To accomplish the proposed enhancement to Saturday expiration 
processing, certain changes to OCC's by-laws and rules are necessary. 
Generally, the proposed changes will eliminate references to 
preliminary and final processing cycles and reports. The proposed 
changes also will amend OCC's by-laws and rules to reflect that the 
expiration exercise procedure is carried out utilizing an on-line 
transmission of instructions and reports to and from clearing members 
instead of physical delivery of hard copy reports. Additionally, 
article VI, section 18 of the by-laws, which provides for emergency 
situations, will be revised (i) to make it clear that expiration 
processing cannot be extended beyond the normal expiration time except 
where the following day is not a business day and (ii) to provide for 
emergency automatic exercises not only when OCC is unable to issue 
Expiration Exercise Reports but also when it is unable to receive 
exercise instructions properly submitted by clearing members.
    Article I, Section 1 of OCC's by-laws will be amended to add a new 
defined term, ``Expiration Exercise Report,'' which will refer to the 
on-line exercise reports (including intraday updates) that OCC will 
make available to its clearing members. Technical and conforming 
changes will be made to Interpretations and Policies .02 under article 
VI, section 1.
    A number of changes are proposed to be made to Article VI, Section 
18. First, the proposed rule change will allow exercise processing to 
continue into the day after the expiration date only when that day is 
not a business day. This limitation is not new. It was imposed when 
options expiring on business days were first introduced.\4\ The purpose 
was to avoid the abuses that might result from allowing post-expiration 
exercise instructions to be given at times when U.S. markets were open. 
It was deleted as part of a number of related rule changes in 1993.\5\ 
OCC has now concluded that it should not have been deleted and proposes 
to restore the rule. Section (a) also will be amended to require a 
clearing member to submit exercise instructions to OCC within such 
times as OCC shall prescribe. Currently, a clearing member must respond 
within two hours of receiving a report.

    \4\ Securities Exchange Act Release No. 23004 (March 19, 1986), 
51 FR 9563 [File No. SR-OCC-85-18] (order approving amendments to 
OCC by-laws and rules to accommodate the issuance, clearance, and 
settlement of European-style Treasury bill options).
    \5\ Securities Exchange Act Release No. 33158 (November 4, 
1993), 58 FR 60229 [File No. SR-OCC-93-8] (order approving 
amendments to OCC by-laws and rules to accommodate the clearance and 
settlement of Quarterly-Index Expiration Options to be traded on the 
New York Stock Exchange).
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    Section (b) of article VI, section 18 provides a ``backstop'' 
automatic exercise procedure in cases where OCC is unable to produce 
the reports required for expiration exercise processing within 
applicable deadlines. The proposed rule change will provide for 
automatic exercise not only in those cases but also in cases where OCC 
is unable to receive properly submitted exercise instructions within 
applicable deadlines. Cases of the latter type are currently covered by 
section (c), which is not well adapted to an on-line environment.\6\ 
OCC believes that an inability to receive exercise instructions should 
be treated in the same way as an inability to issue exercise reports 
and therefore proposes to delete section (c) and correspondingly expand 
the coverage of sections (a) (providing time frames for any delays) and 
(b) (providing for automatic exercise).

    \6\ Section (c) of Article VI, Section 18 currently provides 
that if a preliminary or final exercise report is made available by 
OCC to a clearing member and if OCC cannot keep any of its offices 
open until the time prescribed for the return of such report, OCC 
will reopen its offices to receive such report which shall then be 
deemed to have been filed on a timely basis.
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    Rule 805, which specifies the exercise processing procedures for 
Saturday expirations, will be revised to provide expressly for on-line 
processing and to cover weekday as well as Saturday expirations. The 
rule will be amended to eliminate references to preliminary and final 
exercise reports. Instead, OCC will make on-line exercise settlement 
reports available to clearing members utilizing OCC's on-line C/MACS 
system.\7\ The expiration exercise report will list all of the clearing 
member's expiring positions. Once the expiration exercise report is 
made available, clearing members can submit exercise instructions in 
response to such report on separate C/MACS report screens. The response 
screens will be updated on a real-time basis.

    \7\ OCC will specify in its Operations Manual the deadline for 
making expiration exercise reports available to clearing members. 
Initially, OCC proposes to specify as the deadline 7:00 a.m. Central 
Time on the expiration date, which is the current deadline for 
issuing preliminary exercise reports.
    Paragraph (b) of rule 805 will be amended to reflect a change in 
the deadline for submitting exercise instructions. Currently, responses 
to the preliminary exercise report must be submitted by 9 a.m. central 
time and responses to the final report must be submitted by 4 p.m. 
central time. Under the proposed system, clearing members will be 
required to submit exercise instructions in response to the expiration 
exercise report before such time as OCC shall specify.\8\

    \8\ OCC will specify this deadline in its Operations Manual. 
Initially, the deadline will be 1:00 p.m. central time. This new 
cut-off time will allow OCC to begin its critical expiration 
processing earlier and should reduce the amount of time clearing 
members will be required to maintain staff on expiration Saturdays.
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    Paragraphs (c) and (d) of rule 805 will be deleted because a final 
report will no longer be distributed. Paragraphs (e) through (h) and 
(j) through (l) of rule 805 and the interpretations thereto will be 
amended to eliminate references to preliminary and final reports and to 
clarify that exercise instructions must be submitted using the on-line 
system rather than by hard copy reports. In addition, OCC is proposing 
to further amend paragraph (h) to allow OCC to prescribe alternative 
exercise procedures if unusual or unforeseen conditions prevent OCC 
from making expiration exercise reports available on a timely basis or 
prevent clearing members from submitting timely on-line responses. As 
is presently the case, however, OCC will not extend the deadline for 
submitting exercise instructions beyond the expiration time except 
pursuant to Article VI, Section 8 of OCC's by-laws.
    Paragraph (i) of rule 805 will be eliminated because the on-line 
system will not permit clearing members to submit untimely exercise 
instructions. Instead, clearing members desiring to submit late 
exercise instructions will have to tender written exercise notices 
pursuant to paragraph (c) of rule 805. Rule 805 also will be relettered 
to reflect the deletion of paragraphs.
    Rule 805 will be deleted because there will no longer be a need for 
separate exercise processing procedures for options that expire on 
weekdays. The procedures prescribed by rule 805 will apply to all 
expiring options, regardless of expiration date. Finally, rules 801, 
802, 1304, 1404, 1504, 1603, 1702, 1804, 2103, 2302, and 2403 will be 
amended to reflect the relettering of the paragraphs of rule 805 and 
the elimination of rule 806.
    OCC believes the proposed rule change is consistent with the 
requirements of section 17A of the Act \9\ and the rules and 
regulations thereunder because the proposal will 

[[Page 45509]]
enhance exercise processing for expiring options positions.

    \9\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC believes that no burden will be placed on competition as a 
result of the proposed rule change.

(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

    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 submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submissions, 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 Room, 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-95-10 and should be submitted by 
September 21, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\

    \10\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21577 Filed 8-30-95; 8:45 am]
BILLING CODE 8010-01-M