[Federal Register Volume 60, Number 205 (Tuesday, October 24, 1995)]
[Notices]
[Pages 54557-54558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26285]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36385; File No. SR-OCC-95-10]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change to Enhance Saturday Expiration 
Date Processing Procedures

October 18, 1995.
    On July 11, 1995, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-95-10) 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 August 31, 1995.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.

    \1\15 U.S.C. Sec. 78s(B)(1) (1988).
    \2\Securities Exchange Act Release No. 36149 (August 23, 1995), 
60 FR 45507.
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I. Description of the Proposal

    Under the rule change, OCC is enhancing its Saturday expiration 
processing cycles by instituting a single real-time procedure for the 
updating of expiring positions of its clearing members. Prior to the 
amendment, OCC's Saturday expiration processing procedure for index and 
equity options did not provide real-time updates to clearing members on 
their expiring positions. Accordingly, two processing cycles, a 
preliminary and a final cycle, were 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. Such real-time updates 
eliminate the need for a preliminary and final processing cycle. OCC 
now will employ this same real-time system for its Saturday expirations 
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 enhancement to Saturday expiration processing, 
certain changes have been made to OCC's by-laws and rules. The rule 
change eliminates references to preliminary and final processing cycles 
and reports. The rule change also amends 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 by physical delivery of hard copy reports. 
The rule change also makes it clear that expiration processing cannot 
be extended beyond the normal expiration time except when the following 
day is not a business day and provides for emergency automatic 
exercises not only when OCC is unable to issued exercise reports but 
also when it is unable to receive exercise instructions properly 
submitted by clearing members.
    Specifically, a new defined term, ``Expiration Exercise Report,'' 
which refers to the on-line exercise reports (including intraday 
updates) that OCC will make available to its clearing members has been 
added to Article I, Section 1 of OCC's by-laws. Technical and 
conforming changes have been made to Interpretations and Policies .02 
under Article VI, Section 1.
    Article VI, Section 18 has been amended to allow exercise 
processing to continue into the day after the expiration date only when 
that day is not a business day.\4\ The purpose is to avoid the abuses 
that might result from allowing post-expiration exercise instructions 
to be given at times when U.S. markets were open. Section (a) of 
Article I, Section 18 now requires a clearing member to submit exercise 
instructions to OCC within such times as OCC shall prescribe.\5\

    \4\This limitation is not new. It was imposed when options 
expiring on business days were first introduced. 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). However, the limitation was deleted as 
part of a number of related OCC rule changes in 1993. 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).
    \5\Prior to approval of this proposed rule change, a clearing 
member had to respond within two hours of receiving a report.
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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 rule change provides 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 being deleted.\6\

    \6\Section (c) of Article VI, Section 18 previously provided 
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, provides expressly for on-line processing and 
covers weekday as well as Saturday expirations. OCC has deleted from 
the rule references to preliminary and final exercise reports. OCC will 
utilize its on-line C/MACS system to make the Expiration Exercise 
Reports available to clearing members.\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.
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    Paragraph (b) of Rule 805 has been amended to reflect a change in 
the deadline for submitting exercise instructions. Previously, 
responses to the preliminary exercise report had to be submitted by 
9:00 a.m. Central Time, and responses to the final report had to be 
submitted by 4:00 p.m. Central Time. Under the new system, clearing 
members are 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.

[[Page 54558]]

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    Paragraphs (c) and (d) of Rule 805 have been deleted because a 
final exercise report will no longer be distributed. Paragraphs (e) 
through (h) [now designated as paragraphs (c) through (f)] and (j) 
through (1) [now designated as paragraphs (g) through (i)] of Rule 805 
and the interpretations thereto have been amended to eliminate 
references to preliminary and final exercise reports and to clarify 
that exercise instructions must be submitted using the on-line system 
rather than by hard copy reports. Paragraph (h) [now designated as 
paragraph (f)] also has been amended 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. However, as is presently the case, OCC will not extend the 
deadline for submitting exercise instructions beyond the expiration 
time except pursuant to Article VI, Section 18 of OCC's by-laws.
    Paragraph (i) of Rule 805 is 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 must tender written exercise notices pursuant to 
paragraph (c) of Rule 805.
    Rule 806 has been deleted because there no longer will 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 have been 
amended to reflect the relettering of the paragraphs of Rule 805 and 
the elimination of Rule 806.

II. Discussion

    Section 17A(b)(3)(F) of the Act\9\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. Additionally, 
Section 17A(a)(1)(B) of the Act\10\ sets forth a Congressional finding 
that inefficient procedures for clearance and settlement impose 
unnecessary costs on investors and others.

    \9\15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
    \10\15 U.S.C. Sec. 78q-1(a)(1)(B) (1988).
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    The Commission believes that OCC's proposed rule change is 
consistent with OCC's obligations under the Act because OCC's proposal 
will allow the processing of Saturday expiring options pursuant to 
existing OCC systems, rules, and procedures already in place for 
options expiring on weekdays. The system currently in place for options 
expiring on weekdays is a computerized, real-time system. The prior 
system for processing Saturday expiration options relied on the 
physical delivery of hard copy reports which was more time consuming 
and inefficient. Implementation of a single real-time processing cycle 
for Saturday expiring options should provide a more effective way to 
process these options and should result in a more efficient and less 
costly service to OCC's clearing members.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A 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-95-10) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 95-26285 Filed 10-23-95; 8:45 am]
BILLING CODE 8010-01-M