[Federal Register Volume 60, Number 217 (Thursday, November 9, 1995)]
[Notices]
[Pages 56625-56628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27825]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36453; File No. SR-OCC-95-16]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to Customized Expiration Dates

November 2, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on September 11, 1995, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission the proposed rule change (File No. SR-OCC-95-16) as 
described in Items I and II below, which Items have been prepared 
primarily by OCC. On September 22, 1995, and on October 27, 1995, OCC 
filed amendments to the proposed rule change.\2\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and to grant accelerated approval of the 
proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letters from Jean M. Cawley, OCC, to Jerry W. Carpenter, 
Assistant Director, Division of Market Regulation, Commission 
(September 22, 1995, and October 27, 1995).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change seeks to amend OCC's by-laws and rules to 
accommodate the Philadelphia Stock Exchange's (``PHLX'') proposal to 
permit market participants to select customized expiration dates for 
flexibly structured currency option contracts \3\ listed in PHLX's 
customized currency options program.\4\

    \3\ ``Flexibly structured option'' with respect to foreign 
currency options means a foreign currency option having an 
expiration date, an exercise price, or an exercise style that are 
customized within exchange specified limits by the parties to the 
transaction.
    \4\ For a description of PHLX's proposal, refer to Securities 
Exchange Act Release No. 36131, International Series Release No. 844 
(August 22, 1995), 60 FR 44927 [File SR-PHLX-95-52] (notice of 
filing of proposed rule change by PHLX relating to customized 
expiration dates for customized foreign currency options).
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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.\5\

    \5\ The Commission has modified the text of the summaries 
submitted by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    PHLX has proposed to add a new feature to its customized currency 
options program that will allow program participants to select any 
business day other than an exchange \6\ holiday for exchange designated 
holiday as an expiration date for flexibly structured currency option 
contracts. Any flexibly structured currency option contract with a 
customized expiration date (``customized expiration date currency 
option contracts'') will expire at 9:15 A.M. Central Time on its 
expiration date.\7\ Under PHLX's proposal, trading in such contracts 
would cease at 8:00 A.M. Central Time on their expiration date. No new 
series of flexibly structured currency option contracts with a ``same 
day'' expiration date (i.e., expiration on the date that the contract 

[[Page 56626]]
is opened) may be opened, but trading in an existing series of 
customized expiration date currency option contacts will be permitted 
until 8:00 A.M. on their expiration date such that open positions in 
the contracts may be reduced or increased. In accordance with PHLX's 
filing,\8\ PHLX member organizations will be required to utilize a pro 
rata methodology for allocation of exercises of customized expiration 
date currency option contracts, which OCC has assigned to the PHLX 
member organizations. OCC is modifying its rules to require that 
clearing member procedures for allocating exercise assignments shall be 
made in accordance with the requirements set forth in exchange rules 
rather than on a first in, first out basis or on a random selection 
basis. Furthermore, OCC will assign to its clearing members any 
exercise instructions with respect to a short position in customized 
expiration date currency option contracts using a pro rata methodology 
rather than OCC's current random assignment procedures.\9\ PHLX 
believes that customized expiration dates will permit institutional 
market participants to hedge their exchange rate exposure more 
accurately than by trading a contract that expires on a date that PHLX 
has selected.

    \6\ The term ``exchange'' is defined in Article I, section E. 
(4) of OCC's by-laws as a national securities exchange or an 
national securities association which has qualified for 
participation in OCC pursuant to the provisions of Article VII of 
OCC's by-laws.
    \7\ According to PHLX's filing (SR-PHLX-95-52), customized 
option contracts with expiration dates corresponding to the 
expiration dates for non-customized option contracts (i.e., option 
contracts customized in other respects but which expire on normal 
mid-month or end-of-month expiration dates) would not be treated as 
customized expiration date currency option contracts. Those 
contracts still would expire at 10:59 P.M. Central Time, the 
expiration time for all option contracts other than customized 
expiration date currency option contracts, even if a market 
participant intentionally or unintentionally designates such 
contracts as customized expiration date currency option contracts. 
Supra, note 3.
    \8\ Supra note 4.
    \9\ The pro rata assignment methodology is described in detail 
later in this approval order.
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    In order to accommodate these enhancements to PHLX's customized 
foreign currency options program, certain changes to OCC's by-laws, 
rules, and stated practices are necessary. In general, the proposed 
changes provide for the morning expiration of customized expiration 
date currency option contracts and pro rata procedures to be used for 
assigning exercises in connection with such option contracts. Position 
processing and exercise settlement of customized expiration date 
currency option contracts will occur using OCC's existing procedures.
    Article I, Section I of OCC's by-laws will be amended to define the 
term ``expiration time.'' Option contracts presently expire at 10:59 
P.M. Central Time on their expiration date. The proposed definition of 
expiration time includes both that time and 9:15 A.M. Central Time 
which is the time that customized expiration date currency option 
contracts will expire on their expiration date. Conforming changes also 
are being made to Section 9 of Article VI; Section 3 of Articles XII, 
XIII, and XIV; and Section 2 of Articles XV, XVI, XVII, XX, XXII, and 
XXIII of OCC's By-Laws. OCC Rule 805 concerning expiration date 
exercise procedures also is being amended to incorporate the newly 
defined term ``expiration time.''
    The definition of ``variable terms'' in Section 1.V.(1) of Article 
I of OCC's by-laws is being amended to provide that with respect to an 
option contract, variable terms refers to the name of the underlying 
security, the exercise price, the expiration month of such option 
contract, and in the case of an option contract identified by an 
exchange as being an ``any day'' option contract the expiration date of 
such option contract.
    The definition of ``expiration date'' in Section 1.E.(2) of 
Articles XV and XX of OCC's by-laws is being amended to accommodate 
customized expiration date currency option contracts. Under Section 
1.E.(2), the expiration date for a customized expiration date currency 
option contract will be the date reported by OCC by an exchange 
pursuant to Section 7 of Article VI of OCC's by-laws and OCC Rule 401 
with respect to any option contract identified by such exchange as an 
``any day'' option contract. In addition, Section 1.E.(2) is being 
amended to delete references to Saturday as an expiration date for 
specific foreign currency and cross-rate foreign currency option 
contracts. These references are unnecessary because all foreign 
currency and cross-rate foreign currency contracts with a Saturday 
expiration date have expired.
    OCC Rule 803 concerning the assignment of exercise notices to 
clearing members is being amended to eliminate the reference to the 
procedures of random selection as the means used by OCC to assign 
exercise notices to clearing members with open short positions in the 
series of option involved.\10\ The amended rule provides for the 
assignment of exercise notices in accordance with OCC procedures, which 
include the proposed pro rata method of assigning exercise notices for 
customized expiration date currency option contracts. Similar to the 
procedures for random assignment, the pro rata assignment procedures 
will be a stated policy, practice, or interpretation of proposed OCC 
Rule 803 and will not be set forth in Rule 803.

    \10\ OCC Rule 803 currently refers to OCC's procedures of random 
selection for purposes of assigning exercise notices but does not 
describe those procedures. OCC's procedures for random assignment 
are considered to be a stated policy, practice, or interpretation 
with respect to OCC Rule 803, and a copy of those procedures is 
available from OCC on request.
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    OCC Rule 804 concerning clearing members' procedures for allocating 
exercise assignments is being modified to provide that the allocation 
shall be made in accordance with the requirements set forth in exchange 
rules. By referencing exchange rules, this change provides flexibility 
in that it will encompass the current allocation procedure of Rule 804, 
which currently provides that the allocation must be made on a first 
in, first out basis or on a random selection basis that is consistent 
with exchange rules, and it also will compass pro rata allocation or 
any other method prescribed by exchange rules.
    OCC also is amending Rules 1603 and 2103 regarding expiration date 
exercise procedures to eliminate the distinction between Saturday and 
Friday expiration date exercise procedures. The proposed changes to OCC 
Rule 805 and the recent deletion of Rule 806,\11\ as well as the 
expiration of all Saturday expiration date foreign currency option 
contracts, make the distinction unnecessary.\12\ Accordingly, the 
reference to Saturday expiration in current paragraph (a) of Rules 1603 
and 2103 is being deleted. The text of paragraph (a) is otherwise 
unchanged except for the deletion of its designation as paragraph (a) 
and the new designation of the subparagraphs thereunder. Paragraph (b) 
also is being deleted because it is no longer necessary.

    \11\ OCC Rule 806 was deleted because there no longer was a need 
for separate exercise processing procedures for options that expire 
on weekdays. Securities Exchange Act Release No. 36385 (October 18, 
1995), 60 FR 54557 [File No. SR-OCC-95-10] (approving proposed rule 
change relating to the enhancement of Saturday expiration date 
processing procedures.)
    \12\ OCC will specify the cutoff times applicable to expiration 
date processing for foreign currency options in its Operations 
Manual. Those times will remain the same as those currently set 
forth in OCC Rule 1603(b).
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    In addition, OCC is amending Rules 1604 and 2104 to provide that an 
exercise settlement date with respect to foreign currency and cross-
rate foreign currency option contracts ordinarily will be the fourth 
business day \13\ after the day an exercise notice is properly 
submitted to OCC. Prior to the amendment, Rules 1604 and 2104 provided 
that the exercise settlement date was the third foreign business day 
following the business day after the day on which an exercise notice 
was properly tendered to OCC pursuant to Rule 801. As a result, an 
exercise settlement date for such options could have occurred on a date 
that was not a business day in respect of OCC.

    \13\ Business day is defined in Article I.B.(2) of OCC's bylaws 
to be a day on which OCC is open for business for the purpose of 
conducting money settlement.
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    Furthermore, Rules 1604 and 2104 are being amended to enable OCC to 
establish a later settlement date to 

[[Page 56627]]
accommodate bank holidays in any country where OCC is to receive or 
deliver currency or where a correspondent bank is located. OCC believes 
the authority to defer the settlement date is necessary because options 
are being listed on an increasing number of currencies for which market 
participants may customize an expiration date. This authority will give 
OCC the flexibility to ensure that its correspondent banks are open for 
business on an exercise settlement date and have a sufficient amount of 
time to act on instructions. The proposed amendments to Rules 1604 and 
2104 also will require OCC to provide notice of such later exercise 
settlement date to its clearing members. OCC presently contemplates 
providing such notice through its electronic bulletin board, ONN, or C/
MACS message.
    In addition, OCC is amending the Interpretations and Policies 
sections to Rules 1604, 1605, 2104, and 2105 to provide that Sunday 
will not be included as a business day for purposes of determining the 
exercise settlement date for customized currency options because OCC's 
correspondent banks will not be open to effect settlement on Sunday.
    Finally, the proposal provides for modifications to OCC's stated 
policies, practices, and interpretations to accommodate pro rata 
assignments of exercised customized expiration date currency option 
contracts. Under the proposal, OCC will assign exercise notices with 
respect to customized expiration date currency option contracts to 
clearing members with open short positions in the same series of 
options by use of a pro rata methodology rather than a random selection 
method.
    Using the proposed pro rata methodology, OCC will assign short 
positions in an options series based on the ratio of exercised long 
contracts to total open interest in that options series. Specifically, 
under the pro rata methodology the number of short contract positions 
in a given series will be summed to determine the total open interest 
in that series. Then, the number of exercised long contracts within 
that series will be summed, and that total will be divided by the total 
open interest in order to determine the exercise percentage. The number 
of short contract positions in each clearing member account then will 
be multiplied by the exercise percentage to determine the pro rata 
assignment amount. Only whole contracts will be allocated in the first 
round; therefore, any resulting decimal amounts will be ignored in that 
round.
    If all exercised contracts are assigned in the first round, no 
further allocation will be required. However, if all exercised 
contracts are not assigned in the first round, then an additional round 
will be necessary. The remaining contracts will be assigned one at a 
time in descending order from the short position with the largest 
decimal number to the short position with the smallest decimal number. 
In the event that two or more accounts have equal decimal numbers and 
there is an insufficient number of long exercised positions remaining 
to assign to such short positions, a random number will be used to 
determine which will be assigned.
    PHLX requested that OCC employ the foregoing pro rata assignment 
methodology because PHLX believes that by using a pro rata assignment 
methodology OCC clearing members will be able to determine at the 
earliest possible time how many contracts in each short position will 
be assigned and therefore will be able to assess what market action to 
take to cover an assignment. Accordingly, OCC will inform clearing 
members of the exercise percentage as soon as practical in the 
processing cycle so that clearing members can calculate their own 
assignment amounts before actual assignment reports are available from 
OCC.
    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act\14\ because the 
proposal will facilitate the prompt and accurate clearance of 
customized expiration date currency option contracts.

    \14\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comment 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)\15\ of the Act requires the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes the proposal is consistent with OCC's obligations under 
Section 17A(b)(3)(F) because it will facilitate the clearance and 
settlement of customized expiration date currency option contracts that 
will be traded at PHLX. OCC has observed that the over-the-counter 
market for foreign currency options has developed in part to meet the 
needs of market participants that require increased flexibility for the 
purpose of satisfying particular investment objectives. The clearance 
and settlement by OCC of customized expiration date currency option 
contracts will enhance investors' ability to tailor options 
transactions to meet their specific needs and at the same time have the 
benefit of having those transactions cleared and settled through the 
facilities of OCC instead of through broker-to-broker settlement.

    \15\ 15 U.S.C. 78q-1(b)(3)(F)(1988).
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    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of the filing. The Commission finds good cause 
for so approving the proposed rule change because the proposal should 
facilitate the prompt and accurate clearance and settlement of 
customized expiration date currency option contracts by ensuring that 
these contracts are covered by the relevant provisions of OCC by-laws, 
rules, and by the relevant OCC stated policies, practices, and 
interpretations when trading begins at the PHLX on November 6, 1995.

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-95-16 and 

[[Page 56628]]
should be submitted by November 30, 1995.
    On the basis of the foregoing, 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-95-16) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27825 Filed 11-8-95; 8:45 am]
BILLING CODE 8010-01-M