[Federal Register Volume 61, Number 55 (Wednesday, March 20, 1996)]
[Notices]
[Pages 11456-11458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6642]



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[[Page 11457]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36958; File No. SR-OCC-95-19]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change to Adjust the Exercise Threshold for Yield-Based Treasury 
Options

March 11, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 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 from interested persons and to grant accelerated 
approval of the proposed rule change.
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    \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 revise OCC's rules to adjust the 
exercise threshold for yield-based Treasury option contracts carried in 
clearing members customers' accounts in connection with OCC's exercise-
by-exception (``ex-by-ex'') processing procedures. OCC believes the 
proposal will provide cost savings to its members without affecting the 
risks of processing options.

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.\2\
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    \2\ 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

    Under the proposed rule change, OCC will amend Rule 1702 to adjust 
the exercise threshold for yield-based Treasury option contracts \3\ 
carried in clearing members customers' accounts in connection with 
OCC's ex-by-ex processing procedures.\4\ Currently, OCC Rule 1702 
specifies two threshold amounts whereby option contracts that are in-
the-money by those threshold amounts will be deemed by OCC to have been 
exercised. One of the threshold amounts is used for yield-based 
Treasury options carried in clearing members' customer's accounts and 
the other threshold amount is used for yield-based Treasury options 
carried in all other clearing members' accounts. For customer positions 
in yield-based Treasury options, the current threshold amount is $25.00 
per contract, and for all other positions in such options, the current 
threshold amount is $1.00 per contract. OCC proposes to reduce the 
threshold amount for customer positions in yield-based Treasury options 
from $25.00 to $1.00 per contract. The current $1.00 threshold amount 
for clearing members' non-customer positions in yield-based Treasury 
options will remain unchanged. As a result, all yield-based Treasury 
option positions that are in-the-money by $1,00 per contract or more 
will be exercised unless clearing members submit a timely, contrary 
instruction to OCC. The change to the threshold amount for ex-by-ex 
processing will not affect an OCC clearing member's obligations to its 
customers or correspondent brokers, which are determined by contract 
and generally applicable principals of law.
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    \3\ Yield-based Treasury option contracts are sometimes referred 
to as ``interest rate option contracts'' in the rules of various 
national securities exchanges and the National Association of 
Securities Dealers.
    \4\ Ex-by-ex processing presumes that clearing members want to 
exercise all options that are in-the-money by a specified threshold 
amount. Accordingly, all options subject to ex-by-ex processing are 
identified as being in-the-money, at-the-money, or out-of-the-money 
in a report provided to the clearing member electronically through 
OCC's Clearing/Management and Control system or by hard copy. This 
report reflects that the clearing member instructs OCC to exercise 
all options that are in-the-money by the threshold amount. However, 
the clearing member is able to issue contrary instructions to OCC by 
notating on the report additional contracts it wishes to exercise 
and in-the-money contracts that it does not want to exercise.
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    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act because it reduces 
costs to those acting on behalf of investors without adversely 
affecting the safeguarding of securities in OCC's custody or control or 
for which it is responsible.

(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 Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change and none were received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Section 17A(b)(3)(F) of the Act requires that the rules of clearing 
agency be designed to promote the prompt and accurate clearance and 
settlement of securities transactions.\5\ As discussed below, the 
Commission believes that the rule change is consistent with this 
obligation because it should facilitate the prompt and accurate 
clearance and settlement of yield-based Treasury options transactions 
by providing promptness and precision in the exercise of certain in-
the-money yield-based Treasury options.
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    \5\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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    The rule change should assure that certain customer-held yield-
based Treasury options that are in-the-money by $1.00 or more per 
contract will not go unexercised unless the clearing member provides to 
OCC contrary exercise instructions. By lowering the ex-by-ex threshold 
for yield-based treasury options carried in customer accounts from 
$25.00 to $1.00, OCC has reduced the burden placed on its clearing 
members to provide exercise instructions on yield-based Treasury 
options in-the-money by $1.00 or more that are due to expire. Reducing 
the ex-by-ex processing threshold to $1.00 per contract will mean that 
clearing members will have to manually identify for exercise only those 
customer-held yield-based Treasury options that are in-the-money by 
less than $1.00 per contract; therefore, the cost associated with 
manually exercising customer-held yield-based Treasury options should 
be reduced. The rule change also should reduce the risk that a clearing 
member will fail to exercise a customer-held yield-based Treasury 
option because under the new lower threshold only those options that 
are in-the-money by less than $1.00 will not be exercised.\6\
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    \6\ Clearing members can issue contrary exercise advice 
instructions to exempt specified customer-held yield-based Treasury 
options from ex-by-ex processing.

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[[Page 11458]]

    Originally, the $25.00 threshold was established because of the 
anticipation of transaction costs related to the exercise and 
settlement of yield-based Treasury options. Because yield-based 
treasury options are cash settled and the exercise fees for such 
options either do not exist, are waived, or are not expected to exceed 
the exercise proceeds, OCC believes that a lower ex-by-ex threshold can 
be applied and that its clearing members will not charge a fee for the 
cash settlement of a yield-based Treasury option where a customer will 
be left with a loss.
    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after publication 
of the notice of filing. The Commission finds good cause because 
accelerated approval will permit OCC to immediately implement the lower 
threshold amount for the ex-by-ex processing of customer-held yield-
based Treasury options which will bring the treatment of such options 
in line with the procedures already in place for yield-based Treasury 
options held by non-customers and for index options.\7\ Moreover, 
because no comment letters were received with regard to OCC's recent 
modification of its ex-by-ex processing procedures involving index 
options, which similarly adjusted the exercise threshold for customer-
held index options, the Commission does not expect to receive any 
adverse comments on the present rule change.
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    \7\ For a complete description of the modification of OCC's 
threshold amount used in the ex-by-ex processing of index options, 
refer to Securities Exchange Act Release No. 35982 (July 18, 1995), 
60 FR 38072 [SR-OCC-95-03] (order approving proposed rule change).
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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, N.W., Washington D.C. 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, N.W., Washington, 
D.C. 20549. Copies of such filings will also be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to the file number SR-OCC-95-19 and should be submitted by 
April 10, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-95-19) be, and hereby 
is, approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6642 Filed 3-19-96; 8:45 am]
BILLING CODE 8010-01-M