[Federal Register Volume 61, Number 60 (Wednesday, March 27, 1996)]
[Notices]
[Pages 13558-13559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7344]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36988; File No. SR-OCC-95-18]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Clarifying Rules Regarding 
the Unavailability of Current Index Values

March 20, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 24, 1995, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-OCC-95-18) as described in Items I, II, and III below, which items 
have been prepared primarily by OCC. On March 19, 1996, OCC amended the 
proposed rule change to make a technical correction and to incorporate 
changes made to its rules in a recently approved proposed rule 
change.\2\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from James C. Yong, First Vice President and General 
Counsel, OCC, to Jerry W. Carpenter, Assistant Director, Division of 
Market Regulation, Commission (March 19, 1996).
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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 clarify the 
respective rights and responsibilities of OCC and the options exchanges 
\3\ (``exchanges'') in the event that the primary market for securities 
representing a substantial part of the value of an underlying index is 
not trading at the time when the current index value would ordinarily 
be determined or in the event that the current index value is 
unreported or otherwise unavailable for purposes of calculating the 
exercise settlement amount. The proposed rule change also makes certain 
technical changes in OCC's by-laws and rules governing index options 
and Flexibly Structured Index Options Denominated in a Foreign Currency 
(``FX Index Options'').\4\

    \3\ The exchanges include the American Stock Exchange, the 
Chicago Board Options Exchange, the New York Stock Exchange, the 
Pacific Stock Exchange, and the Philadelphia Stock Exchange.
    \4\ For a complete description of FX Index Options, refer to 
Securities Exchange Act Release No. 35149 (January 3, 1995), 60 FR 
158 [File No. SR-OCC-94-08] (order approving proposed rule change).
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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 that 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

    On July 15, 1994, technical difficulties delayed the opening of the 
National Association of Securities Dealers Automated Quote System 
(``NASDAQ'') until 11:55 a.m., Eastern Time, which was nearly 2\1/2\ 
hours after the time trading normally begins. However, prior to the 
delayed opening, transactions in NASDAQ listed securities occurred 
through the telephone and the Instinet on-line trading system. Prices 
reported in connection with those transactions (``preopening prices'') 
were transmitted to certain designated reporting authorities, and some 
or all of those reporting authorities used those prices in calculating 
values for certain stock index options settling at the opening.
    An issue arose that day as to whether the exchanges would be able 
to provide OCC with settlement values for those index options settling 
on the opening of the market whose component securities included NASDAQ 
listed issues. The exchanges were concerned that they would be unable 
to provide OCC with settlement values prior to OCC's exercise 
processing cut-off time.\6\

    \6\ The designated reporting authorities were able to calculate 
and report the settlement values for the affected series to the 
exchanges, and the exchanges reported those settlement values to OCC 
in time for OCC to conduct its normal expiration processing. 
Although the exchanges reported the settlement values somewhat later 
than usual, OCC clearing member reports were not delayed, and there 
were no significant impact on OCC's processing.
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    While the NASDAQ incident was resolved without significant impact, 
the incident prompted OCC to take a closer look at its rules respecting 
the unavailability of current index values and to consider more fully 
what steps should be taken in such a situation. OCC determined that 
certain technical

[[Page 13559]]
changes should be made to its rules to clarify the respective rights 
and responsibilities of OCC and the exchanges with respect to the 
reporting of current index values and the determination of settlement 
values.
    OCC is proposing to amend Article XVII, Section 4 of its by-laws, 
which empowers OCC to fix an exercise settlement amount in the event 
that OCC determines that the current index value is unreported or 
otherwise unavailable, to make it clear that OCC has the authority to 
fix an exercise settlement amount whenever the primary market for 
securities representing a substantial part of the value of an 
underlying index is not open for trading at the time when the current 
index value (i.e., the value used for exercise settlement purposes) 
ordinarily would be determined. OCC believes this authority is implicit 
in the language of the present by-law because in such circumstances the 
current index value would generally be ``unreported or otherwise 
unavailable;'' however, the proposed rule change will make OCC's 
authority explicit.\7\

    \7\ During the NASDAQ event, OCC stood ready to exercise this 
authority had it become necessary. However, questions arose as to 
how OCC would have determined the prices to fix exercise settlement 
amounts. OCC's proposed changes to Article XVII, Section 4 are 
intended to address those issues.
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    In addition, the proposed change assigns the responsibility for 
fixing exercise settlement amounts to a panel consisting of OCC's 
Chairman and two designated representatives of each exchange on which 
the affected series is open for trading, one of whom shall be such 
exchange's representative on OCC's Securities Committee. This procedure 
to assign the decision-making responsibility to an exchange-controlled 
panel conforms with the procedures used in making determinations with 
respect to adjustments made pursuant to Article VI, Section 11.\8\ The 
proposed change authorizes the panel to fix the exercise settlement 
amount based on its judgment as to what is appropriate for the 
protection of investors and the public interest including, without 
limitation, fixing the exercise settlement amount on the basis of the 
reported level of the underlying index at the close of trading on the 
last preceding trading day for which a closing index level was 
reported.

    \8\ Section 11 of Article VI sets forth the procedures by which 
adjustments are made to options.
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    Identical changes also are being made to Article XXIII, Section 5, 
which governs the fixing of exercise settlement amounts for FX Index 
Options. Under these proposed changes, the situation contemplated by 
the last two sentences of the definition of ``expiration date'' in 
Article XXIII, Section 1.E.(3) (i.e., where the primary market for 
underlying securities representing a substantial part of the value of 
an index is closed on an expiration date) will be explicitly covered by 
Article XXIII, Section 5; therefore, the last two sentences of Article 
XXIII, Section 1.E.(3) will be deleted.
    The remainder of the proposed changes to the by-laws are technical 
changes that are being made primarily for the purpose of conforming 
those by-laws to changes approved in SR-OCC-94-08.\9\

    \9\ Supra note 2.
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    OCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because it will facilitate the prompt and accurate clearance 
and settlement of transactions in index options and FX Index Options.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe 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 have been received.

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 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 the file number SR-OCC-95-18 and should be 
submitted by April 17, 1996.

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

    \10\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7344 Filed 3-26-96; 8:45 am]
BILLING CODE 8010-01-M