[Federal Register Volume 61, Number 143 (Wednesday, July 24, 1996)]
[Notices]
[Pages 38498-38500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18717]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37449; File No. SR-OCC-96-06]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval on a Temporary 
Basis of a Proposed Rule Change Concerning Equity TIMS

July 17, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ notice is hereby given that on May 31, 1996, 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 through November 30, 1996.
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    \1\ 15 U.S.C. Sec. 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 extend the order granting temporary 
approval of OCC's use of its Theoretical Intermarket Margin System 
(``TIMS'') for calculating clearing margin positions in equity 
options.\2\
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    \2\ Equity TIMS is a modified version of OCC'S Non-Equity TIMS, 
which is OCC'S margin system used to calculate requirements on 
options for which the underlying asset is anything but an equity 
security. Securities Exchange Act Release No. 23167 (April 22, 
1986), 51 FR 16127 [File No. SR-OCC-85-21] (order approving Non-
Equity TIMS).
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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.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by OCC.

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[[Page 38499]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    On March 1, 1991, the Commission temporarily approved a proposed 
rule change that authorized OCC to use TIMS to calculate clearing 
member margin requirements on equity options.\4\ Since its initial 
temporary approval of Equity TIMS, the Commission has extended the 
temporary approval four times.\5\
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    \4\ After the Commission's approval of File No. SR-OCC-89-12 on 
March 1, 1991, OCC phased out its previous margin system, which was 
known as the ``production system,'' and since then has used Equity 
TIMS to calculate its clearing members' margin requirements on 
equity option positions. For a complete description of Equity TIMS, 
refer to Securities Exchange Act Release No. 28928 (March 1, 1991), 
56 FR 9995 [File No. SR-OCC-89-12] (order approving the use of 
Equity TIMS to calculate margin on equity options on a temporary 
basis through May 31, 1992).
    \5\ Securities Exchange Act Release Nos. 30761 (May 29, 1992), 
57 FR 24286 [File No. SR-OCC-92-15] (order extending the approval of 
Equity TIMS through May 31, 1993); 32388 (May 28, 1993), 58 FR 31989 
[File No. SR-OCC-93-06] (order extending the approval of Equity TIMS 
through May 31, 1994); 34065 (May 13, 1994), 59 FR 26534 [File No. 
SR-OCC-94-03] (order extending the approval of Equity TIMS through 
May 31, 1995); and 36003 (July 21, 1995), 60 FR 38880 [File No. SR-
OCC-95-07] (order extending the approval of Equity TIMS through May 
31, 1996).
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    Equity TIMS utilizes options price theory (i.e., an option pricing 
model) to project the cost of liquidating in the event of a ``worst 
case'' theoretical change in the price of the underlying securities, 
each clearing member's short equity option positions and long equity 
option positions on which OCC is entitled to assert a lien. This 
projected liquidation cost is then used by Equity TIMS to calculate for 
each clearing member a margin requirement to cover that cost.
    OCC presented a report to Commission staff in April 1995 pursuant 
to staff inquiries as to whether volatility for a ten-year period 
should be used to determine equity options margin intervals. OCC's 
analysis suggests that a ten-year time frame presents problems in 
adequately assessing the potential future volatility of individual 
equities. OCC asserts that some equities (e.g., initial public 
offerings) with traded options experienced high volatility less than 
ten years ago but now are well established, less volatile securities. 
However, some equities with traded options that historically have 
experienced lower volatility have seen volatility increase due to 
market factors or changes in the business climate.
    Accordingly, OCC explored alternatives to using a ten-year period 
for determining equity options margin intervals. As a result of its 
research into such alternatives, OCC believes that the use of a four-
year stable distribution for the purposes of determining equity margin 
intervals within Equity TIMS should address the Commission's concerns. 
Stable distributions essentially seek to fit a probability distribution 
to a sample of historical data without any implicit assumptions of 
normalcy. OCC believes that stable distribution parameters will provide 
it with a greater breadth and quality of information from a given 
period of historical data and proposes to use a four-year period for 
purposes of setting equity option margin intervals.
    OCC believes the proposed rule change is consistent with the 
requirements of Section 17A of Act and the rules and regulations 
promulgated thereunder because Equity TIMS should enhance OCC's ability 
to safeguard the securities and funds 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 a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\6\ Additionally, 
Section 17A(a)(1) of the Act \7\ encourages the use of efficient, 
effective, and safe procedures for securities clearance and settlement. 
The Commission continues to believe that OCC'S proposal to utilize 
Equity TIMS meets the requirements of the Act because OCC's use of 
Equity TIMS over the past six years has resulted in better assessments 
of OCC's risk exposure associated with the clearance and settlement of 
its clearing members' equity option positions and has resulted in 
calculations of clearing margin that more accurately reflect that risk 
exposure.
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    \6\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
    \7\ 15 U.S.C. Sec. 78q-1(a)(1) (1988).
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    Nevertheless, while the Commission continues to believe that the 
margin methodology employed by Equity TIMS is basically sound, the 
Commission staff must fully analyze the efficacy of utilizing the four-
year stable distribution intervals for Equity TIMS before determining 
whether to grant permanent approval. Consequently, the Commission is 
granting temporary approval for Equity TIMS through November 30, 1996.
    OCC has requested that the Commission find good cause for approving 
the proposal prior to the thirtieth day after the publication of notice 
of filing of the proposed rule change. The Commission finds such good 
cause because accelerated approval will allow OCC to continue to use 
Equity TIMS without interruption while the Commission and OCC further 
examine Equity TIMS. The Commission notes that during the five previous 
temporary approval periods, neither OCC nor the Commission has received 
any adverse comments regarding Equity TIMS from its clearing members, 
and none are expected with regard to this filing.

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. Sec. 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 file number SR-OCC-96-06 and should be 
submitted by August 14, 1996.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-96-06) be, and hereby 
is, approved on an accelerated basis through November 30, 1996.


[[Page 38500]]


    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18717 Filed 7-23-96; 8:45 am]
BILLING CODE 8010-01-M