[Federal Register Volume 61, Number 171 (Tuesday, September 3, 1996)]
[Notices]
[Pages 46499-46500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22278]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37602; File No. SR-OCC-95-17]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Approving a Proposed Rule Change Modifying the Escrow Deposit 
Program

August 26, 1996.
    On November 2, 1995, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-95-17) 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 June 7, 1996.\2\ 
OCC amended the proposed rule change on March 22, 1996, and on July 22, 
1996.\3\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 37258 (May 30, 1996), 61 
FR 29160.
    \3\ Letters from Jean M. Cawley, OCC, to Jerry W. Carpenter, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission (March 20, 1996, and July 22, 1996). Because the 
amendments are technical rather than substantive in nature, the 
Commission believes it is not necessary to re-notice the proposed 
rule change.
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I. Description of the Proposal

    OCC is modifying its escrow deposit program to (i) permit escrow 
deposits for stock put options and stock index put options; (ii) delete 
provisions regarding OCC's batch system for processing escrow receipts; 
(iii) change provisions regarding the timing of the release of escrow 
deposits; and (iv) delete provisions for bulk deposits for call options 
and deposits of Treasury bills for put options. In addition, OCC is 
modifying other OCC rules and the On-line Escrow Deposit Agreement to 
conform to this rule change.
    Pursuant to OCC rules, clearing members may deposit, which deposit 
may be in the form of an escrow deposit, with an OCC approved custodian 
shares of stock underlying certain options in lieu of margin. Escrow 
deposits are specific deposits of assets held by OCC at an approved 
custodian for the account of a specific customer. Presently, OCC's 
rules restrict escrow deposits to short positions in stock call option 
contracts and stock index call option contracts. For stock call 
options, the underlying security may be deposited in escrow, and for 
stock index call options, any combination of cash, short-term 
government securities, or marginable equity securities may be deposited 
in escrow.
    Permitting escrow deposits with respect to short positions in stock 
put option contracts and short positions in stock index put option 
contracts had been deferred until sufficient interest existed and an 
acceptable system was developed to process escrow deposits for put 
options. After receiving requests to expand its escrow program to 
include such deposits for stock and stock index puts, OCC determined to 
make several enhancements and modifications to its escrow program.
    First, OCC is expanding its escrow program to permit escrow 
deposits for short positions in stock put option contracts and in stock 
index put option contracts and to process those deposits through its 
on-line Escrow Receipt Depository (``ERD'') system.\4\ To accomplish 
the proposed expansion of

[[Page 46500]]

its escrow program, certain changes to OCC Rules 610 and 1801 are 
necessary. In general, the changes will accommodate the deposit of any 
combination of cash and short-term government securities \5\ for short 
positions in put contracts, will provide for the valuation and 
substitution of deposited assets, and in the event of the value of the 
property declines below a specified amount, will permit OCC to 
disregard the escrow deposit and require the clearing member to deposit 
margin upon notice.
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    \4\ For a complete description of the batch ERD system and the 
transition to the on-line ERD system, refer to Securities Exchange 
Act Release No. 31595 (December 11, 1992), 57 FR 61139 [SR-OCC-92-
30] (order approving on an accelerated basis a proposed rule change 
relating to the conversion of OCC's current batch ERD system to an 
on-line system).
    \5\ As defined in Rule 610, proposed Interpretation .02, short-
term government securities is defined as securities with a fixed 
principal amount issued or guaranteed by the United States and 
having one year or less to maturity.
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    Second, OCC is eliminating its batch ERD system for processing 
escrow receipts. OCC contemplated the eventual replacement of the batch 
ERD system with its on-line ERD system. OCC believes that all its 
clearing members and custodian banks now have completed their 
transition to the on-line system because the batch ERD system is no 
longer used. Therefore OCC is eliminating references to escrow receipts 
in Rule 610 and 1801 and to the batch processing system described in 
Rule 613(a).
    Third, OCC is amending Rule 613 to modify the time at which it 
releases escrow deposits. OCC currently releases an escrow deposit on 
the second business day following the expiration of the short position 
covered by the deposit, and thereafter if assigned, collects margin for 
the position formerly covered by the deposit until the next business 
day after the exercise settlement date. With this proposed rule change 
OCC will hold an escrow deposit covering a short position to which an 
exercise has been allocated until the business day after the exercise 
settlement date and will no longer collect margin.
    Fourth, OCC is amending Rule 610 to eliminate bulk deposits of 
underlying securities for call options and the deposit of Treasury 
bills for put options because these capabilities have been rarely, if 
ever, used by clearing members. Furthermore, the provisions for 
depositing Treasury bills for put options is being superseded by the 
new provisions for providing escrow deposits for put option contracts.
    Finally, OCC is modifying rules that relate to the suspension and 
liquidation of a clearing member to conform to OCC's escrow deposit 
program described above. Specifically, OCC is amending Rule 1106(b)(2) 
to make explicit that OCC would make timely settlement on an exercise 
assigned to a covered short position of a suspended clearing member 
even if the depository had not turned over the deposited property to 
OCC at the time of settlement. OCC would be entitled to reimburse 
itself for the cost of effecting such settlement from the deposited 
property when such property is remitted to OCC. Similarly, Rule 
1107(b)(2) is being amended to reflect the same principles to 
assignments pending at the time of a clearing member's suspension. 
Also, OCC amended its Restated On-Line Escrow Deposit Agreement which 
is to be executed between OCC and each approved escrow deposit bank. 
The amended agreement parallels the principal purposes of the filing, 
which are to provide for the expansion of the program to include escrow 
deposits for short positions in stock and stock index put options, the 
elimination of hard copy receipts, and the modification of the time at 
which escrow deposits are released.

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F).\6\ Section 17A(b)(3)(F) requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds in the custody or control of the 
clearing agency or for which it is responsible. The Commission believes 
that OCC's proposed rule change meets these requirements by 
establishing a framework in which existing OCC systems, rules, and 
procedures are extended to allow escrow deposits for short positions in 
stock put option contracts and stock index put option contracts. The 
elimination of the batch ERD system and the designation of the on-line 
ERD system as the means of processing escrow deposits should make 
processing such deposits more efficient and should promote the 
safeguarding of the deposits in the possession of OCC or for which it 
is responsible. By expanding the escrow receipt framework to include 
short positions in stock put and stock index put option contracts and 
by eliminating unnecessary steps in the escrow receipt process (e.g., 
release of deposits followed by margin collection and bulk deposits for 
put options), OCC is creating more efficient procedures in order to 
streamline the processing of escrow receipts. As a result, the prompt 
and accurate clearance and settlement of securities transactions should 
be promoted.
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    \6\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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III. Conclusion

    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-95-17) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22278 Filed 8-30-96; 8:45 am]
BILLING CODE 8010-01-M