[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Notices]
[Pages 48194-48195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23346]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37645; File No. SR-OCC-96-09]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to the Valuation of 
Government Securities

September 5, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ notice is hereby given that on July 18, 1996, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by OCC. On August 22, 1996, OCC filed an amendment to the 
proposal.\2\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from Michael G. Vitek, Counsel, OCC, to Jerry W. 
Carpenter, Assistant Director, Division, Commission (August 19, 
1996).
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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 modify OCC's valuation of government 
securities used by clearing members as margin clearing fund deposits.

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 parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this proposed rule change is to modify the valuation 
methodology on deposits of government securities for margin and 
clearing fund purposes. The valuation rules for government securities 
for margin and clearing fund purposes have remained largely unchanged 
since the mid-1970's when OCC only valued such collateral at the time 
of deposit. Government securities are currently valued at either: (1) 
The lesser of par value or 100% of the current market value for 
maturities less than one year or (2) the lesser of par value or 95% of 
the current market value for maturities between one and ten years.\4\
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    \4\ Government securities are currently defined as securities 
issued or guaranteed by the United States or Canadian government or 
by any other foreign government acceptable to OCC and that matures 
within ten years. The term ``short-term government securities'' 
means securities maturing within one year. The term ``long-term 
government securities'' means all other government securities. The 
proposed rule change will amend the definition to delete the ten 
year restriction.
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    The par value limitation was initially included in the valuation 
methodology because the security could be carried to its maturity, when 
it would reach par value, without any subsequent valuations after its 
initial deposit with OCC. The restriction of maturities to less than 
ten years was initially implemented as a risk control device because it 
precluded the deposit of longer, more volatile securities which were 
not subject to revaluation after their initial deposit with OCC.
    Since the early 1980's, OCC has revalued government securities on a 
monthly basis. However, OCC is now prepared to revalue government 
securities on a daily basis and to

[[Page 48195]]

include such valuation in its overall daily assessment of clearing 
member margin and clearing fund deposits. OCC believes that the par 
value valuation methodology and the restriction on greater than ten 
year maturities are overly conservative and are no longer necessary to 
protect OCC from the risk of collateral value changes. Instead, the 
proposed rule change will impose new haircut levels on the values of 
government securities.
    Specifically, the rule change proposes that Section 3 of Article 
VIII of OCC's By-Laws and Rule 604 of OCC's Rules be amended to 
establish a new schedule of haircuts. Government securities deposited 
as either clearing fund or margin will be valued at: (1) 99.5% of the 
current market value for maturities less than one year; (2) 98% of the 
current market value for maturities between one and five years; (3) 
96.5% of the current market value for maturities between five and ten 
years; and (4) 95% of the current market value for maturities in excess 
of ten years.
    OCC reviewed the haircut policies of other derivative clearing 
houses and analyzed recent historical volatilites of government 
securities before assessing the proposed haircut levels. Specifically, 
OCC collected daily data since 1990 on government securities of various 
maturities across the yield curve and analyzed this historical 
volatility in the same manner in which OCC analyzes volatility for the 
setting of margin intervals within OCC's Theoretical Intermarket Margin 
System. The proposed haircut levels provided adequate coverage for more 
than 99% of all days since 1990. In addition, OCC reviewed the extreme 
volatility in the U.S. government security market that occurred on 
March 8, 1996, and found that the proposed haircut levels would not 
have been breached. Finally, OCC compared its proposed haircut levels 
with those of other derivative clearing organizations and found that 
the proposed haircut levels are consistent with the haircut policies of 
those clearing houses and that they provide prudent protection from 
market volatility.
    The proposed rule change is consistent with the purposes and 
requirements of Section 17A of the Act, as amended.\5\ Specifically, 
OCC believes the proposed rule change promotes the protection of 
investors by enhancing OCC's ability to safeguard the securities and 
funds in its possession or subject to its control.
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    \5\ 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 will have an impact or 
impose a burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Comments were not and are not intended to be solicited by OCC 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

    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 reason for so 
finding or (ii) as to which the self-regulatory organization 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 NW., Washington, DC 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 form the public in accordance with provisions of 5 
U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room in Washington, D.C. 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-96-09 and should be submitted by October 3, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23346 Filed 9-11-96; 8:45 am]
BILLING CODE 8010-01-M