[Federal Register Volume 62, Number 13 (Tuesday, January 21, 1997)]
[Notices]
[Pages 3070-3071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1361]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38165; File No. SR-OCC-96-19]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Accelerated Approval of a Proposed Rule Change Relating 
to the Expiration Time and Assignment Processing Procedures for Certain 
Flexibly Structured Foreign Currency Options

January 14, 1997.
    On December 17, 1996, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change (File No. SR-OCC-96-19) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') to modify the 
expiration time and assignment processing procedures for certain 
flexibly structured foreign currency options.\1\ Notice of the proposal 
was published in the Federal Register on December 23, 1996.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is granting accelerated approval of the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 38070 (December 20, 
1996), 61 FR 68807.
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I. Description

    The rule change modifies the expiration time and assignment 
processing procedures for certain flexibly structured foreign currency 
options, including certain flexibly structured cross-rate foreign 
currency options. Under the rule, all flexibly structured foreign 
currency options and flexibly structured cross-rate foreign currency 
options (collectively referred to as ``flexibly structured FCOs'') 
listed for trading after January 14, 1997, and expiring on or after 
April 1, 1997, will expire at 10:15 a.m. Eastern Time (``ET'') instead 
of 11:59 p.m. ET. Furthermore, all flexibly structured FCOs will be 
subject to pro rata assignment instead of random assignment.
    The Philadelphia Stock Exchange (``PHLX'') presently trades two 
types of flexibly structured FCO contracts. They are (1) flexibly 
structured FCOs for which market participants do not specify an 
expiration date (``standard flex FCOs'') which expire on standard mid-
month and end-of-month expiration dates at 11:59 p.m. ET (this 
expiration time is consistent with standard foreign currency options); 
and (2) custom dated flexibly structured FCOs (``custom dated flex 
FCOs'') for which market participants specify the expiration date and 
which expire at 10:15 a.m. ET on such expiration date. Exercise notices 
regarding standard flex FCOs are subject to random assignment 
processing. Exercise notices regarding custom dated flex FCOs are 
subject to pro rata assignment processing.
    PHLX requested that OCC modify its rules to provide that the 
expiration time for both types of flexibly structured FCOs be 10:15 
a.m. ET on their expiration date, and that exercises involving such 
flexibly structured FCOs be assigned pursuant to OCC's pro rata 
procedures.\3\ PHLX also requested that this change be effective for 
any standard flex FCOs listed for trading after January 14, 1997, with 
an expiration on or after April 1, 1997. Accordingly, any standard flex 
FCO contract established on or before January 14, 1997, will expire at 
11:59 p.m. ET and be subject to a random assignment process. Currently, 
there is open interest in standard flex FCOs expiring mid-month and 
end-of-month for the months of March, April, July, September, and 
October 1997.\4\ Because the existing standard flex FCOs will be exempt 
from the new procedures, OCC will be required to execute two separate 
processing cycles, one in the morning and one in the evening. OCC has 
represented to the Commission that the execution of two separate 
processing cycles will not adversely affect OCC or its participants.\5\
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    \3\ The Commission has approved a proposed rule change by PHLX 
regarding the trading hours, expiration times, assignment procedures 
and other operational procedures for flexibly structured FCOs. 
Securities Exchange Act Release No. 37718 (September 24, 1996), 61 
FR 51479 [File No. SR-PHLX-96-13] (order approving proposed rule 
change).
    \4\ Notwithstanding the above, PHLX has indicated that it may 
ask holders of existing series to direct OCC to adjust the 
expiration time so that such contracts will expire at 10:15 a.m. ET 
with pro rata assignment. If the holders and the writers direct OCC 
to make these adjustments, OCC will act accordingly provided that 
OCC receives the proper authorizations from all parties involved.
    \5\ Additionally, OCC believes that the change in assignment 
processing is merely a change in OCC's procedures and does not 
affect the methodologies of either the random or pro rata assignment 
process.

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[[Page 3071]]

    Certain definitions in OCC's by-laws have been amended to be 
consistent with the previously approved PHLX rules.\6\ Articles I, XV, 
and XX of OCC's by-laws regarding expirations dates and times for 
standard option contracts, foreign currency options, and cross-rate 
foreign currency options, respectively, have been amended to better 
define the distinction between standard foreign currency options and 
flexibly structured FCOs and will clarify that, but for standard flex 
FCOs established on or before January 14, 1997, all flexibly structured 
FCOs, whether standard flex FCOs or custom dated flex FCOs, will expire 
at 10:15 a.m. on the expiration date and be subject to a pro rata 
assignment process. In addition, Section 1.E(4)(iii) of Articles XV and 
XX of OCC's by-laws will serve as a transitional rule to govern the 
expiration time and assignment processing to be used for existing 
standard flex FCO contracts (i.e., standard flex FCO contracts 
established on or before January 14, 1997) and to exempt such standard 
flex FCO contracts from the rule change.
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    \6\ The specific changes to OCC's by-laws are set forth in OCC's 
proposed rule change, which is available for review through OCC and 
the Commission's Public Reference Room.
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II. Discussion

    Section 17A(b)(3)(F) of the Act \7\ provides that the rules of a 
clearing agency must be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that the proposed rule change is consistent with OCC's 
obligation under the Act because it will increase uniformity in the 
expiration time and assignment processing procedures for all flexibly 
structured FCOs. Because OCC has modified its by-laws to create uniform 
expiration times for all flexibly structured FCO contracts listed for 
trading after January 14, 1997 with an expiration on or after April 1, 
1997 to 10:15 a.m. ET, any investor confusion resulting from the 
disparate expiration times for standard flex FCOs and custom flex FCOs 
should be reduced which should promote the prompt and accurate 
clearance and settlement of securities transactions.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    Furthermore, OCC's by-laws also have been modified to require that 
exercise notices regarding both custom flex and standard flex FCOs be 
assigned pursuant to OCC's pro rata procedures as opposed to random 
assignment procedures. Under random assignment procedures, option 
writers are randomly
assigned and exercised against.\8\ Under pro rata assignment, the 
number of contracts assigned to a particular option writer is directly 
proportional to the total number of option contracts assigned to all 
option writers.\9\ Pro rata assignment should allow member participants 
to ascertain their exercise exposures more quickly than with random 
assignment processing. Accordingly, because standard flex FCO writers 
will be able to ascertain their exposures, the rule change should 
increase liquidity thereby enhancing the prompt and accurate clearance 
and settlement of securities transactions.
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    \8\ For example, option writers could have none, some, or all of 
their positions in a particular series of contracts assigned.
    \9\ For example, under pro rata processing if 25% of all 
outstanding contracts in a particular series are exercised, an 
individual writer will know that only 25% of its short position in 
such contracts will be assigned.
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    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing. The Commission finds good cause for so 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of filing so that the proposal can be 
implemented by January 14, 1997 in conjunction with the end of a 
foreign currency options expiration cycle.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A 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-96-19) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3 (a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1361 Filed 1-17-97; 8:45 am]
BILLING CODE 8010-01-M