[Federal Register Volume 62, Number 186 (Thursday, September 25, 1997)]
[Notices]
[Pages 50419-50422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25446]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39094; File No. SR-OCC-97-06]


Self-Regulatory Organizations, The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change to Issue, Clear, and Settle Packaged Spread Options

September 19, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 15, 1997, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on July 1, 1997, amended 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, conditioned as described below, of the proposed 
rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

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 amend OCC's by-laws 
and rules to permit OCC to issue, clear, and settle packaged spread 
options, which have been proposed for trading by the Chicago Board 
Options Exchange (``CBOE'').

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.\2\
---------------------------------------------------------------------------

    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
---------------------------------------------------------------------------

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

1. Description of Packaged Spreads
    The purpose of the proposed rule change is to amend OCC's by-laws 
and rules to permit OCC to issue, clear, and

[[Page 50420]]

settle packaged spread options, which have been proposed for trading by 
the CBOE.\3\ A packaged spread option is a cash-settled option that 
upon exercise calls for the payment by the assigned writer (i.e, 
seller) to the exercising holder (i.e., buyer) of an amount equal to 
the net exercise settlement values of all of the component options in a 
specified spread position (``exercise settlement amount''). A spread 
position is the position resulting from the purchase and sale of more 
than one option of the same type (i.e., put or call) on the same 
underlying interest. A packaged spread option permits an investor to 
create the entire spread position in a single transaction thereby 
avoiding the difficulty of simultaneous executions and potentially 
reducing transaction costs.
---------------------------------------------------------------------------

    \3\ For a description of CBOE's proposal, refer to Securities 
Exchange Release Nos. 38214 (January 28, 1997), 62 FR 5266 [File No. 
SR-CBOE-96-76] (notice of filing of proposed rule change relating to 
the listing and trading of packaged vertical spread options) and 
38213 (January 28, 1997), 62 FR 5265 [File No. SR-CBOE-96-75] 
(notice of filing of proposed rule change relating to the listing 
and trading of packaged butterfly spread options).
---------------------------------------------------------------------------

    The proposed packaged spread options will be European-style, cash 
settled index options which will synthetically create a butterfly 
spread or a vertical spread position. A butterfly spread strategy is a 
neutral strategy where the holder of the spread typically seeks to 
profit from a market in which the underlying interest does not 
significantly rise or decline in value. A packaged butterfly spread 
option is a single security that replicates the behavior of a butterfly 
spread strategy by combining four options of the same type on the same 
underlying interest with the same expiration date. Two of the options 
have the same exercise price, the third option has an exercise price 
above the exercise price of the first two by a stated amount (``spread 
interval''), and the fourth has an exercise price below the first two 
by the same spread interval. Because a butterfly spread strategy has 
precisely the same settlement value whether it consists of all puts or 
all calls, packaged butterfly spreads will not be identified as either 
puts or calls except that, as noted below, they will be counted as 
calls for purposes of determining the number of calls issued by OCC and 
registered under the Securities Act of 1933 (``Securities Act'') and 
the Act.
    A packaged vertical spread option is a single security that upon 
exercise calls for the payment of an exercise settlement amount equal 
to the net exercise settlement amounts of the component options in a 
vertical spread position. A vertical spread position consists of a 
combination of two options of the same type at different exercise 
prices expiring on the same date. The difference between the exercise 
prices is the vertical spread interval. The holder of a vertical call 
spread is long the call having the lower exercise price and is short 
the call having the higher exercise price. The holder of a vertical put 
spread is long the put having the higher exercise price and short the 
put having the lower exercise price. The holder of a vertical spread 
option typically seeks to profit from an increase (i.e., in the case of 
a vertical call spread) or decrease (i.e., in the case of a vertical 
put spread) in the value of the underlying index, with the maximum 
potential gain in either case being the amount of the vertical spread 
interval times the multiplier for the index.
2. Organization of Proposed Rule Change
    The proposed rule change consists of four sections: (i) amendments 
to OCC's existing by-laws; (ii) a new Article XXVI of the by-laws 
applicable only to packaged spread options, (iii) amendments to OCC's 
existing rules; and (iv) a new Chapter XXVII of the rules applicable 
only to packaged spread options.
3. Proposed Amendments to Existing By-Laws
    The proposed rule changes will amend certain defined terms in 
Article I of the by-laws to indicate how those terms will apply to 
packaged spread options. The definitions of the terms ``call'' and 
``put'' will be amended to state that for purposes of determining the 
number of calls and puts registered under the Securities Act and the 
Act a packaged vertical call spread option will be deemed to be a 
single call option, a packaged butterfly spread options will be deemed 
to be a single call option, and a packaged vertical put spread option 
will be deemed to be a single put option. Otherwise, for purposes of 
OCC's by-laws and rules, packaged vertical call spread options, 
packaged vertical put spread options, and packaged butterfly spread 
option will be separate ``types'' of options. Accordingly, the proposed 
rule change will amend the term ``type of option'' set forth in article 
I, Section I.T. (4) to include packaged butterfly spread options, 
packaged vertical call spread options, and packaged vertical put spread 
options as distinct types of options.
    OCC also proposes to amend the definition of ``cleared security'' 
set forth in Article I, Section I.C.(5). According to OCC, the change 
is intended merely to eliminate unnecessary words and has no specific 
relationship to packaged spread options although a packaged spread 
option will be defined as an ``option contract'' and therefore is 
within OCC's definition of ``cleared security.''
    The amendments in Sections 6 and 7 of Article VI regarding the 
issuance of securities and the reporting of matched trades, 
respectively, are intended merely to adapt those sections to apply to 
packaged spread options. Similarly, the changes in Interpretations and 
Policies .01 of OCC's rules following Article VI, Section 9, are 
intended merely to make clear that the general rights and obligations 
of holders and writers of packaged spread options will be set forth in 
new Article XXVI of OCC's by-laws and not in Article VI, Section 9. 
Article VI, Section 10 will be amended to identify the terms of 
packaged spread options that must be determined by the exchange on 
which these options trade prior to opening of trading in a series of 
packaged spread options. Additionally, Article VI, Section 18(b)(2) 
will be amended to use more general language that can apply to packaged 
spread options as well as other non-stock option products without 
referencing the particular chapter of OCC's rules that applies to each.
4. Proposed New By-laws
    The proposed rule change will adopt Article XXVI of the by-laws 
which will pertain only to packaged spread options. Section 1 will 
define additional terms and will supplement existing defined terms in 
Article I with respect to packaged spread options. Most of these are 
self-explanatory and do not require discussion.\4\ The term ``base 
exercise price'' will be used for packaged spread options rather than 
simply ``exercise price'' to avoid confusion between the exercise price 
of the packaged spread option itself and the exercise prices of the 
component positions in puts and calls that the packaged spread options 
are designed to replicate. For packaged butterfly spread options, the 
``base exercise price'' will be the exercise price of the two options 
that have the same exercise price in the spread. For packaged vertical 
call spread options, the base exercise price will be the lower exercise 
price of the spread. For packaged vertical put spread options, it will 
be the higher exercise price of the spread. Except as described above, 
packaged spread options will otherwise

[[Page 50421]]

be subject to the provisions governing index options found in Article 
XVII of OCC's Rules and Chapter XVIII of OCC's by-laws.
---------------------------------------------------------------------------

    \4\ The text of OCC's proposed rule changes is included in OCC's 
filing which is available for inspection and copying at the 
Commission's Public Reference Room or through OCC.
---------------------------------------------------------------------------

    Article XXVI, Section 2 regarding the general rights and 
obligations of holders and writers of packaged spread options is 
similar to corresponding provisions in other Articles. Provisions in 
Sections 3, 4, and 5 relating to adjustments, unavailability or 
inaccuracy of index values, and time for determination of index values 
merely incorporate corresponding provisions of Article XVII of the 
index option by-laws.
5. Proposed Amendments to Existing Rules
    Provisions in existing Rules 207 and 401 regarding records and 
reporting of matched trades, respectively, will be modified in order to 
accommodate the unique attributes of packaged spread options. Rule 602, 
which sets forth the margin requirements for non-equity options does 
not require substantive modification in order to provide for the 
margining of packaged spread options. The existing margin rules 
calculate margin for an account that contains options in a spread 
position based upon the net risk of that position. Consequently, the 
margin requirement for a short position in packaged spread options and 
the margin credit, if any, for a long position will be precisely the 
same as if margin was calculated based upon the corresponding spread 
position consisting of separate European-style puts or calls. 
Accordingly, the margin rule will apply to packaged spreads without 
modification except that Interpretations and Policies .06 to Rule 602 
will be modified to make clear that packaged spreads will never be 
treated as ``unpaired'' because short and long option positions are 
synthetically paired within the packaged spread option itself.
6. Proposed New Rules
    OCC proposes to add Chapter XXVII to its rules which will relate 
only to packaged spread options. Rule 2701 sets forth that OCC will not 
accept escrow deposits in lieu of margin on packaged spread options. 
Rules 2702 and 2703 set forth the exercise and assignment procedures 
for packaged spread options. These procedures essentially parallel the 
procedures in OCC Rules 805 and 1802-1804 that are applicable to 
European-style index options. OCC will follow its usual expiration date 
exercise procedures in identifying to clearing members those options 
that are in the money by at least $1 and will afford the clearing 
member an opportunity to negate an exercise if it chooses to do so. As 
is the case with most other options, Interpretations and Policies .01 
to proposed Rule 2702 states that these procedures are for 
administrative convenience only and are not intended to override a 
clearing member's agreement with its customers as to whether an option 
will be exercised. Rule 2704 will provide that the exercise settlement 
date will ordinarily be the business day following the expiration date 
as is the case for index options.
    Rule 2705 will specify that the exercise settlement amount for a 
packaged spread option will be the settlement value of the 
synthetically created spread position as calculated by OCC utilizing a 
settlement value furnished to OCC by the exchange on which the packaged 
spread option is traded. Rule 2706 is needed to integrate the packaged 
spread rules with those in Chapter XI relating to clearing member 
suspensions. It is parallel to similar provisions in other product-
specific chapters of the OCC's rules.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act\5\ because it 
applies to packaged spread options the same procedures and safeguards 
that have been and are successfully employed by OCC for other options 
products. OCC believes that these procedures have proven effective in 
promoting the prompt and accurate clearance and settlement of 
securities transactions and to safeguard funds and securities in its 
custody or control for which it is responsible.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1
---------------------------------------------------------------------------

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

    OCC does not believe that the proposed rule change will have any 
material adverse impact 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

    Section 17A(b)(3)(F) \6\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible and to promote the prompt and accurate 
clearance and settlement of securities transactions. OCC's proposal 
will allow OCC to clear and settle packaged spread options using 
existing OCC systems, rules, and procedures. Thus, due to the 
similarity of packaged spreads to other option products currently 
cleared and settled by OCC, OCC should be able to implement the 
clearance and settlement of packaged spread options safely and in a 
manner consistent with its safeguarding obligations under Section 17A. 
In addition, the packaging of a strategy that synthetically creates two 
option positions (as with vertical spread options) and four option 
positions (as with the packaged butterfly spread options) into one 
security should reduce the number of transactions processed because a 
clearing member will only have to enter into one transaction and 
because OCC will only have to process one transaction rather than 
multiple transactions to achieve the same option strategy. In this way, 
the Commission believes that the proposal is consistent with OCC's 
obligation under Section 17A to promote the prompt and accurate 
clearance and settlement of securities transactions.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after publication of notice of the 
filing because accelerated approval will allow OCC to coordinate the 
issuance, clearance, and settlement of packaged spread options with the 
CBOE's listing of packaged spread options. The Commission believes that 
because OCC will be applying procedures which have proved to be 
efficient and safe in the past, accelerated approval is justified. 
Furthermore, no negative comments were received upon publication of the 
notice of filing of the CBOE's proposed rule changes, and the 
Commission does not expect to receive any adverse comments on the 
present proposed rule change.\7\ However, the Commission's approval of 
OCC's proposed rule change is subject to the Commission's approval of 
CBOE's proposed rule changes.
---------------------------------------------------------------------------

    \7\ Supra note 3.
---------------------------------------------------------------------------

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

[[Page 50422]]

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 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 the file 
number SR-OCC-97-06 and should be submitted by October 16, 1997.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-97-06) be and hereby is 
approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25446 Filed 9-24-97; 8:45 am]
BILLING CODE 8010-01-M