[Federal Register Volume 63, Number 6 (Friday, January 9, 1998)]
[Notices]
[Pages 1521-1523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-494]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39503; File No. SR-OCC-97-19]
Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Relating to the Establishment of a Service Providing
Theoretical Profit and Loss Values for Use in Calculating Net Capital
Requirements for Listed Options and Related Positions and Relating to
Fees and Charges Associated With the New Service
December 31, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 29, 1997, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change (File No.
SR-OCC-97-19) as described in Items I and II below, which items have
been primarily prepared by OCC. The commission is publishing this
notice and order to solicit comments from interested parties and to
grant accelerated approval of the proposal.
---------------------------------------------------------------------------
\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 proposed rule change will allow OCC to provide to its clearing
members and to broker-dealers that are not OCC clearing members a new
service which will provide theoretical profit and loss values for
broker-dealers' use in calculating their net capital requirements under
the Commission's uniform net capital rule \2\ for listed options and
related positions. OCC also is proposing to amend its schedule of fees
to include fees for the new service.\3\
---------------------------------------------------------------------------
\2\ Rule 15c3-1, 17 CFR 240.15c3-1.
\3\ OCC's proposed schedule of fees for the new service is
attached to this release as Exhibit 1.
---------------------------------------------------------------------------
[[Page 1522]]
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 the basis for the proposed rule change
and discussed any comments it received on the proposed rule change. The
text of these statements have been examined at the places specified in
Item IV below. OCC has prepared summaries, as set forth in sections A,
B, and C below, of the most significant aspects of these statements.\4\
---------------------------------------------------------------------------
\4\ The Commission has modified the text of the summaries
prepared by OCC.
---------------------------------------------------------------------------
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
On February 6, 1997, the Commission adopted amendments to its
uniform net capital rule.\5\ The amendments allow broker-dealers to use
theoretical options pricing models to determine net capital
requirements for listed options and related positions.
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 38248 (February 6,
1997), 62 FR 6474 (February 12, 1997). The amendments adopted in the
release took effect on September 1, 1997.
---------------------------------------------------------------------------
In the release adopting the amendments (``Adopting Release''),\6\
the Commission discusses a pilot program that it had sponsored to
evaluate a risk-based haircut system. OCC and the Chicago Board Options
Exchange, Incorporated (``CBOE'') had been invited by the Commission's
Division of Market Regulation (``Division'') to participate in the
pilot program. In connection with the pilot program and with the
concurrence of the Division, OCC developed the software and carried out
the operations to calculate risk-based haircuts. Under the Commission's
release proposing the amendments \7\ and under the Division's no-action
letter \8\ regarding risk-based haircuts, broker-dealers in the pilot
were required to use OCC's theoretical intermarket margining system to
determine theoretical option prices.
---------------------------------------------------------------------------
\6\ Id.
\7\ Securities Exchange Act Release No. 33761 (March 15, 1994),
59 FR 13275 (March 21, 1994).
\8\ Letter from Brandon Becker, Division of Market Regulation,
Commission, to Mary L. Bender, First Vice President, CBOE, and to
Timothy Hinkas, Vice President, OCC (March 15, 1994).
---------------------------------------------------------------------------
OCC believes that the pilot program confirmed the theory that a
risk-based haircut system reflects the risk inherent in options
positions more accurately than systems used previously and that it
significantly reduces haircuts for accounts having primarily hedged
positions. In the Adopting Release, the Commission recognizes the pilot
program's findings and allows all broker-dealers to employ theoretical
option pricing models in determining net capital requirements for
listed options and related positions. In addition, the Adopting Release
states that OCC's theoretical options pricing methodology is deemed to
be an approved model for calculating haircuts under the net capital
rule for a period of two years from the effective date of the
amendments to the net capital rule adopted in the Release.\9\
---------------------------------------------------------------------------
\9\ OCC has informed the Commission that prior to the expiration
of the two year approval period it will clarify the status of its
theoretical option pricing model by appropriate approval from the
examining authority designated pursuant to Section 17(d) of the Act,
15 U.S.C. 78q(d).
---------------------------------------------------------------------------
During both the pilot program and the period after effectiveness of
the amendments to the uniform net capital rule, OCC has provided the
theoretical profit and loss values free of charge to broker-dealers
using its service. Beginning January 1, 1998, OCC intends to begin
charging OCC clearing members for theoretical profit and loss values.
OCC also will provide theoretical profit and loss values to broker-
dealers that are not clearing members and will use the same fee
structure. The proposed fee structure is based on the ongoing
operational costs that OCC will incur to provide the service to broker-
dealers regardless of whether they are OCC clearing members. The fee
structure for OCC's theoretical profit and loss value service is
attached as Exhibit 1.
Operationally, OCC will provide theoretical profit and loss values
to broker-dealers through two means: (1) By computer interface or (2)
by dial-up access through OCC's theoretical information online system
(``TIO''). Broker-dealers that choose to receive data by computer
interface will be required to receive each day a full file containing
theoretical values for each class group.\10\ Broker-dealers that choose
to receive data by TIO will be able to receive partial theoretical
information.
---------------------------------------------------------------------------
\10\ OCC has informed the Commission that a full file will
contain approximately 2000-3000 class groups.
---------------------------------------------------------------------------
OCC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \11\ because it simplifies the
net capital treatment of options and more accurately reflects the risk
inherent in broker-dealer option position. OCC also believes that the
proposed rule change allocates fees in an equitable manner.
---------------------------------------------------------------------------
\11\ 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 would 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 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) of the Act \12\ requires that the rules of a
clearing agency be designed to remove impediments to and perfect the
mechanism of a national system for prompt and accurate clearance and
settlement of securities transactions. The Commission believes that the
proposed rule change is consistent with OCC's obligations under Section
17A(b)(3)(F) because the use of OCC's theoretical profit and loss
values should increase the accuracy of the valuation of broker-dealer
option positions. This increased accuracy should allow OCC's clearing
members and other broker-dealers using the service to improve their
operations and therefore to improve the mechanism of the national
clearance and settlement system.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In addition, Section 17A(b)(3)(D) of the Act \13\ requires that the
rules of a clearing agency provide for the equitable allocation of
reasonable dues, fees, and other charges among its participants. The
Commission believes that the proposed rule change is consistent with
OCC'S obligations under Section 17A(b)(3)(D) because the fees for the
theoretical profit and loss value services are applied equally to all
broker-dealers using the service whether or not they are OCC clearing
members.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the publication of notice of
the filing. Approving the proposed rule change prior to the thirtieth
day after publication of notice will allow OCC to continue to offer its
theoretical profit and loss value service without interruption. This is
important because currently OCC's model is the only approved
theoretical options pricing model.
[[Page 1523]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making such 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 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 Section, 450 Fifth Street, NW.,
Washington, DC 20549. 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 No. SR-OCC-97-19 and should be submitted by
January 30, 1998.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-97-19) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
Exhibit 1
Theoretical profit and loss values
Computer Interface:
Monthly fee (per broker*)............................... $2,000.00
Month-end only (per class group for all class groups in
the database**) (per broker)........................... 0.10
Dial-up access (via Theoretical Information Online System)
per class group per day per broker** ($200.00 minimum and
$2,000.00 maximum per month per broker).................... 0.10
* ``Per broker'' essentially means ``per seaparte net capital
calculation,'' i.e., does not mean that the charges apply to each
market-maker/specialist whose positions are taken into account
calculating a broker's net capital.
** Approximately 2000-3000 class groups
[FR Doc. 98-494 Filed 1-8-98; 8:45 am]
BILLING CODE 8010-01-M