[Federal Register Volume 63, Number 153 (Monday, August 10, 1998)]
[Notices]
[Pages 42653-42655]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21305]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40295; File No. SR-OCC-98-05]


Self-Regulatory Organizations; The Options Clearing Corporations; 
Notice of Filing of a Proposed Rule Change Authorizing the Designation 
of Sunday as a Business Day and Clarifying the Rules for Margining 
Exercised and Assigned Positions in Currency Options

July 31, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 5, 1998. 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. The Commission is publishing this notice is solicit comments 
from interested persons on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change (1) will provide OCC with the flexibility 
to designated Sunday as a business day for the purposes of calculating 
the exercise settlement date for foreign currency options and for 
cross-rate foreign currency options (collectively ``currency options'') 
and (2) will clarify the rules governing the calculation of margin of 
exercised and assigned currency options.

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

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[[Page 42654]]

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

    The principal purpose of the proposed rule change is to provide OCC 
with the flexibility to designate Sunday as a business day for the 
purpose of determining the exercise settlement date for foreign 
currency and cross-rate foreign currency options. The secondary purpose 
of the proposed rule change is to clarify the rule governing the 
calculation of margin with respect to positions in cross-rate foreign 
currency options following their exercise and assignment.
Sunday as a Business Day
    In 1986, OCC amended its Rules to provide that the Sunday following 
an expiration would be deemed to be a business day for the purposes of 
determining the exercise settlement date for expiring foreign currency 
options.\3\ According to OCC, the reason for this change was to permit 
expiring foreign currency options to settle on the same day as the 
foreign currency futures contracts traded on he International Monetary 
Market (``IMM'') and to a lesser degree on the Philadelphia Board of 
Trade (``PBOT''). IMM futures contracts expire on a quarterly basis, 
and the coordination of exercise settlement dates among OCC-cleared 
options, IMM-trades futures contracts, and PBOT-traded futures 
contracts created hedging opportunities and settlement efficiencies for 
OCC's membership.
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    \3\ Securities Exchange Act Release No. 23781 (November 17, 
1986) 51 FR 41556 [File No. SR-OCC-86-20]
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    While the use of Sunday as a business day aligned the exercise 
settlement dates for the above-described contracts, OCC believes that 
it also resulted in certain operational issues. For example, non-
expiring foreign currency options that were exercised on the same date 
as expiring foreign currency options were settled on a different 
exercise settlement date than the expiring options. According to OCC, 
he operational issues were nonetheless manageable at the time the 
change was made. However, the addition of end-of-the-month options, 
serial month (i.e., non-quarterly), and flexibly structured options on 
currencies have made the management of these operational issues 
increasingly difficult for OCC and the membership alike.
    OCC believes that it is not always necessary to use Sunday as a 
business day for determining the settlement date for currency options. 
The opportunity to hedge with the IMM of PBOT futures realistically 
only occurs four times a year. For twenty other expirations, the 
benefits derived from using Sunday as a business day are not fully 
achieved. Yet, OCC and the membership still bear the costs for staffing 
those Sundays in order to complete DVP processing so that exercised 
currency options settle on the correct date. Accordingly, OCC is 
proposing to resolve these operational issues by amending its Rules to 
allow OCC to designate when Sunday will be a business day for purposes 
of calculating exercise settlement dates.
    In addition, OCC desires to coordinate the date on which exercise 
settlement occurs for expiring options exercised on Friday and non-
expiring options also exercised on Friday. As such, OCC proposes to 
amend its Rules to provide that if Sunday is used as a business day for 
determining the exercise settlement date of exercised expiring options, 
it will also be used as a business day for exercised non-expiring 
options.
    OCC believes that several advantages would be achieved from 
implementing the foregoing changes. Staffing costs would be reduced for 
OCC and the membership as DVPs would only need to be processed on 
Sunday four times a year as opposed to twenty-four times a year as is 
now the case. When Sunday is not designated as a business day, DVP 
processing would occur on Monday. Coordination of settlement dates for 
options (expiring and non-expiring) exercised on the same date will 
increase settlement efficiencies, reduce the complexity of the 
settlement cycle, and limit confusion regarding when exercise 
settlement is to occur. The membership, through their representatives 
on the Roundtable, have concurred with the foregoing proposals. Under 
the proposed rule, OCC would notify the membership in advance of when 
Sunday would be used as a business day for determining an exercise 
settlement date.
    Changes are being made to Rules 602, 1602, 1604, 1605, 1606, 1606, 
2102, 2104, 2105 and 2106 (either in the text or in the Interpretations 
and Policies thereto) to conform them to the proposed changes for the 
reasons stated above.\4\
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    \4\ The complete text of the proposed changes to the Rules is 
included in OCC's filing, which is available for inspection and 
copying at the Commission's public reference room and through OCC.
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Margin Change
    Two amendments are being proposed to Rule 602(f) which concerns the 
calculation of margin on currency option contracts following their 
exercise and assignment. The first change is to clarify Rule 
602(f)(2)(i) to state that margin calculations are performed separately 
on positions in foreign currency options and cross-rate foreign 
currency options and that a clearing member's positions in cross-rate 
currency options which generate a net margin credit can be used to 
offset the clearing member's margin requirement arising from other 
positions. According to OCC, the credit generated from cross-rate 
foreign currency options is not necessary to protect OCC against the 
risk of DVP bank default as exercises of cross-rate foreign currency 
options do not settle via OCC's DVP System. Accordingly, OCC believes 
that permitting a clearing member's net margin credit from exercised 
cross-rate currency options to offset any other margin requirement is 
consistent with its net margining philosophy and does not create any 
undue risk to OCC. The second purpose is to conform Rule 602 to the 
changes relating to the designation of Sunday as a business day.
    OCC believes the proposed rule change is consistent with Section 
17A of the Act because it facilitates coordination of settlement across 
markets and promotes settlement efficiencies without adversely 
affecting the securities or funds for which OCC is responsible.

(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 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

    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 reasons for so 
finding or (ii) as to which OCC 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.

[[Page 42655]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of OCC. All 
submissions should refer to File No. SR-OCC-98-05 and should be 
submitted by August 31, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-21305 Filed 8-7-98; 8:45 am]
BILLING CODE 8010-01-M