[Federal Register Volume 63, Number 204 (Thursday, October 22, 1998)]
[Notices]
[Pages 56684-56685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28320]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40563; File No. SR-OCC-98-05]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval 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

October 15, 1998.
    On June 5, 1998, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change (File No. SR-OCC-98-05) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposal was published in the Federal Register on August 11, 
1998.\2\ For the reasons discussed below, the Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 40295 (July 31, 1998) 63 
FR 42655.
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I. Description

    The rule change provides OCC with the flexibility to designate 
Sunday as a business day for the purposes of determining the exercise 
settlement date for foreign currency and cross-rate foreign currency 
options. The rule change also clarifies the rule governing the 
calculation of margin with respect to positions in cross-rate foreign 
currency options following their exercise and assignment.
    Currently, the Sunday following an expiration is deemed to be a 
business day for the purposes of determining the exercise settlement 
date for expiring foreign currency options.\3\ This designation permits 
expiring foreign currency options to settle on the same day as the 
foreign currency futures contracts traded on the 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-traded futures contracts, and PBOT-traded futures 
contracts create 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.
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    While the use of Sunday as a business day aligned the exercise 
settlement dates for the above-described contracts, it resulted in 
certain operational issues for OCC. 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. 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 or 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.
    The rule change allows OCC to coordinate the date on which exercise 
settlement occurs for expiring options exercised on Friday and non-
expiring options also exercised on Friday. The rule change provides 
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. When Sunday is not 
designated as a business day, DVP processing will occur on Monday. OCC 
will notify the membership in advance of when Sunday would be used as a 
business day for determining an exercise settlement date.\4\
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    \4\ Changes are made to Rules 602, 1602, 1604, 1605, 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. 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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    In addition, two amendments are made to Rule 602(f) concerning the 
calculation of margin on currency option contracts following their 
exercise and assignment. The first change clarifies 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. The second 
amendment conforms Rule 602 to the changes relating to the designation 
of Sunday as a business day.

II. Discussion

    Section 17A(b)(3)(F) of the Act \5\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that allowing OCC to designate Sunday as a business day will 
increase settlement efficiency

[[Page 56685]]

and limit confusion regarding when exercise settlement is to occur. In 
addition, the Commission believes that permitting an OCC clearing 
member's net margin credit from exercised cross-rate currency options 
to offset any other margin requirement also promotes the coordination 
of settlement across markets. Therefore, the Commission believes that 
OCC's rule change is consistent with its obligation under Section 
17A(b)(3)(F) to promote the prompt and accurate clearance and 
settlement of securities transactions.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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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 with 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-98-05) be and hereby is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28320 Filed 10-21-98; 8:45 am]
BILLING CODE 8010-01-M