[Federal Register Volume 63, Number 248 (Monday, December 28, 1998)]
[Notices]
[Pages 71535-71536]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34252]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40813; File No. SR-OCC-98-06]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to Market 
Coordination in the Application of Circuit Breakers

December 21, 1998.
    On June 9, 1998, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') and on 
July 23, 1998 and October 27, 1998, amended the proposed rule change 
(File No. SR-OCC-98-06) 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 November 5, 1998. \2\ No comment letters 
were received. For the reasons discussed below, the Commission is 
approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s (b) (1).
    \2\ Securities Exchange Act Release No. 40624 (October 30, 1998) 
63 FR 59834.
---------------------------------------------------------------------------

I. Description

    On April 9, 1998, the Commission approved amendments to the 
``circuit breaker'' provisions of Rule 80B of the New York Stock 
Exchange (``NYSE''). \3\ Under the amended Rule 80B, the securities 
markets could reopen after a trading halt and continue to trade in the 
range of 20 to 30 percent down while the rules of the Chicago 
Mercantile Exchange would not permit index

[[Page 71536]]

futures contracts to trade below twenty percent down. As a result, it 
is possible that the closing prices used by the future markets to 
determine variation margin on index futures and the closing prices of 
future options could lose their theoretical relationship to the closing 
prices of related index option contracts. In such circumstances, OCC 
margin calculations for cross-margined accounts might incorrectly 
estimate the actual risk of the cross-margined positions.
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 39846 (April 9, 1998) 63 
FR 18477. OCC submitted a comment letter in response to the notice 
of the proposed rule change. Letter from Wayne P. Luthringshausen, 
Chairman, OCC (March 23, 1998).
---------------------------------------------------------------------------

    The rule change permits OCC to adjust margin requirements for 
cross-margined accounts in the event of an asynchronized application of 
circuit breakers by the securities and futures exchanges. Specifically, 
the rule change gives OCC plenary authority to take whatever actions 
that it deems appropriate to adjust margins with respect to cross-
margined accounts when futures and options market have become delinked.

II. Discussion

    Section 17A(b)(3)(F) of the Act \4\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody and control of the clearing agency 
or for which it is responsible. Section 17A(a)(2)(A)(ii) of the Act \5\ 
directs the Commission to use its authority under the Act to facilitate 
the establishment of linked or coordinated facilities for the clearance 
and settlement of transactions in securities, securities options, 
contracts of sale for future delivery and options thereon, and 
commodity options. The Commission believes that the proposed rule 
change is consistent with these requirements under the Act.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1(b)(3)(F).
    \5\ 15 U.S.C. 78q-1(a)(2)(A)(ii).
---------------------------------------------------------------------------

    The Commission views the use of cross-margining arrangements as a 
significant risk reduction method because it provides a means whereby 
individual clearing organizations do not have to independently manage 
the risk associated with some components (i.e., the futures or options 
component) of a clearing member's total portfolio. Therefore, cross-
margining programs serve to help OCC assure the safeguarding of 
securities and funds and to facilitate the establishment of linked or 
coordinated facilities for the clearance and settlement of futures and 
options, transactions in securities. However, if the securities and 
futures markets became delinked because of an asynchronized application 
of circuit breakers it is possible that OCC's margin system might not 
accurately estimate the risk associated with positions in a cross-
margined account. The Commission believes that the rule change should 
ensure the continuous accuracy of OCC's margin calcualtions for cross-
margined accounts.

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. OCC-98-06) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority. \6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3 (a) (12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34252 Filed 12-24-98; 8:45 am]
BILLING CODE 8010-01-M