[Federal Register Volume 66, Number 6 (Tuesday, January 9, 2001)]
[Notices]
[Pages 1712-1713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-543]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43782; File No. SR-OCC-00-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the Definition 
of Marking Price and Closing Price

December 29, 2000.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') notice is hereby given that on May 2, 2000, 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 to solicit comments on 
the proposed rule change from interested persons.
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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 would amend OCC's price determination 
rules by conforming the definition of ``marking price'' to the 
definition of ``closing price.'' The rule change would also revise both 
definitions to clarify that OCC will normally determine underlying 
stock prices based on the last reported sale price during regular 
business hours.

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\
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    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to conform the 
definition of ``marking price'' in OCC Rule 601 to the definition of 
``closing price'' in OCC Rule 805. The rule change would also revise 
both definitions to clarify that OCC will normally determine underlying 
stock prices based on the last reported sale price during regular 
business hours.
Background
    OCC Rule 805(j) defines the term ``closing price'' for purposes of 
OCC's exercise by exception procedure. Under this procedure, unless a 
clearing member specifically instructs OCC to the contrary, expiring 
equity options in the clearing member's accounts are exercised without 
any affirmative action by the clearing member if the ``closing price'' 
of the underlying stock exceeds (in the case of a call) or is less than 
(in the case of a put) the strike price of the option by a specified 
interval. That interval is three-quarters of a point in a customers' 
account and one-quarter of a point in any other clearing member 
account.\3\
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    \3\ See OCC Rule 805(d)(2).
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    Before February 1999, Rule 805(j) defined ``closing price'' to mean 
the closing price of an underlying stock ``on its primary market.'' In 
recognition of the increasing fragmentation of the equity markets, the 
rule was amended in February 1999 to refer instead to the last reported 
sale price ``on such national securities exchange or other domestic 
securities market as [OCC] shall determine.'' \4\ Thus, the rule change 
gave OCC the discretion to designate the market whose closing price 
will serve as the benchmark in order to avoid

[[Page 1713]]

potential disputes as to a stock's primary market.
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    \4\ Securities Exchange Act Release No. 41089 (February 23, 
1999), 64 FR 10051 (March 1, 1999).
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    Rule 601 specifies the procedure for margining short positions in 
equity options. Open short positions are margined based on prices or 
quotes for the option itself. Assigned short positions, however, are 
margined based on the difference between the strike price of the option 
and the ``marking price'' of the underlying stock.\5\ Unlike the 
definition of ``closing price'' in Rule 805(j), the definition of 
``marking price'' in Rule 601(b)(6) still refers to the closing price 
of an underlying stock on its ``primary market.''
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    \5\ Assigned short positions are margined at OCC from the 
assignment date through the exercise settlement date (E+3).
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Discussion
    1. Conforming Rule 601(b)(6) to Rule 805(j). OCC believes that the 
definition of ``marking price'' in Rule 601(b)(6) and the definition of 
``closing price'' in Rule 805(j) should not be materially different. 
According to OCC, the two prices are normally determined in the same 
manner and therefore should be defined in the same way. Therefore, OCC 
proposes that the Rule 601 definition of ``marking price'' conform to 
Rule 805 because the same concerns that led OCC to replace the term 
``primary market'' in Rule 805 apply equally in the context of Rule 
601.
    2. Regular Trading Hours. OCC believes that with the growth of 
after-hours trading, questions might arise concerning the time that the 
``last reported sale price'' of an underlying stock should be 
determined for purposes of fixing both the Rule 805 closing price and 
the rule 601 marking price. OCC therefore proposes that Rule 805(j) and 
601(b)(6) be amended to refer to the last reported sale price ``during 
regular trading hours (as determined by the Corporation [OCC]) * * *.'' 
This amendment would allow OCC to avoid potential disputes by (i) 
eliminating any basis for arguing that the closing price or the marking 
price should be determined based on after-hours trading and (ii) giving 
OCC discretion to determine when ``regular trading hours'' end.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act \6\ because it 
promotes the prompt and accurate clearance and settlement of equity and 
index options.
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    \6\ 15 U.S.C. 78q-1.
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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.

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, NW, Washington, DC 20549-0609. 
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 file number SR-OCC-00-04 and should be submitted by 
January 30, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-543 Filed 1-8-01; 8:45 am]
BILLING CODE 8010-01-M