[Federal Register Volume 66, Number 160 (Friday, August 17, 2001)]
[Notices]
[Pages 43282-43283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20770]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44689; File No. SR-OCC-2001-08]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by The Options 
Clearing Corporation Relating to the Price Used in Calculating Premium 
Marking

August 13, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 25, 2001, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change 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 persons and to grant approval of 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 would set an option's marking price for 
purposes of calculating premium margin at the arithmetic average of the 
best bid and best offer across all exchanges listing the option.

II. Self-Regulatory Organization's Statement of 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. The self-regulatory organization 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

1. Background
    In November 1999, OCC proposed to change how it determines an 
option's marking price for purposes of calculating premium margin.\3\ 
Specifically, OCC proposed to use the last sale price, adjusted to the 
bid/offer if the last sale is below/above the bid/offer. Although this 
rule change was recently approved, it has not been implemented.\4\ 
While this rule change was pending, the number of options listed on 
more than one exchange dramatically increase and caused OCC to 
calculate premium margin for an options series by using the highest 
asked price from the option exchange with the highest transaction 
volume in such series. At times, this has led to noticeable jumps in 
marking prices when a change in the volume-leading exchange occurred. 
As a result, OCC reassessed the proposed last sale methodology and 
concluded that it might also lead to inconsistent marking as the 
exchange with the highest volume in an option series may not be the one 
on which the last sale is made. Accordingly, after consulting with the 
Commission's staff, OCC has determined not to use the last sale price 
for marking options. Rather, OCC will use an alternative methodology 
that it believes will yield more consistent results.
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    \3\ File No. SR-OCC-99-14.
    \4\ Securities Exchange Act Release Nos. 43023 (July 11, 2000), 
65 FR 44088 (July 17, 2000) (notice of proposed rule change); 44183 
(Apr. 16, 2001), 66 FR 20343 (Apr. 20, 2001) (order approving 
proposed rule change).
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2. New Marking Methodology
    To increase option pricing consistency and to improve the 
calculation of reasonable implied volatility curves, OCC proposes to 
use the arithmetic average of the best bid and the best offer across 
all exchanges on which the option trades as the marking price of each 
option series. OCC believes that this approach will improve the 
construction of implied volatility curves, especially for deep in-the-
money and out-of-the-money options that often are quoted without a 
progressive variance in prices. OCC also believes that the proposed 
approach will reduce the likelihood of inconsistent price jumps, which 
are often caused by changes in the volume leading exchange. OCC 
understands that this proposed marking methodology is consistent with 
industry practices.
    Specifically, OCC proposes to amend OCC Rules 601 and 602. First, 
OCC would nullify the recently approved changes made to Rules 
601(b)(4)(A) and 602(b)(4)(A). This nullification would restore the 
cited rule provisions to what they were before the approval of SR-OCC-
99-14. Thus, OCC will use the highest asked price for an option series 
from the exchange with the highest transaction volume in that series. 
Second, OCC would amend the cited rule provisions to reflect the new 
methodology for determining an option's marking price for purposes of 
calculating premium margin. OCC will begin using the new arithmetic 
average promptly when the programming changes are ready for 
installation. OCC will provide advance notice of implementation to the 
Commission and to its clearing members.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act because the 
proposed rule change will foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions and remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions.

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

[[Page 43283]]

to the proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F) \5\ of the Act. Section 17A(b)(3)(F) of the Act requires 
that the rules of a clearing agency be designed to assure the 
safeguarding of securities and funds that are in the custody or control 
of the clearing agency or for which it is responsible. The Commission 
finds that the proposed rule change is consistent with this obligation 
because it will facilitate a more consistent and predictable marking 
price methodology for the purposes of calculating premium margin as 
well as providing a more accurate assessment of risk. Specifically, the 
rule change should enable OCC to avoid the market risk associated with 
volatile jumps in marking prices when a change in the volume-leading 
exchange occurs. Moreover, the last sale methodology might lead to 
inconsistent marking as the exchange with the highest volume in an 
option series may not be the one on which the last sale is made. Thus, 
the rule change should reduce OCC's market risk and therefore should 
help it to safeguard securities and funds in its custody or control or 
for which it is responsible.
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing. The Commission finds good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of filing because such approval will 
allow OCC to immediately amend its rules so that the rules accurately 
reflect OCC's practice of setting options' marking prices for purposes 
of calculating premium margin and to implement its new method of 
setting options marking prices as soon as its systems are ready.

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 OCCs principal office. All submissions should 
refer to File No. SR-OCC-2001-08 and be submitted by September 7, 2001.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2001-08) be, and hereby 
is, approved on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-20770 Filed 8-16-01; 8:45 am]
BILLING CODE 8010-01-M