[Federal Register Volume 66, Number 245 (Thursday, December 20, 2001)]
[Notices]
[Pages 65770-65773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31294]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45152; File No. SR-OCC-2001-16]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Clearing Certain 
Commodity Futures and Options Thereon

December 12, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 24, 2001, 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 amends OCC's by-laws and rules to provide 
for the clearance and settlement of transactions in commodity futures 
on broad-based stock indexes and options on such futures, both of which 
are subject to the exclusive jurisdiction of the Commodity Futures 
Trading Commission (``CFTC'').

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

1. Introduction
    The proposed rules would provide for the clearance and settlement 
of futures on broad-based stock indexes and options on such futures 
under the same basic rules and procedures currently applicable to the 
clearance and settlement of other OCC-cleared contracts, including 
options and security futures. Because such contracts are within the 
exclusive jurisdiction of the CFTC, OCC submitted to the CFTC on 
October 9, 2001, an application for registration as a derivatives 
clearing organization (``DCO'') under section 5b(c) of the Commodity 
Exchange Act (``CEA'') and part 39 of the CFTC's regulations. The CFTC 
granted OCC's application for registration on December 10, 2001.
    Commodity futures would be cleared pursuant to the same basic OCC 
rules and procedures recently approved by the Commission for the 
clearance of

[[Page 65771]]

security futures.\3\ There is not significant difference between the 
mechanics of the clearance and settlement of a future on a narrow-based 
stock index (a security future) and a future on a broad-based stock 
index. Accordingly, many of the changes proposed in this filing merely 
expand the provisions applicable to security futures to include 
commodity futures. Likewise, futures options are substantially similar 
in most respects to other options cleared by OCC. Thus, for example, 
procedures governing premium payments and exercise are the same. 
Accordingly, OCC is proposing to permit futures options to be governed 
by many of the same by-laws and rules applicable to other options. 
Where special provisions for futures options are needed, they are 
contained primarily in Article XII of the by-laws and Chapter XIII of 
the Rules, which would be amended to apply to commodity futures and 
futures options as well as security futures.
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    \3\ See Securities Exchange Act Release Nos. 44434, (June 15, 
2001), 66 FR 33283 (File No. SR-OCC-2001-05) and 44727, (August 20, 
2001), 66 FR 45351 (File No. SR-OCC-2001-07).
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2. New and Amended Definitions
    OCC proposes to define several additional terms applicable to 
commodity futures and futures options and to include those terms in 
Article I of the by-laws because they are used throughout the by-laws 
and rules. New futures terms would be adopted and defined to correspond 
as closely as possible to the terminology used in the existing futures 
markets while also being consistent with terminology in OCC's rules. 
Various existing security futures definitions are proposed to be 
amended to apply to commodity futures as well as security futures. The 
new definitions are mostly self-explanatory, but the following are a 
few terms that are of particular significance.
    The term ``commodity future'' would be added to distinguish these 
produces from security futures and would be defined as a futures 
contract within the exclusive jurisdiction of the CFTC and traded on a 
futures market. The term ``future'' would be added to encompass both 
security futures and commodity futures where, as is most often the 
case, no distinction is needed. A ``futures market'' would be defined 
to mean a contract market registered as such under the CEA. OCC does 
not currently propose to clear commodity futures products traded on 
markets other than registered contract markets. The definition of an 
``option'' would be amended to include a ``futures option'' which would 
be defined as an option traded on a futures market to buy or sell a 
commodity futures contract. The term ``cleared contract'' would be 
added to embrace all contracts cleared by OCC including securities 
options, security futures, and other cleared securities subject to the 
jurisdiction of the Commission as well as commodity futures and futures 
options that are not securities.\4\ Proposed changes of the definitions 
of ``commencement time'' and ``series marker'' are discussed below.
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    \4\ Although the present rule filing provides only for the 
clearing of futures on broad-based indexes and options thereon, the 
terms commodity future and futures option are defined more broadly 
to facilitate the clearance by OCC of transactions in commodity 
futures and futures options on other underlying interests in the 
event that OCC undertakes to clear additional CFTC-regulated 
products in the future. Of course, OCC would need to further amend 
its rules to set forth the particular terms of any such additional 
products and would need to file a proposed rule change pursuant to 
Section 19(b) to do so.
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3. Clearing Member Qualifications
    Section 1 of Article V of OCC's by-laws is proposed to be amended 
to permit futures commission merchants (``FCMs'') that are not notice-
registered as broker-dealers under section 15(b)(11)(A) of the Act to 
become clearing members. Interpretation and Policy .06 under section 1 
was added in SR-OCC-2001-07 to provide that OCC may give expedited 
review and may waive certain non-financial criteria where appropriate 
in order to admit affiliates of existing clearing members for the 
purpose of clearing security futures.\5\ OCC proposes in this rule 
change to extend the same consideration to such affiliates that become 
clearing members for the purpose of clearing commodity futures and 
futures options. As stated in SR-OCC-2001-07, OCC believes that it is 
appropriate to give special consideration to such affiliates to the 
extent that their affiliation with an existing clearing member provides 
access to competent and experienced personnel able to assist the 
affiliate, if necessary, in meeting OCC's operational requirements.
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    \5\ Securities Exchange Act Release No. 44727, (August 20, 
2001), 66 FR 45351 (File No. SR-OCC-2001-07).
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    OCC's financial requirements would remain substantially the same 
for all clearing members whether regulated primarily or exclusively as 
broker-dealers or as FCMs. In the case of a clearing member regulated 
primarily or exclusively as an FCM, OCC would permit such FCM to 
compute its net capital in accordance with the CFTC's regulations. OCC 
Rules 301(c), 303(c), and 307 are proposed to be modified to provide 
appropriate references to CFTC regulations governing FCM financial 
requirements in order, as nearly as practicable, to provide 
requirements that are parallel to those applicable to clearing members 
regulated primarily as broker-dealers.
4. Accounts
    Article VI, section 3 is proposed to be amended to clarify that 
commodity futures and futures options positions of futures customers 
may not be carried in the firm account. Additionally, Interpretation 
and Policy .01 would be added to require a clearing member carrying a 
customer account pursuant to Article VI, section 3(e) (i.e., an account 
holding positions of securities customers) to be fully registered as a 
broker-dealer and to require a clearing member carrying a segregated 
futures account under Article VI, section 3(f) (i.e., an account 
holding positions of futures customers) to be fully registered as an 
FCM. Whether a person is a futures customer or a securities customer 
would be determined by (i) agreement between the intermediary carrying 
the customer's account and the customer, subject to the provisions of 
the Act, the CEA, and regulations under either or both of those 
statutes as applicable to the particular intermediary (broker-dealer, 
FCM, or dual registrant), (ii) the types of cleared contracts involved 
(securities, security futures, or commodity futures products), and 
(iii) the identity of the person whose account is carried (including 
the nature of any affiliation such person has with the intermediary). 
Article VI, Section 3(a) would be modified to provide that positions in 
commodity futures and futures options of persons who are not futures 
customers (and whose accounts are therefore proprietary within the 
meaning of CFTC Regulation 1.3(y)) may be carried in the firm account 
regardless of that person's status under the Commission's hypothecation 
rules or Rule 15c3-3.
5. Amendments to Article XII of the By-Laws
    Article XII sets out the basic provisions for security futures, 
including both physically-settled and cash-settled security futures. 
The article is proposed to be amended to apply to commodity futures and 
futures options as well. The major change would be the addition of 
subparagraph (b) to section 2, which would provide for the settlement 
of exercised futures options. When a futures option is exercised, OCC 
would (i) in the case of a call, open in the account from which the 
call was exercised the number of long futures

[[Page 65772]]

contracts equal to the unit of trading for the option and (ii) in the 
case of a put, open in the account from which the put was exercised the 
number of short futures contracts and open in the account to which the 
exercise was assigned the number of long futures contracts equal to the 
unit of trading for the contract. Futures contracts that are opened in 
settlement of the exercise of a futures option contract would be deemed 
to have been opened on the day of exercise, and the exercise price for 
the futures option would be the contract price for the futures 
contract. After the futures contract is opened, the buyer and seller 
would have the same rights and obligations as the holders of other 
futures contracts.
6. Adjustments
    As with security futures, OCC will determine adjustments to 
commodity futures that are required to reflect certain events affecting 
the underlying index. Futures on broad-based stock indexes would be 
subject to the same adjustment provisions in Article XII, sections 3 
and 4 of the by-laws that are applicable to narrow-based stock index 
futures. These adjustment provisions are patterned after similar 
provisions in section 3 of Article XVII applicable to index options. 
Paragraph (b) of Article XII, section 3 would be modified in this 
filing, and a new paragraph (c) would be added to update the provisions 
to conform to changes in the adjustment provisions applicable to index 
options that were approved by the Commission earlier this year.\6\ New 
paragraph (d) of Article XII, section 3 would be added in order to 
provide for appropriate adjustments to outstanding futures options when 
the underlying index future is adjusted. In that case, the futures 
option would be adjusted to provide for delivery of the adjusted 
future. Where appropriate, the exercise prices and the number of 
outstanding options might be adjusted. Section 6 of Article XII, which 
provides that the final settlement price for any security futures 
contract at maturity is determined by a method approved by the market 
listing the future would be made applicable to both security futures 
and commodity futures. Interpretation and Policy .01 would be added to 
make clear that any such method of determining final settlement prices 
must be consisted with applicable regulations. This interpretation is 
proposed in light of the rules proposed by the Commission and the 
CFTC,\7\ which propose to requires that final settlement prices for 
security futures ordinarily must be based on opening prices and imposes 
other limits not specifically set forth in Article XII, section 6 of 
OCC's by-laws as approved by the Commission in SR-OCC-2001-07.
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    \6\ See Securities Exchange Act Release No. 44184, (April 16, 
2001), 66 FR 20342 (File No. SR-OCC-99-12), approving changes filed 
in SR-OCC-99-12.
    \7\ Securities Exchange Act Release No. 44743, (August 24, 
2001), 66 FR 45904 (File No. S7-15-01).
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7. Trade Reporting and Matching
    Trade reporting and matching would occur for commodity futures in 
the same manner as for security futures and for futures options in 
generally the same manner as for other options. As in the case of 
security futures, however, OCC would not require transactions in 
commodity futures and futures options to be identified as opening or 
closing. If a market elected to submit trade information without 
identification as to whether the transaction is opening or closing, OCC 
would treat all transactions as opening transactions. Each clearing 
member would then submit gross position adjustment information at the 
end of the day to reduce its positions to reflect the actual open 
interest in accounts carried by the clearing member. These procedures 
are consistent with current practice on many futures exchanges. As in 
the case of security futures, commodity futures and futures options 
might include, if a futures market so elected, a series marker to 
prevent contracts traded on that market from being treated as fungible 
with otherwise identical futures contracts traded on other markets 
cleared by OCC. The definition of a series marker in Article I of the 
by-laws would be amended to make clear that a series marker can be 
shared by mutual consent among more than one exchange or market. As a 
result, contracts might be fungible when traded on any market within 
the group but not fungible with contracts traded on markets outside the 
group. This is intended as a clarification of, rather than a change in, 
the existing rule.
    Rule 401 would also be amended to provide that block trades and 
other non-competitively executed transactions, in addition to exchange-
for-physicals, would be identified in the matched trade report. These 
provisions would apply to futures options as well as commodity futures 
and security futures. As defined in Article I, section 1, the 
commencement time for such trades would not occur until OCC has 
received the premium or initial variation payment on the transaction. 
This provision would allow OCC to reject the trade if the clearing 
member fails to make such payment. These trades are proposed to be 
treated differently from other trades because when a transaction is 
effected at a price other than the current market price, OCC's loss may 
be greater in the event of a clearing member default. In addition, the 
regulations of the CFTC require the identification of non-competitive 
trades.\8\
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    \8\ 17 CFR 1.38(b).
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8. Margins
    OCC Rule 602, which is applicable to narrow-based index futures, 
index options, and other non-equity options, would be amended to 
include commodity futures and futures options in the calculation of the 
margin required for each account of a clearing member. Margin would be 
calculated for these new products in exactly the same way as for other 
futures and options subject to OCC rule 602.
9. Clearing Fund Contributions
    Broad-based index futures and futures options thereon would be 
covered by the same clearing fund that stands behind all options and 
security futures cleared by OCC. Clearing activity in commodity futures 
and futures options would be taken into consideration in calculating 
the amount of a clearing member's contribution in the same way that 
activity in other contracts is considered. OCC rule 1001 would provide 
that affiliates of existing clearing members that become clearing 
members of OCC solely for the purpose of clearing transactions in 
broad-based index futures of futures options need not put up an 
additional $150,000 minimum clearing fund contribution. This would 
merely expand the existing provision applicable to clearing member 
affiliates that become clearing members for purposes of clearing 
security futures.
10. Discipline
    OCC rule 1202, regarding appeal from OCC-imposed discipline, would 
be amended to provide that if an OCC disciplinary proceeding relates 
solely to the clearing member's activities as an FCM, OCC must notify 
the clearing member in writing that it may have a right to appeal under 
section 8c of the CEA. The intent of this proposed rule change would be 
to subject clearing member disciplinary proceedings that relate to 
violations of customer segregated funds rules and other violations of 
the CEA or regulations thereunder to CFTC review.

[[Page 65773]]

11. Amendments to Chapter XIII
    OCC proposed and the Commission approved a new Chapter XIII of its 
rules to govern security futures.\9\ With the current filing, OCC is 
simply proposing to amend Chapter XIII to apply to commodity futures 
and futures options as well.
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    \9\ Securities Exchange Act Release No. 44727, (August 20, 
2001), 66 FR 45351 (File No. SR-OCC-2001-07).
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    The proposed rule change is consistent with the purposes and 
requirements of section 17A of the Act because it fosters cooperation 
and coordination with persons engaged in the clearance and settlement 
of securities transactions, removes impediments to and perfects the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions, and, in general, protects 
investors and the public interest. By clearing commodity futures and 
futures options under the same basic rules applicable to SEC-regulated 
products, OCC believes that its commodity clearing activities will be 
consistent with the prompt and accurate 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 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 reason for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (a) By order approve the proposed rule change or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

VI. 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 the File No. SR-OCC-2001-16 and should be submitted by 
January 4, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-31294 Filed 12-19-01; 8:45 am]
BILLING CODE 8010-01-M