[Federal Register Volume 67, Number 99 (Wednesday, May 22, 2002)]
[Notices]
[Pages 36056-36059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12805]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45946; File No. SR-OCC-2001-16]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to Clearing 
Certain Commodity Futures and Options Thereon

May 16, 2002.

I. Introduction

    On October 24, 2001, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2001-16 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 December 20, 2001.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 45152 (December 12, 
2001), 66 FR 65770.
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II. Description

    1. Introduction
    Pursuant to the proposed rule change being approved, OCC will 
provide clearance and settlement services for 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.\3\ 
There is no significant difference between the mechanics for

[[Page 36057]]

the clearance and settlement of a future on a narrow-based stock index 
(a security future) and the mechanics for the clearance and settlement 
of a future on a broad-based stock index.\4\ Accordingly, many of the 
changes being made 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 and 
settled by OCC, and accordingly, futures options will 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, as discussed below, are being amended so that they apply to 
commodity futures and futures options as well as to security futures.
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    \3\ Because such contracts are within the exclusive jurisdiction 
of the Commodity Futures Trading Commission (``CFTC''), on October 
9, 2001, OCC submitted to the CFTC an application for registration 
as a derivatives clearing organization (``DCO'') under Section 5b(c) 
of the Commodity Exchange Act (``CEA'') and under 17 CFR Part 39 of 
the CFTC's regulations. The CFTC granted OCC's application for 
registration on December 10, 2001. The Commission notes that 
although futures on broad-based stock indexes and options on these 
futures fall within the exclusive jurisdiction of the CFTC, the 
Commission retains its authority to inspect and examine OCC with 
respect to OCC's clearance and settlement of these products by 
virtue of its status as a registered clearing agency under Section 
17A of the Act.
    \4\ The Commission recently approved OCC's rules and procedures 
for the clearance and settlement of security futures. 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 is adding new definitions for several terms applicable to 
commodity futures and futures options and is including those terms in 
Article I of the By-Laws. New futures terms have been 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 have been amended so that they are applicable to commodity 
futures as well as to security futures. The new definitions are mostly 
self-explanatory, but a few terms that are of particular significance 
are described below.
    The term ``commodity future'' is added to distinguish these 
products from security futures and is defined as a futures contract 
within the exclusive jurisdiction of the CFTC that is traded on or 
through the facilities of a futures market or is subject to the rules 
of a futures market. The term ``future'' is defined so that it 
encompasses both security futures and commodity futures where, as is 
most often the case, no distinction is needed. A ``futures market'' is 
defined to mean a contract market registered with the CFTC as such. OCC 
does not currently propose to clear commodity futures products traded 
on markets other than registered contract markets. The definition of 
``option contract'' has been amended to include a ``futures option'' 
which is defined as an option to buy or sell any commodity future 
traded on or through the facilities of a futures market or is subject 
to the rules of a futures market. The term ``cleared contract'' is 
defined as a security, commodity future, or futures option that is 
cleared by OCC.\5\ Changes to the definitions of ``commencement time'' 
and ``series marker'' are discussed below.
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    \5\ While many of the changes made by this ruling have been 
broadly made to facilitate the clearance and settlement by OCC of 
transactions in commodity futures and futures options no matter what 
the underlying interests, this rule filing approves only OCC's 
proposal to clear and settle futures on broad-based indexes and 
options thereon. In the event that OCC undertakes a clear additional 
CFTC-regulated products in the future, OCC will file a proposed rule 
change under Section 19(b) of the Act regardless of whether OCC 
needs to amend or add specific language to its By-Laws or Rules.
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    3. Clearing Member Qualifications
    Section 1 of Article V of OCC's By-Laws is 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 .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.\6\ OCC will 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 in meeting OCC's operational requirements.
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    \6\ Supra note 4.
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    OCC's financial requirements will 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 will permit such FCM to compute 
its net capital in accordance with the CFTC's regulations. OCC Rules 
301(c), 303(c), and 307 have been modified to provide appropriate 
references to CFTC regulations governing FCM financial requirements in 
order to provide as nearly as practicable requirements that are 
parallel to those applicable to clearing members regulated primarily as 
broker-dealers.

4. Accounts

    OCC By-Law Article VI, Section 3, is 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 has been 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 is 
determined by (i) the agreement between the intermediary carrying the 
customer's account, subject to the provisions of the Act, the CEA, and 
regulations under either or both of those statutes as applicable to the 
particular intermediary (i.e., broker-dealer, FCM, or dual registrant), 
(ii) the types of cleared contracts involved (i.e., 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) has been 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 stock futures. 
Article XII is amended to apply to commodity futures and futures 
options as well. The major change is the addition of subparagraph (b) 
to Section 2, which governs the rights and obligations of buyers and 
sellers of futures options. When a futures option is exercised, OCC 
will: (a) in the case of a call, open in the account from which the 
call was exercised the number of long futures contracts and open in the 
account to which the exercise was assigned the number of short futures 
contracts equal to the unit of trading for the option and (b) 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

[[Page 36058]]

opened in settlement of the exercise of a futures option contract will 
be deemed to have been opened on the day of exercise, and the exercise 
price for the futures option will be the contract price for the futures 
contract. After the futures contract is opened, the buyer and seller 
will have the same rights and obligations as the holders of other 
futures contracts.

6. Adjustments

    As with security futures, adjustments to commodity futures and 
futures options that are necessary to reflect certain events affecting 
the underlying index will be determined by OCC. Futures on broad-based 
stock indexes and futures options thereon will 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 were patterned after similar provisions in 
Section 3 of Article XVII which are applicable to index options. 
Paragraph (b) of Article XII, Section 4 has been modified and new 
paragraph (c) has been added to update and to conform to changes in the 
adjustment provisions applicable to index options that were approved by 
the Commission last year.\7\ New paragraph (d) of Article XII, Section 
4 has been 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 will be adjusted to provide 
for delivery of the adjusted future. Where appropriate, the exercise 
prices and the number of outstanding options may be adjusted. Section 6 
of Article XII, which provides that the final settlement price for any 
futures contract at maturity is determined by a method approved by the 
market listing the future, is made applicable to both security futures 
and commodity futures. Interpretation .01 is being added to make clear 
that any such method of determining final settlement prices must be 
consistent with applicable regulations. This interpretation is added in 
light of the rules proposed by the Commission and the CFTC that would 
require that final settlement prices for security futures ordinarily be 
based on opening prices.\8\
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    \7\ Securities Exchange Act Release 44184 (April 16, 2001), 66 
FR 20342 [File No. SR-OCC-99-12].
    \8\ Securities Exchange Act Release 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 will 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. OCC however, will not 
require transactions in commodity futures and futures options to be 
identified as opening or closing as it requires for security futures 
and for other options. If a futures market elects to submit trade 
information without identification as to whether the transaction is 
opening or closing, OCC will treat all transactions as opening 
transactions. Each clearing member then will have to 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 with security futures, commodity 
futures and futures options may include, if a futures market so elects, 
a series marker that prevents 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 has been 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 may be fungible when 
traded on any market within a 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 is also being amended to provide that non-competitively 
executed transactions, such as block trades and exchange-for-physicals, 
must be identified as such in the matched trade report.\9\ 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 trades designated as non-competitively 
executed does 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 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.
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    \9\ CFTC regulations require the identification of non-
competitive trades. 17 CFR 1.38(b).
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8. Margins

    OCC Rule 602, which contains the calculation used to determine the 
margin required for each account of a clearing member for narrow-based 
index futures, index options, and other non-equity options, is amended 
to include commodity futures and futures options. Margin will 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

    Commodity futures and futures options will 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 will 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 provides that affiliates of 
existing clearing members that become clearing members of OCC solely 
for the purpose of clearing transactions in broad-based index futures 
or futures options need not put up an additional $150,000 minimum 
clearing fund contribution. This merely expands the existing provision 
applicable to clearing member affiliates that become clearing members 
solely for the purpose of clearing security futures.

10. Discipline

    OCC Rule 1202, dealing with disciplinary proceedings, is 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. As a result of this change, clearing member disciplinary 
proceedings that relate to violations of customer segregated funds 
rules and other violations of the CEA or regulations thereunder will be 
subject to CFTC review.

11. Amendments to Chapter XIII

    OCC proposed and the Commission approved a new Chapter XIII of its 
Rules to govern security futures.\10\ With the current filing, OCC is 
simply amending that Chapter so that it applies to commodity futures 
and futures options as well.
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    \10\ Securities Exchange Act Release No. 44727 (August 20, 
2001), 66 FR 45351 [File No. SR-OCC-2001-07].
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III. Discussion

    In Section 17A of the Act, Congress stated its finding that the 
development of uniform standards and procedures for clearance and 
settlement will reduce unnecessary costs and increase the protection of 
investors and persons facilitating transactions by and acting on

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behalf of investors.\11\ Congress then directed the Commission to 
facilitate the establishment of coordinated facilities for the 
clearance and settlement of transactions in securities, securities 
options, futures, and options on futures.\12\ By providing clearance 
and settlement services for futures on broad-based stock indexes and 
options on such futures under the same basic rules and procedures 
applicable to the clearance and settlement of other OCC-cleared 
contracts such as options and security futures, OCC is establishing 
itself as a facility capable of providing coordinated clearance and 
settlement services for transactions in both securities and futures. 
Therefore, the Commission finds that the approval of OCC's rule change 
is consistent with the directive of Congress.
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    \11\ 15 U.S.C. 78q-1(a)(1)(D).
    \12\ 15 U.S.C. 78q-1(a)(2)(A)(ii).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements 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-2001-16) be and hereby 
is approved.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12805 Filed 5-21-02; 8:45 am]
BILLING CODE 8010-01-P