[Federal Register Volume 67, Number 214 (Tuesday, November 5, 2002)]
[Notices]
[Pages 67434-67435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28099]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46735; File No. SR-OCC-2002-19]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Random Assignment Processing

October 28, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 15, 2002, 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 prepared 
primarily by OCC. The Commission is publishing this notice and order 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 alters OCC's procedures for random 
assignment processing.

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

    OCC proposes to refine its random assignment procedures for 
processing exercise notices. These procedures are not described in 
OCC's rules but are treated as a stated policy, practice, or 
interpretation with respect to Rule 803, which addresses assignments to 
clearing members.
Current Method
    Under OCC's current random assignment process, an assignment 
``wheel'' is created for each option series for which there is an 
exercise and all short positions of that series are placed on the 
wheel, starting with positions in the customers' account of the 
clearing member with the lowest identification number, followed by 
positions in other accounts of that clearing member, then by positions 
in the customers' account of the clearing member with the next lowest 
identification number, and so forth. The number of contracts exercised 
for that series is totaled. If the number of exercised contracts is 
less than the number of contracts held in open short positions, 
exercises are assigned in standard assignment increments of 25 
contracts.\3\ The system calculates a random starting point on the 
wheel for the first assignment increment. The first 25 contracts are 
assigned starting at the first position randomly chosen. Based on the 
number of contracts in the open interest for the series and the number 
of exercise increments to be assigned, a uniform skip interval is 
calculated as follows:

    \3\ If the number of contracts being exercised is equal to the 
number of open short positions, the entire open interest for that 
series will be assigned automatically.
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S = the total number of contracts being exercised for a particular 
series
T = the total number of contracts on the wheel
I = the assignment increment
1. T1 = S + I -1;
2. T2 = T1/I, where T2 is an integer;
3. T3 = T/T2, where T3 is an integer;
4. Skip Interval = T3 `` 1, if I  than T3, skip interval = 
0.

    After the first assignment, the system skips the calculated skip 
interval, assigns the next 25 contracts, and skips again to the next 
assignment increment until all exercises are assigned.
Proposed Change
    OCC is proposing minor modifications to its random assignment 
process. First, positions will be placed on the wheel in sequential 
order based on a unique data base identification code given to a 
position account (i.e., an account or subaccount \4\ that can hold

[[Page 67435]]

positions). Thus, a position account of a clearing member that had been 
added after the initial allocation of data base identification codes 
will not be clustered on the wheel adjacent to the other position 
accounts of that clearing member as is the case today.
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    \4\ In a combined market-makers' account, positions of 
individual market-makers are assigned unique acronyms and are not 
netted against each other for reporting purposes. Each market-maker 
acronym is treated as a separate ``position account.''
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    Second, the skip interval calculation described above is slightly 
modified as follows:

S = the total number of contracts being exercised for a particular 
series
T = the total number of contracts on the wheel
I = the assignment increment
1. T1 = S/I (with decimals carried to six places; T1 is rounded up so 
that it is an integer)
2. Initial Skip Interval = (T/T1) - I (with decimals carried to six 
places and reserved for further use; decimals are truncated so that the 
initial skip interval is an integer)
3. If the initial skip interval is < 0, then the initial skip increment 
is = 0.

    Assignments will be processed using the revised skip interval 
calculation. After the random starting point has been determined and 
the first 25 contracts have been assigned, the initial skip interval 
will be calculated. The decimals from the resulting total will be 
truncated to determine the first skip interval and will be stored to 
calculate the second skip interval. After first skip interval, the next 
25 contracts will be assigned and the second skip interval will be 
calculated by adding the initial skip interval (including decimals) to 
the remaining decimal number from the truncated first skip interval. 
The decimals from the resulting total will be truncated and stored to 
calculate the third skip interval. This process will continue until all 
exercises have been assigned.
    The proposed change in method by which positions are placed on an 
assignment wheel will substantially reduce the system processing time 
needed to create the assignment wheel, and would thereby improve 
overall system efficiency. The proposed change to the skip interval 
formula will further refine the calculation. Truncating the calculated 
skip interval to produce a uniform skip interval that is less than the 
calculated interval may cause a slightly smaller number of exercises to 
be assigned to positions at the end of the wheel (i.e., just before the 
random starting point).\5\ The proposed modification to the skip 
interval formula will lessen the effect of truncating the calculated 
skip interval and will thereby smooth the distribution of assignments.
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    \5\ Truncating is necessary because fractional contracts cannot 
be assigned.
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    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act because it enhances OCC's procedures for random 
assignment processing and therefore, helps to 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 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).\6\ Section 17A(b)(3)(F) requires that the rules of a 
clearing agency be designed to remove impediments to and perfect the 
mechanism for a national system for the prompt and accurate clearance 
and settlement of securities transactions. The Commission believes that 
the proposed rule change is consistent with this requirement because 
the changes to the skip interval calculation will improve the 
efficiency of OCC's assignment process and will result in a more 
uniform distribution of assignments among OCC's clearing members with 
short positions.
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    \6\ 15 U.S.C. 78q-1(b)(3)(I).
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    OCC has requested that the Commission approve this rule change 
prior to the thirtieth day after the date of publication of notice of 
the filing. The Commission finds good cause for approving the proposed 
rule change prior to the thirtieth day after publication of notice 
because by so approving OCC will be able to implement the necessary 
system changes in connection with other system changes which are 
scheduled for implementation in early November 2002.

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 the File No. SR-OCC-2002-19 and should be submitted by 
November 26, 2002.

V. 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 the requirements of Section 17A of the Act and the 
rules and regulations thereunder applicable.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2002-19) be, and hereby 
is, approved.

    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. 02-28099 Filed 11-4-02; 8:45 am]
BILLING CODE 8010-01-P