[Federal Register Volume 69, Number 127 (Friday, July 2, 2004)]
[Notices]
[Pages 40447-40449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15086]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49925; File No. SR-OCC-2004-08]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Clearance and Settlement of Variance Futures and 
Options on Variance Futures

June 28, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 11, 2004, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change 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 parties.
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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

    OCC is seeking approval to clear and settle variance futures and to 
clear and settle options on variance futures.

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 these 
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. Introduction
    The purpose of this proposed rule change is to enable OCC to clear 
and settle futures contracts on the variance over a set time period of 
a reference variable selected by the futures market proposing to trade 
the contracts ``variance futures'' and to clear and settle options on 
variance futures. A variance is a statistical measure of the 
variability of price returns relative to an average (mean) price 
return.
    CBOE Futures Exchange, LLC (``CFE'') has proposed to trade variance 
futures for which the reference variable would be the S&P 500 Index. 
The underlying variance will be calculated by CFE (or its agent) using 
a standard formula that uses continuously compounded daily returns on 
the reference variable for a specified time period. The calculated 
variance will then be annualized assuming 252 business days per year. 
CFE currently proposes futures on the one month variance and three 
month variance of the S&P 500 Index although CFE may list variance 
futures on other variance measurement periods for the S&P 500 Index or 
on other reference variables in the future. The variance measurement 
period for each series of variance futures traded on CFE will begin on 
the first business day following the maturity date of the previously 
maturing series and continue to (and include) the maturity date of the 
subject series. CFE may open trading in a series of variance futures 
prior to the beginning of the measurement period for the underlying 
variance. For example, CFE may open a future contract on the one month 
variance of the S&P 500 Index four months before its maturity date 
where the measurement period for the variance underlying that variance 
future would be the one month prior to the maturity date of the future.
    Futures on variance differ from futures on volatility indexes 
currently traded on CFE and cleared and settled by OCC in that 
underlying variance is calculated using only historical daily closing 
values of the reference variable while an underlying volatility index 
represents the implied volatility component of bid and ask premium 
quotations for options on a reference variable.
    OCC believes that an underlying variance is a ``commodity'' within 
the definition of Section 1a(4) of the Commodity Exchange Act 
(``CEA''), which defines ``commodity'' to include ``all * * * rights, 
and interests in which contracts for future delivery are presently or 
in the future dealt in.'' OCC believes a variance as proposed to be 
traded by CFE is clearly neither a ``security'' as defined in Section 
3(a)(10) of the Securities Exchange Act of 1934 (the ``Act'') nor a 
``narrow-based security index'' as defined in Section 3(a)(55)(B) of 
the Act. Accordingly, OCC believes a futures contract on such a 
variance would not be a ``security future'' within the meaning of 
Section 3(a)(55)(A) of the Act and therefore would be within the 
exclusive jurisdiction of the Commodity Futures Trading Commission. OCC 
therefore proposes to clear this product in its capacity as a 
``derivatives clearing organization'' registered under Section 5b of 
the CEA.
2. Rule Changes
    In order to provide for the clearance of variance futures, OCC 
proposes to add four new defined terms to Article I of its By-Laws. The 
more general term ``multiplier'' would be added to encompass the 
already defined term ``index multiplier'' as well as the multiplier 
that would be applied to a variance future to determine the final 
settlement price. Adding the multiplier definition would simplify other 
amendments to the By-Laws and Rules as described below. The term 
``reference variable'' will be defined to mean the price or value of a 
security, commodity, future, currency, asset, index, or other thing, 
the variance or other measure of variability of which is used as the 
underlying interest for a cleared contract. The term would be needed to 
describe contracts, such as variance futures, that have as their 
underlying a measure of the variability of the price or level of an 
index or instrument. ``Underlying variance'' or ``variance'' would be 
defined as the variability of the reference variable over a specified 
time period as measured by the futures market on which the variance 
future is traded or that market's designated reporting authority. A 
``variance future'' would be defined as a future on a variance.
    Article VI, Section 10(d) of the By-Laws currently provides that 
the index multiplier for an index future is set by a market at the time 
a series is opened and may be adjusted under Article XII, Sections 3 
and 4. The rule change would make Section 10(d) applicable to variance 
futures by replacing the term ``index multiplier'' with the new term 
``multiplier'' and by specifically referring to variance futures as 
well as index futures. Likewise, Article XII, Sections 3 and 4 
(relating to adjustments) and Section 5, ``Unavailability or Inaccuracy 
of Final Settlement Price,'' are made applicable to variance futures 
and options on such futures. In order to determine the variance of a 
variance future that has a stock index as its reference variable, the 
level of the stock index must be accurate and available. Therefore, OCC 
would require similar authority to adjust variance futures for changes 
in the index that is the reference variable or the unavailability of 
such index, as OCC has in the case of indexes underlying index futures. 
Additionally, a new

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Section 4(d) would be added to Article XII to account for the fact that 
variance futures may also need to be adjusted for changes in the 
calculation of the underlying variance itself.
    Variance futures are non-equity futures and as such would be 
margined under Chapter VI, Rule 602.\3\ Rule 602(a)-(e) describes OCC's 
current automated margining system, TIMS. However, TIMS is not 
currently configured to calculate appropriate margin levels for 
variance futures. Thus, the appropriate risk margin levels for variance 
futures cannot be determined through the application of Rule 602(a)-
(e). It will be necessary to add variance futures to those instruments 
that are exempted from the provisions of 602(a)-(e) by Rule 602(f). New 
Rule 602(f)(6) would direct that risk margin for variance futures be 
calculated using such measures of risk as OCC deems appropriate. 
Because the margin requirements for variance futures will not be set 
through TIMS, those margin requirements will not appear on the Daily 
Margin Report provided for in Rule 605, which is a report of the TIMS 
calculations applied to a Clearing Member's positions. OCC will add an 
interpretation and policy to Rule 605 advising Clearing Members that 
risk margin with respect to variance futures will not be included in 
the Daily Margin Report, and that notifications to Clearing Members of 
their risk margin requirement in respect of variance futures will be 
given before 9 a.m. Central Time, which is the same deadline that 
applies to delivery of the Daily Margin Report. Clearing Members will 
be required to make settlement of variance futures risk margin as if it 
were included in the Daily Margin Report.
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    \3\ ``Non-equity future'' is defined in OCC By-Laws Article I as 
a future other than a stock future.
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    The ``Introduction'' to Chapter XIII will be amended to include 
variance futures among those futures contracts that OCC is approved to 
clear and settle. Rule 1301(a) will be, like Article VI, Section 10(d), 
made applicable to variance futures by simply replacing ``index 
multiplier'' with ``multiplier'' and by adding references to variance 
futures where index futures are referenced.
3. Amendment to Clearing Agreement
    OCC and CFC will be entering into First Amendment to Agreement for 
Clearing and Settling Security Futures and Futures and Futures Options 
on Broad-Based Indexes. The Amendment will make several changes to the 
Clearing Agreement in anticipation of the clearance of variance 
futures. Only certain of those changes will be substantive. Section 
3(b) of the Clearing Agreement currently identifies the permissible 
underlying interests for futures contracts that CFE may clear though 
OCC. Section 5 of the Amendment will amend Section 3(b) to permit the 
parties to agree on additional underlying interests by completion and 
execution of a schedule in the form that will be attached to the 
Amendment as Schedule C. The parties have also agreed upon and will 
include with the Amendment a Schedule C-1 for variance futures. Section 
10 of the Amendment will amend Section 3(e) to extend the established 
procedure for selecting underlying interests to an underlying interest 
listed on a Schedule C.
    Section 3(c)(i) of the Clearing Agreement currently states that 
broad-based index futures are the only acceptable underlying interest 
for options to be cleared under the Clearing Agreement. Section 6 of 
the Amendment would change this language so that any future other than 
a security future may be an underlying interest for such an option.
    The Clearing Agreement currently requires CFE to indemnify OCC in 
certain circumstances. Section 11 of the Amendment would add a 
provision clarifying, among other things, the applicability of the 
indemnification provisions to certain currently pending litigation 
against CBOE and CFE and to similar litigation or claims that may be 
brought in the future. Section 11 of the Amendment would also make CBOE 
a party to the Clearing Agreement for the purpose of assuming joint and 
several liability with OCC in the event that OCC is entitled to 
indemnification with respect to such litigation or claims.
* * * * *
    The proposed changes to OCC's By-Laws and Rules and the Amendment 
to the Clearing Agreement are consistent with the purposes and 
requirements of Section 17A of the Act \4\ because they are designed to 
promote the prompt and accurate clearance and settlement, to foster 
cooperation and coordination with persons engaged in clearance and 
settlement, to remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement, 
and, in general, to protect investors and the public interest.
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    \4\ 15 U.S.C. 78q-1.
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    Variance futures are commodity futures within the exclusive 
jurisdiction of the CFTC, and OCC will therefore clear variance futures 
in its capacity as a registered derivatives clearing organization under 
the CFTC's regulatory jurisdiction. Accordingly, although this rule 
change represents a change in OCC's existing service of clearing 
commodity futures contracts, that service is not otherwise within the 
jurisdiction of the Commission. This rule change will not affect the 
safeguarding of funds or securities in OCC's possession because OCC 
will apply procedures and safeguards to the clearing of these contracts 
that are similar to those it applies to the clearing of securities 
options and security futures over which the Commission has direct 
regulatory authority. The respective rights and obligations of OCC and 
its clearing members with respect to matters within the Commission's 
jurisdiction will be unaffected.

(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 foregoing rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A)(iii) of the Act \5\ and Rule 19b-4(f)(4) \6\ 
thereunder because the proposed rule effects a change in an existing 
service of OCC that does not adversely affect the safeguarding of 
securities or funds in the custody or control of OCC or for which OCC 
is responsible and does not significantly affect the respective rights 
or obligations of OCC or persons using the service. At any time within 
sixty days of the filing of such rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
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    \5\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \6\ 17 CFR 240.19b-4(f)(4).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

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change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's on-line comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail message to [email protected]. Please 
include File No. SR-OCC-2004-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File No. SR-OCC-2004-08. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet web site (http://www.sec.gov/rules/sro.shtml). 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 also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
web site at http://www.optionsclearing.com. All comments received will 
be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-OCC-2004-08 and should be submitted on or 
before July 23, 2004.

    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. 04-15086 Filed 7-1-04; 8:45 am]
BILLING CODE 8010-01-U