[Federal Register Volume 69, Number 135 (Thursday, July 15, 2004)]
[Notices]
[Pages 42490-42492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49987; File No. SR-OCC-2004-07]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating To Settlements of Exercises and Assignments of Foreign 
Currency Options

July 8, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 10, 2004, 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 updates OCC's By-laws and Rules pertaining 
to the settlement of exercised foreign currency options in anticipation 
of the installation of the portion of OCC's new ENCORE clearing system 
that will process those settlements.

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

    The purpose of the proposed rule change is to update OCC's By-laws 
and Rules pertaining to the settlement of exercised foreign currency 
options in anticipation of the installation of the portion of OCC's new 
ENCORE clearing system that will process those settlements. This 
installation, which was scheduled for May 7, 2004, will convert 
existing processing to the ENCORE technology with only a few 
variations. Nevertheless, OCC wishes to take this occasion to update 
its Rules by eliminating details that now seems more appropriately 
included in operational procedures than in its rulebook and by making a 
few other changes, as described below, that are appropriate to reflect 
experience that OCC has gained and certain developments that have 
occurred since OCC's Rules were initially adopted. These amendments are 
equally applicable before and after the planned conversion to the 
ENCORE system. The specific changes are described below.
Overview of Exercise Settlement Process for Foreign Currency Options
    As set forth in Rules 1605, 1606, and 1606A, the gross settlement 
obligations for all accounts are netted down to a single amount for 
each currency pair following the assignment of exercise notices with 
respect to foreign currency options for all accounts within a 
particular clearing number. Netting occurs within a currency pair so 
that an obligation to deliver a specific foreign currency against the 
receipt of U.S.

[[Page 42491]]

dollars will be netted against an obligation to receive that same 
foreign currency against payment of U.S. dollars. In the event that two 
or more settlements arising from different exercise/assignment dates 
for a currency pair will settle on the same date, those settlements 
will also be netted. If such processing nets out all settlement 
obligations for a currency, then such obligations are deemed 
discharged. To the extent a settlement obligation remains, OCC makes 
available to settling clearing members a report showing their projected 
settlements. Settlement obligations arising from multiple clearing 
numbers controlled by the same clearing member are not netted against 
each other.
    In response to the projected settlement report, clearing members 
may submit instructions designating obligations to be settled on a 
deliver versus payment (``DVP'') basis. A clearing member may instruct 
OCC that it will settle all or, subject to certain constraints imposed 
by OCC's procedures, any part of the gross obligation on a DVP basis 
and any remaining net settlement may also be settled on a DVP basis. 
After the close of the DVP window, OCC recalculates the remaining net 
currency pairs, eliminating deliveries and payments to be settled under 
the submitted DVP instructions. If DVP instructions were not submitted 
for the entire remainder, those remaining net obligations will settle 
on a regular way basis. Final settlement obligations, identifying the 
applicable settlement method, are then made available to clearing 
members and reported to their banks.
    Two business days before settlement date, OCC debits the settling 
clearing members' bank accounts for U.S. dollar obligations settling on 
a regular way basis. The debited amount is held until settlement date. 
On settlement date, if a settling clearing member with a collect in 
U.S. dollars had not opposite foreign currency obligation, the U.S. 
dollar collect will be released during regular morning settlements. If 
the settling clearing member did have a foreign currency deliver 
obligation, OCC will make the corresponding U.S. dollar settlement upon 
receiving confirmation from OCC's bank that the clearing member has 
satisfied its settlement obligations. If OCC receives a partial 
delivery of a foreign currency, the deficiency is treated as unsettled 
and only a portion of the U.S. dollars being held will be released to 
the collecting clearing member. OCC will issue new regular way 
settlement information for the unsettled foreign currency obligation.
    As provided in Rule 1606(c) and Interpretation .01 following Rule 
1606, in the case of certain currencies OCC (or OCC's bank) requires 
that a clearing member must obtain an advance guarantee from its bank 
that the bank will deliver the currency on the exercise settlement 
date. This requirement is imposed for those currencies for which 
delivery is likely to be delayed in the absence of such guarantees as 
determined by OCC's bank through its experience in the currency 
markets. For those currencies for which a guarantee is required, the 
clearing member must both provide a bank guarantee of the settlement 
and then make actual settlement in order to discharge its obligations. 
In the case of DVP settlements, the clearing member's bank advises OCC 
whether it has accepted or rejected the DVP instructions. If rejected, 
OCC's acceptance of the DVP instruction is revoked and the settlement 
obligation will be processed as a regular way settlement. Obligations 
settling on a DVP basis are settled on the exercise settlement date.
Description of the Specific Rule Changes
    The principal changes are to Rules 1605, 1606, and 1606A of chapter 
XVI. These rules have been substantially redrafted, and accordingly, 
the former rules are deleted in their entirety. The revised rules 
essentially set forth the settlement process described above. The 
revised rules also eliminate references to The Intermarket Clearing 
Corporation (``ICC''), which has been merged into OCC.
    Rule 1604(b) is being amended to grant authority to the Chairman, 
Management Vice Chairman, President, and any delegate of such officers 
the authority to advance or postpone the settlement date for exercises 
of foreign currency options because it may be impractical or impossible 
to convene a Board meeting in time to address unusual conditions as 
action is typically required on the day the conditions arise. The 
Board's delegation increases OCC's flexibility to respond to unexpected 
or unusual events affecting the exercises settlement date for foreign 
currency options. While OCC has not experienced any unusual events 
relating to the settlement of foreign currency obligations, management 
believes that it is important the OCC have a level of flexibility in 
order to immediately respond to unusual conditions that may make it 
necessary to change a settlement date for foreign currency obligations. 
A similar change to Rule 902, Obligations to Deliver, was made in 2002 
to give these same officers authority to extend or postpone a 
settlement date for exercises of equity option.\3\
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    \3\ Securities Exchange Act Release No. 47629 (April 3, 2003), 
68 FR 17715 (April 10, 2003) [File No. SR-OOC-2002-21].
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    Certain nonsubstantive, conforming changes are made elsewhere in 
the rules. Amendments to Rule 602(f)(2) of chapter VI, Rule 1107 of 
chapter XI, and Rule 1602 of chapter XVI were necessary to correct 
references to Rule 1605 and to conform terminology to the defined terms 
contained in the other revised rules.
    OCC believes that the proposed changes to its rules are consistent 
with the purpose and requirements of section 17A of the Securities and 
Exchange Act of 1934, as amended, because such changes are designed to 
promote the prompt and accurate clearance and settlement of 
transactions in and exercises of foreign currency options and to assure 
safeguarding of securities and funds in the custody and control of OCC.

(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 pursuant to section 
19(b)(3)(A)(iii) of the Act \4\ and Rule 19b-4(f)(4) \5\ promulgated 
thereunder because the proposal effects a change in an existing service 
of OCC that (A) does not adversely affect the safeguarding of 
securities or funds in the custody or control of OCC or for which it is 
responsible and (B) 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 the Proposed 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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    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 17 CFR 240.19b-4(f)(4).

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[[Page 42492]]

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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to [email protected]. Please include 
File Number SR-OCC-2004-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Johathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.

All submissions should refer to File Number SR-OCC-2004-07. 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 Number SR-OCC-2004-07 and should be submitted on 
or before August 5, 2004.

    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. 04-16051 Filed 7-14-04; 8:45 am]
BILLING CODE 8010-01-M