[Federal Register: July 15, 2004 (Volume 69, Number 135)]
[Notices]
[Page 42490-42492]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jy04-113]
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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 rule-comments@sec.gov. 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