[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]
[Notices]
[Pages 42752-42755]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18118]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64883; File No. SR-OCC-2011-06]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Regarding Clearing and Settling a Price Differential Spread Futures
Transaction
July 14, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ notice is hereby given that on June 30, 2011, The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission the proposed rule change as described in Items I and II
below, which items have been prepared primarily by OCC. OCC filed the
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
\2\ and Rule 19b-4(f)(4) thereunder \3\ so that the proposal was
effective upon filing with the Commission. 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).
\2\ 15 U.S.C. 78s(b)(3)(A)(iii).
\3\ 17 CFR 240.19b-4(f)(4).
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I. Self-Regulatory Organization's Statement of Terms of Substance of
the Proposed Rule Change
The proposed rule change would accommodate the clearing and
settling of a transaction type called a Price Differential Spread for
purposes of effecting exchange transactions in futures contracts.
II. Self-Regulatory Organization's Statement of 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.
A. Self-Regulatory Organization's Statement of Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of this proposed rule change is to amend OCC's By-Laws
and Rules to accommodate the proposed introduction by ELX Futures L.P.
(``ELX''), an electronic futures market that is designated as a
contract market by the Commodity Futures Trading Commission (``CFTC''),
of a transaction type called a Price Differential Spread (``Price
Differential Spread'') for purposes of effecting exchange transactions
in futures contracts.\4\ A Price Differential Spread is a pair of
transactions resulting from a type of order where the party placing the
order seeks to simultaneously buy and sell futures contracts on the
same underlying interest but with different contract months (each such
transaction referred to herein as a ``leg'' of the Price Differential
Spread), provided that the price at which contracts are bought in one
leg less the price at which contracts are sold in the other leg (the
``price differential'') is no greater than the limit specified by such
party (such limit referred to herein as the ``maximum price
differential''). Price Differential Spreads are principally used to
roll futures positions forward into futures with the same underlying
interest but with a later delivery date. In such a transaction, the
cost to the party rolling the positions forward is determined solely by
the difference between the prices at which the two legs of the Price
Differential Spread are executed. The price of either leg alone is not
relevant. As discussed below, by allowing a Clearing Member to use
contract prices that are based on the previous day's exchange-reported
closing price, the actual price differential is highlighted and
allocation of equivalent transactions
[[Page 42753]]
among different customers is facilitated. For purposes of illustration,
assume that the ``front leg'' of a Price Differential Spread (i.e., the
leg with the nearer contract month) is the sale of futures contracts
and that the ``back leg'' (i.e., the leg with the more distant contract
month) is the purchase of futures contracts.
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\4\ OCC understands that similar transactions are used by at
least one other futures exchange.
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When submitting a Price Differential Spread order to ELX, the
trader will specify the maximum price differential, and ELX will
attempt to match the two legs of the Price Differential Spread based on
available orders (not limited to Price Differential Spread orders) from
other traders. Assume that a Clearing Member submits a Price
Differential Spread order (such Clearing Member referred to herein as
the ``Price Differential Spread Executor'') to sell a March SYM
contract and buy a June SYM contract with a maximum price differential
of $1.00 and that ELX matches the front leg to counterparty A, that
buys the March SYM contract at $118.00, and the back leg to
counterparty B, that sells the June SYM contract at $118.95. In this
case, the price differential between the two legs, based on matched
trade prices, is $0.95, which is lower than the $1.00 maximum price
differential that the Price Differential Spread Executor has specified.
Price Differential Spreads are differentiated from other futures
transactions cleared by OCC in that the Price Differential Spread
Executor may choose at the time it submits the order to (1) Record the
contract prices of both legs of a Price Differential Spread at the
prices at which the contracts are matched on the exchange (``Spread
Engine Prices'') or (2) record the contract price of the front leg at
the exchange-reported closing price on the immediately preceding
trading day for the contracts bought or sold (``prior day closing
price'') and record the contract price of the back leg at (a) the
contract price of the front leg plus the price differential, if the
front leg is the sale of futures contracts or (b) the contract price of
the front leg less the price differential if the front leg is the
purchase of futures contracts (``Spread Settle Prices'').
After matching both legs of a Price Differential Spread, ELX will
send to OCC a pair of matched trade reports, each of which will
identify the buyer, the seller, the futures contract traded, the
exchange-assigned identification number (``Price Differential Spread
ID'') connecting the two legs of the Price Differential Spread, the
Spread Engine Price, and the Spread Settle Price. The matched trade
reports also will indicate the price type (i.e., the Spread Engine
Price or the Spread Settle Price) that OCC should use to record the
trades on behalf of the Price Differential Spread Executor.\5\
Continuing the example, assume that the prior day closing price for the
March SYM contract was $117.90. If the Price Differential Spread
Executor elects to use the Spread Engine Prices at the time it submits
the order, OCC will initially record the front leg at $118.00 and the
back leg at $118.95. Alternatively, if the Price Differential Spread
Executor elects to use the Spread Settle Prices at the time it submits
the order, OCC will initially record the front leg at $117.90 and the
back leg at $118.85 (which is the sum of the $117.90 contract price for
the front leg plus the price differential of $0.95 because the front
leg is the sale of a futures contract).\6\ In addition, after the two
legs of the Price Differential Spread have been accepted by OCC for
clearance and prior to a deadline established by OCC, which deadline
would occur before the initial variation payment, the Price
Differential Spread Executor may access OCC's systems to change its
initial election with respect to such trades as between using the
Spread Engine Prices and using the Spread Settle Prices. ELX has
informed OCC that Price Differential Spread traders require the
flexibility to choose between the prices being used for clearing their
Price Differential Spreads for purposes of allowing them to allocate
trades among multiple customers at an equitable price similar to the
average pricing functionality that already exists in OCC's trade
allocation process and that the implementation of this new post-trade
process will be consistent with existing practices in the futures
industry. ELX also has informed OCC that Price Differential Spread
transactions will not affect the prices at which trades are publicly
reported.
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\5\ In the case where each counterparty to the trade has entered
into the trade as part of its own Price Differential Spread, the
matched trade report will identify separately with respect to each
counterparty the price to be initially recorded as the contract
price and the Price Differential Spread ID.
\6\ Assume instead that the front leg is the purchase of a
futures contract at $118.95 and the back leg is the sale of a
futures contract at $118.00. The price differential is still $0.95.
If the Price Differential Spread Executor elects to use the Spread
Settle Prices at the time it submits the order, OCC will initially
record the front leg at $117.90 and the back leg at $116.95 (which
is the $117.90 contract price minus the price differential of $0.95
because the front leg is the purchase of a futures contract).
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Except in the case where the counterparty to a leg of a Price
Differential Spread enters into the trade as part of its own Price
Differential Spread and elects to record the trade using the Spread
Settle Price, the counterparty sees the trade as an ordinary stand-
alone futures transaction, and OCC will record the trade on behalf of
the counterparty using the Spread Engine Price. Therefore, continuing
the example, in a case where the Price Differential Spread Executor
chooses to use the Spread Settle Prices for clearing a Price
Differential Spread, the trades as recorded on OCC's books and records
for the Price Differential Spread Executor will use a different set of
prices (i.e., $117.90 and $118.85) from those recorded for counterparty
A and counterparty B (i.e., $118.00 and $118.95). However, the
aggregate amount of the variation payments that the Price Differential
Spread Executor will pay to or collect from OCC will be the same
(except for very small discrepancies due to rounding differences as
described below) regardless of which set of prices is used to calculate
variation payments because the price differential between the two legs
of the Price Differential Spread is the same (i.e., $0.95).
Accordingly, and subject to the treatment of rounding differences as
described in the following paragraphs, OCC's clearing system will be in
balance because the variation payments due to or from the Price
Differential Spread Executor on the futures contracts executed as part
of the Price Differential Spread will equal the amount due to or from
the counterparties to those transactions on an aggregate basis even if
not on a contract-by-contract basis.
When the Price Differential Spread Executor records the trades
using the Spread Settle Prices, rounding the Spread Settle Prices to
the nearest applicable minimum price increment when the initial
variation payments on the trades are calculated may result in the Price
Differential Spread Executor paying slightly more or receiving slightly
less than it would have paid or received if it had elected to record
the trades using the Spread Engine Prices. In either case the amount
will be no more than one cent per contract. The amount by which the
Price Differential Spread Executor receives slightly less or pays
slightly more than it would have otherwise paid or received with
respect to the trades will fund the amount by which other Price
Differential Spread Executors are entitled to receive more or pay less
as a result of OCC's rounding procedures.
While all such discrepancies in variation payments due to OCC's
rounding procedures should net to zero when averaged over time, they
may not net to precisely zero on any business day. Any net excess
received by OCC on
[[Page 42754]]
any business day will be contributed to a ``Rounding Fund'' and will be
carried forward to fund any net amount that OCC may be required to pay
on subsequent days. In order to ensure that there is always a
sufficient positive balance in the Rounding Fund to fund any such net
amount that may be owed by OCC, a cushion is needed. Accordingly, ELX
has agreed in an amendment to the Clearing Agreement between OCC and
ELX to provide OCC an initial amount of $5,000 as a contribution to the
Rounding Fund and to contribute additional amounts as reasonably
required by OCC to provide a larger cushion should growth in product
volume indicate such additional amounts are required. The Rounding Fund
will be held by OCC in one or more bank accounts used by OCC to make
daily cash settlements with Clearing Members so that it will be
automatically available to fund variation payments as needed and to
eliminate the expense and operational risk of unnecessary funds
transfers. OCC will maintain a record of the amount held in the
Rounding Fund on OCC's own books and records. If at any time ELX ceases
to clear transactions through OCC or ceases to permit Price
Differential Spread transactions, OCC will pay any amount left in the
Rounding Fund to ELX.
OCC proposes to make the following amendments to its By-Laws and
Rules in order to accommodate clearance of Price Differential Spreads.
OCC proposes to add a new Rule 1301A to (1) Define Price Differential
Spreads,\7\ (2) require the listing exchange to include the Spread
Engine Price and the Spread Settle Price and to identify (separately
with respect to each counterparty to the trade, if applicable) which of
the two prices is to be initially recorded as the contract price and
the Price Differential Spread ID in each of the matched trade reports
that the listing exchange sends to OCC with respect to Price
Differential Spreads, (3) permit a Clearing Member to choose post trade
the contract prices to be used for clearing its Price Differential
Spread trades, and (4) highlight the rounding situation described
above. OCC would also make a minor conforming amendment to Rule 1301.
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\7\ OCC also proposes to add the term ``Price Differential
Spread'' to Article I of its By-Laws as a cross reference to Rule
1301A where the term is actually defined.
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In addition, OCC and ELX would enter into Amendment 1 to the
Agreement for Clearing and Settlement Services dated December 5, 2008,
between OCC and ELX to accommodate Price Differential Spreads. A copy
of Amendment 1 is attached hereto as Exhibit 5.
OCC states that the proposed changes to OCC's By-Laws and Rules are
consistent with the purposes and requirements of Section 17A of the Act
\8\ because they effect a change in an existing service of OCC that
does not adversely affect the safeguarding of securities or funds in
OCC's custody or control or for which OCC is responsible or
significantly affect the respective rights or obligations of OCC or
persons using its securities clearing services. The proposed rule
change is not inconsistent with any rules of OCC including any rules
proposed to be amended.
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\8\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will have any
impact or impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
OCC has not solicited or received written comments relating to the
proposed rule change. OCC will notify the Commission of any written
comments it receives.
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 \9\ and Rule 19b-4(f)(4) \10\ because it
effects a change in an existing service of a registered clearing agency
that does not adversely affect the safeguarding of securities or funds
in the custody or control of the clearing agency or for which it is
responsible and does not significantly affect the respective rights or
obligations of the clearing agency or persons using the service. At any
time within 60 days of the filing of the proposed rule change, the
Commission summarily may temporarily suspend 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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\9\ Supra note 2.
\10\ Supra note 3.
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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
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 No. SR-OCC-2011-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-OCC-2011-06. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filings also will be available for
inspection and copying at OCC's principal office and OCC's Web site
(http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_11_06.pdf). 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-
2011-06 and should be submitted on or before August 9, 2011.
[[Page 42755]]
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-18118 Filed 7-18-11; 8:45 am]
BILLING CODE 8011-01-P