[Federal Register Volume 61, Number 171 (Tuesday, September 3, 1996)]
[Notices]
[Pages 46499-46500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22278]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37602; File No. SR-OCC-95-17]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Approving a Proposed Rule Change Modifying the Escrow Deposit
Program
August 26, 1996.
On November 2, 1995, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-95-17) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of
the proposal was published in the Federal Register on June 7, 1996.\2\
OCC amended the proposed rule change on March 22, 1996, and on July 22,
1996.\3\ No comment letters were received. For the reasons discussed
below, the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 37258 (May 30, 1996), 61
FR 29160.
\3\ Letters from Jean M. Cawley, OCC, to Jerry W. Carpenter,
Assistant Director, Division of Market Regulation (``Division''),
Commission (March 20, 1996, and July 22, 1996). Because the
amendments are technical rather than substantive in nature, the
Commission believes it is not necessary to re-notice the proposed
rule change.
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I. Description of the Proposal
OCC is modifying its escrow deposit program to (i) permit escrow
deposits for stock put options and stock index put options; (ii) delete
provisions regarding OCC's batch system for processing escrow receipts;
(iii) change provisions regarding the timing of the release of escrow
deposits; and (iv) delete provisions for bulk deposits for call options
and deposits of Treasury bills for put options. In addition, OCC is
modifying other OCC rules and the On-line Escrow Deposit Agreement to
conform to this rule change.
Pursuant to OCC rules, clearing members may deposit, which deposit
may be in the form of an escrow deposit, with an OCC approved custodian
shares of stock underlying certain options in lieu of margin. Escrow
deposits are specific deposits of assets held by OCC at an approved
custodian for the account of a specific customer. Presently, OCC's
rules restrict escrow deposits to short positions in stock call option
contracts and stock index call option contracts. For stock call
options, the underlying security may be deposited in escrow, and for
stock index call options, any combination of cash, short-term
government securities, or marginable equity securities may be deposited
in escrow.
Permitting escrow deposits with respect to short positions in stock
put option contracts and short positions in stock index put option
contracts had been deferred until sufficient interest existed and an
acceptable system was developed to process escrow deposits for put
options. After receiving requests to expand its escrow program to
include such deposits for stock and stock index puts, OCC determined to
make several enhancements and modifications to its escrow program.
First, OCC is expanding its escrow program to permit escrow
deposits for short positions in stock put option contracts and in stock
index put option contracts and to process those deposits through its
on-line Escrow Receipt Depository (``ERD'') system.\4\ To accomplish
the proposed expansion of
[[Page 46500]]
its escrow program, certain changes to OCC Rules 610 and 1801 are
necessary. In general, the changes will accommodate the deposit of any
combination of cash and short-term government securities \5\ for short
positions in put contracts, will provide for the valuation and
substitution of deposited assets, and in the event of the value of the
property declines below a specified amount, will permit OCC to
disregard the escrow deposit and require the clearing member to deposit
margin upon notice.
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\4\ For a complete description of the batch ERD system and the
transition to the on-line ERD system, refer to Securities Exchange
Act Release No. 31595 (December 11, 1992), 57 FR 61139 [SR-OCC-92-
30] (order approving on an accelerated basis a proposed rule change
relating to the conversion of OCC's current batch ERD system to an
on-line system).
\5\ As defined in Rule 610, proposed Interpretation .02, short-
term government securities is defined as securities with a fixed
principal amount issued or guaranteed by the United States and
having one year or less to maturity.
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Second, OCC is eliminating its batch ERD system for processing
escrow receipts. OCC contemplated the eventual replacement of the batch
ERD system with its on-line ERD system. OCC believes that all its
clearing members and custodian banks now have completed their
transition to the on-line system because the batch ERD system is no
longer used. Therefore OCC is eliminating references to escrow receipts
in Rule 610 and 1801 and to the batch processing system described in
Rule 613(a).
Third, OCC is amending Rule 613 to modify the time at which it
releases escrow deposits. OCC currently releases an escrow deposit on
the second business day following the expiration of the short position
covered by the deposit, and thereafter if assigned, collects margin for
the position formerly covered by the deposit until the next business
day after the exercise settlement date. With this proposed rule change
OCC will hold an escrow deposit covering a short position to which an
exercise has been allocated until the business day after the exercise
settlement date and will no longer collect margin.
Fourth, OCC is amending Rule 610 to eliminate bulk deposits of
underlying securities for call options and the deposit of Treasury
bills for put options because these capabilities have been rarely, if
ever, used by clearing members. Furthermore, the provisions for
depositing Treasury bills for put options is being superseded by the
new provisions for providing escrow deposits for put option contracts.
Finally, OCC is modifying rules that relate to the suspension and
liquidation of a clearing member to conform to OCC's escrow deposit
program described above. Specifically, OCC is amending Rule 1106(b)(2)
to make explicit that OCC would make timely settlement on an exercise
assigned to a covered short position of a suspended clearing member
even if the depository had not turned over the deposited property to
OCC at the time of settlement. OCC would be entitled to reimburse
itself for the cost of effecting such settlement from the deposited
property when such property is remitted to OCC. Similarly, Rule
1107(b)(2) is being amended to reflect the same principles to
assignments pending at the time of a clearing member's suspension.
Also, OCC amended its Restated On-Line Escrow Deposit Agreement which
is to be executed between OCC and each approved escrow deposit bank.
The amended agreement parallels the principal purposes of the filing,
which are to provide for the expansion of the program to include escrow
deposits for short positions in stock and stock index put options, the
elimination of hard copy receipts, and the modification of the time at
which escrow deposits are released.
II. Discussion
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 promote the prompt and accurate
clearance and settlement of securities transactions and to assure the
safeguarding of securities and funds in the custody or control of the
clearing agency or for which it is responsible. The Commission believes
that OCC's proposed rule change meets these requirements by
establishing a framework in which existing OCC systems, rules, and
procedures are extended to allow escrow deposits for short positions in
stock put option contracts and stock index put option contracts. The
elimination of the batch ERD system and the designation of the on-line
ERD system as the means of processing escrow deposits should make
processing such deposits more efficient and should promote the
safeguarding of the deposits in the possession of OCC or for which it
is responsible. By expanding the escrow receipt framework to include
short positions in stock put and stock index put option contracts and
by eliminating unnecessary steps in the escrow receipt process (e.g.,
release of deposits followed by margin collection and bulk deposits for
put options), OCC is creating more efficient procedures in order to
streamline the processing of escrow receipts. As a result, the prompt
and accurate clearance and settlement of securities transactions should
be promoted.
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\6\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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III. Conclusion
The Commission finds that the proposal is consistent with the
requirements of the Act, particularly with Section 17A(b)(3)(F) of the
Act, and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-95-17) 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) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22278 Filed 8-30-96; 8:45 am]
BILLING CODE 8010-01-M