Federal Register / Vol. 62, No. 159 / Monday, August 18, 1997 / Notices 44025

4 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

(e) Rule 4.2 and Interpretations

thereunder related to the requirement to

furnish Exchange-related order, market

and transaction data, as well as

financial or regulatory records and

information.

(f) Rule 11.9(c) related to the

requirement to comply with quotation

policies.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

CSE 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. The CSE has prepared

summaries, set forth in sections A, B

and C below, of the most significant

parts of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

(1) Purpose

The purpose of the proposed rule

change is to enhance the Exchange’s

Minor Rule Violation Program.

Exchange Rule 8.14 provides for an

alternative disciplinary regime

involving violations of Exchange Rules

that the Exchange determines are of a

minor nature. The Minor Rule Violation

Program provides the Exchange with the

ability, but not the obligation, to address

minor rule violations by imposing a

fine, not to exceed $2500, on any

member that the Exchange determines

has violated such rule. Adding a

particular rule violation to the Minor

Rule Violation Program in no way

circumscribes the Exchange’s ability to

treat violations of those rules through

more formal disciplinary measures. The

Minor Rule Violation Program simply

provides the Exchange with greater

flexibility in addressing rule violations

appropriately. Section (e) of Rule 8.14

requires the Exchange from time to time

to prepare a list of minor rule violations.

As part of its ongoing effort to

improve its regulatory program, the

Exchange has determined that certain

rule violations should be added to the

Minor Rule Violation Program. The

Minor Rule Violation Program currently

includes the requirements of Exchange

Rules 4.1 and 4.2, concerning books and

records, to submit trade data to the

Exchange. The Exchange intends to

clarify that a member must also provide

financial and regulatory records in

accordance with Rule 4.2 and

Interpretation thereunder as well as

trade-related information.

Similarly, the proposed rule change

will include quotation policies set by

the Exchange’s Securities and Market

Performance Committee and delineated

by Regulatory Circular. Exchange Rule

11.9(c) requires Designated Dealers, the

Exchange’s multiple, competing

specialists, to maintain continuous

quotations throughout the trading day.

Including these quotation requirements

in the Minor Rule Violation Program

will help the Exchange ensure

compliance with its quotation

requirements and spread parameters

because the Exchange will have

adequate regulatory flexibility in

dealing with potential violations. This,

in turn, will enhance the value of

quotations made by the Exchange’s

multiple, competing specialists.

(2) Basis

The proposed rule change is

consistent with Section 6(b) of the Act

in general, and furthers the objectives of

Section 6(b)(5) in particular in that it is

designed to promote just and equitable

principles of trade and to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest. Specifically, the

proposed rule change will augment the

Exchange’s ability to police its market

and will increase the Exchange’s

flexibility in responding to minor rule

violations. The Exchange will be able to

address appropriate minor rule

violations promptly and efficiently

through the minor rule procedures,

without the need to initiate formal

disciplinary proceedings.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CSE does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

No comments were solicited in

connection with the proposed rule

change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reason for so finding or (ii)

as to which the Exchange consents, the

Commission will:

(A) by order approve such proposed

rule change, or

(B) institute proceedings to

determined whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

People making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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

Room. Copies of the filing will also be

available for inspection and copying at

the CSE’s principal offices. All

submissions should refer to File No.

SR–CSE–97–07 and should be

submitted by September 8, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.4

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–21749 Filed 8–15–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38923; File No. SR–OCC–

97–09]

Self-Regulatory Organizations; The

Options Clearing Corporation; Notice

of Filing of a Proposed Rule Change

Seeking To Amend the Valuation Rate

Applied to Equity Securities and

Corporate Debt Deposited as Margin

Collateral

August 11, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

May 21, 1997, The Options Clearing

Corporation (‘‘OCC’’) filed with the
44026 Federal Register / Vol. 62, No. 159 / Monday, August 18, 1997 / Notices

2The Commission has modified the text of the

summaries prepared by OCC.

3Securities Exchange Act Release No. 11820

(November 12, 1975), 40 FR 53637 [File No. SR–

OCC–75–05] (notice of proposed rule change). The

Commission did not approve this proposed rule

change. OCC withdrew File No. SR–OCC–75–05

and submitted File No. SR–OCC–82–11 in its place.

Securities Exchange Act Release No. 18994 (August

20, 1982), 47 FR 37731 [File No. SR–OCC–82–11]

(order approving File No. SR–OCC–82–11 and

withdrawing File No. SR–OCC–75–05).

4Securities Exchange Act Release No. 18994

(August 20, 1982), 47 FR 37731 [File No. SR–OCC–

82–11] (order approving File No. SR–OCC–82–11

and withdrawing File No. SR–OCC–75–05).

5Securities Exchange Act Release No. 20558

(January 13, 1984), 49 FR 2183 [File No. SR–OCC–

83–17] (order granting accelerated approval of

proposed rule change).

6Securities Exchange Act Release Nos. 29576

(August 16, 1991), 56 FR 41873 [File No. SR–OCC–

88–03] (order approving proposed rule change

involving the value securities program); 38105

(December 31, 1996), 62 FR 1014 [File No. SR–

OCC–96–13] (order approving proposed rule change

relating to unit investment trusts as margin).

7Securities Exchange Act Release No. 33893

(April 14, 1994), 59 FR 18427 [File No. SR–OCC–

92–13] (notice of amendment to filing and order

granting accelerated approval to proposed rule

change). As originally filed, SR–OCC–92–13

proposed a 70% valuation rate. OCC submitted this

proposed rule change upon receipt of advice from

the staff of the Federal Reserve Board that it would

not object to a 70% valuation rate. OCC and the

Commission’s staff later concurred on 60% as the

valuation rate, and accordingly, OCC amended its

filing.

8 17 CFR 240.15c3–1.

9 Generally, haircuts are percentage deductions

broker-dealers apply to their securities positions to

determine the value of the securities for net capital

purposes.

10Securities Exchange Act Release No. 38248

(February 12, 1997), 62 FR 6480 [File No. S7–07–

94] (effective September 1, 1997) and Letter from

Brandon Becker, Division of Market Regulation,

Commission, to Mary L. Bender, First Vice

President, Chicago Board Options Exchange, and

Timothy Hinkas, Vice President, OCC (March 15,

1994).

11 17 CFR 240.15c3–1(c)(2)(v)(J).

12 17 CFR 240.15c3–1(c)(2)(v) (F), (G), (H), and (J).

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change (File No. SR–OCC–97–09) 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.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The purpose of the proposed rule

change is to increase from 60 percent to

70 percent the valuation rate OCC

applies to equity securities and

corporate debt deposited as margin

collateral.

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

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 amend the valuation rate

OCC applies to equity securities and

corporate debt deposited with OCC as

margin collateral. Under the proposed

rule change, the rate will be increased

from 60 percent to 70 percent.

Background

In 1975, OCC proposed instituting a

program to accept deposits of common

stock as margin collateral (‘‘valued

securities program’’) under its Rule

604(d) and sought to value these

deposits at 70 percent of their current

market value.3 According to OCC, the

valued securities program would reduce

OCC’s reliance on letters of credit as a

form of margin collateral and would

reduce the amount of money OCC’s

clearing members paid to banks for

letters of credit. Because margin

securities are the major source of

collateral for letters of credit, the valued

securities program would eliminate the

need for OCC’s clearing members to

deposit margin securities at a bank in

order to obtain a letter of credit for the

benefit of OCC. Instead, clearing

members could pledge margin stock

directly to OCC as a form of margin

collateral. OCC believed that the 70

percent valuation rate would provide a

sufficient cushion against exposure to

market and liquidity risk in the event

OCC would need to liquidate deposited

securities in connection with a clearing

member’s default.

The novelty of the valued securities

program resulted in extensive regulatory

review by the staffs of the Commission

and the Federal Reserve Board. This

review led to several changes to the

valued securities program, including a

change in the valuation rate to be

applied to stock deposited as margin

collateral. As the program was

approved, the rate was set at no more

than the maximum loan value specified

in Regulation U (i.e., 50 percent of

current market value).4

OCC began accepting deposits of stock

as margin collateral in 1985 and has

gained substantial experience in

operating the program as initially

approved and as later enhanced.

Enhancements to the program include:

(i) Expanding the types of common

stock eligible for deposit; 5 (ii)

permitting the acceptance of deposits of

qualified preferred stock, corporate

debt, and units of beneficial interests in

unit investment trusts; 6 and (iii)

increasing the valuation rate to 60

percent.7 However, even with these

enhancements, OCC states that its

clearing members continued to request

that a valuation rate of 70 percent be

applied to securities deposits into the

valued securities program.

Seventy Percent Valuation Rate

OCC believes that a 70 percent

valuation rate is prudent and will

protect OCC in case of a clearing

member’s default. OCC also asserts that

the proposed valuation rate is consistent

with the securities haircuts prescribed

in the Commission’s uniform net capital

rule.8 Under the net capital rule,

haircuts are intended to account for

market and liquidity risks associated

with securities positions in the event of

a broker-dealer liquidation.9 For brokerdealers using the risk-based haircut

methodology approved in February

1997,10 the maximum haircut to be

taken for equity or equity options

positions is 15 percent. For brokerdealers using the alternative method,

the maximum haircut for long

proprietary securities positions is 15

percent.11 For broker-dealers using the

basic method, the maximum haircut

applicable to non-convertible debt

securities, convertible debt securities,

preferred stock, and common stock (all

of which are forms of valued securities)

is 30 percent.12

A 70 percent valuation rate for

securities deposited in OCC’s valued

securities program means that a 30

percent haircut will be applied to those

positions. Accordingly, the haircut

proposed by OCC is two times the

maximum deduction required for

proprietary and market-maker trading

accounts under the risk-based haircut

methodology; two times the maximum

deduction required for long proprietary

positions under the alternative method;

and equal to the maximum deduction

required under the basic method. In

light of the purposes served by

securities haircuts and in comparison to

the haircut percentages prescribed in

the Commission’s uniform net capital

rule, OCC believes that a 30 percent

haircut will adequately cover any
Federal Register / Vol. 62, No. 159 / Monday, August 18, 1997 / Notices 44027

13OCC Rule 609.

14 15 U.S.C. 78q–1.

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1) (1988).

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 38081

(December 23, 1996), 62 FR 138 (January 2, 1997)

(order approving File No. SR–PSE–96–40).

4See Securities Exchange Act Release No. 36841

(February 14, 1996), 61 FR 6666 (February 21, 1996)

(order approving File No. SR–PSE–95–24).

5These rules currently allow the Exchange to

trade FLEX Index options on the Wilshire Small

Continued

market or liquidity risk that it could

encounter in liquidating a clearing

member’s valued securities deposits.

Moreover, in addition to the valuation

rate applied to deposits of valued

securities, OCC Rule 604(d)(1) specifies

other criteria governing OCC’s

acceptance of deposits. According to

OCC, these criteria have been designed

to ensure: (i) That a ready and liquid

public market exists for deposited

securities; (ii) that a diversified portfolio

of securities is deposited with respect to

each account carried by a clearing

member at OCC; (iii) that OCC can

prescribe a lower valuation for

individual issues; and (iv) that deposits

are marked-to-the-market on each

business day. Furthermore, as market

conditions or other circumstances

warrant, OCC has the authority to issue

intraday margin calls.13 Accordingly,

OCC believes that it can prudently

apply a 70 percent valuation rate to

deposits of valued securities. OCC also

believes that a 70 percent valuation rate

will result in a further diversification of

the overall portfolio of margin collateral

deposited with OCC and, as such, will

lessen the risk of overexposure to any

one form of margin collateral.

OCC believes that the proposed rule

change is consistent with the

requirements of Section 17A of the

Act 14 and the rules and regulations

thereunder because it reduces costs to

persons facilitating transactions by and

acting on behalf of public investors

without adversely affecting OCC’s

ability to safeguard funds and securities

in its custody or control or for which it

is responsible.

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

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

ninety days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which OCC consents, the

Commission will:

(A) By order approve such proposed

rule change or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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

Room, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of OCC. All submissions should

refer to the file number SR–OCC–97–09

and should be submitted by September

8, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–21751 Filed 8–15–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38920; File No. SR–PCX–

97–22]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Exchange, Inc., Relating

FLEX Index Options and LEAPS on the

Dow Jones & Co. Taiwan Index

August 11, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on June 9,

1997, the Pacific Exchange, Inc. (‘‘PCX’’

or ‘‘Exchange’’) 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 by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PCX, pursuant to Rule 19b–4 of

the Act, proposes to amend its rules to

allow the trading of FLEX Index options

and LEAPS on the Dow Jones & Co.

Taiwan Index.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization 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.

The self-regulatory organization 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 the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

On December 23, 1996, the

Commission approved an Exchange

proposal to list and trade cash-settled,

European-style stock index options on

the Dow Jones & Co. Taiwan Index

(‘‘Index’’).3 The Index is comprised of

113 representative stocks traded on the

Taiwan Stock Exchange. The Index is

deemed to be a broad-based index.

The Exchange is now proposing to

amend its rules on Flexible Exchange

options (‘‘FLEX Options’’) 4 to provide

that FLEX Options on the Dow Jones &

Co. Taiwan Index are approved for

trading on the Exchange. In this regard

the Exchange is proposing to amend

PCX Rules 8.100(a)(1) and 8.102(e)(1).5