39334 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

1 15 U.S.C. 78s(b)(1) (1994).

2 17 CFR 240.19b–4 (1997).

3Amendment 1 revised the last sentence of

proposed new paragraph (c)(4) of Rule 3020. See

Letter from Elliott R. Curzon, Assistant Chief

Counsel, NASD Regulation, to Lisa Henderson,

Attorney, SEC, dated May 27, 1998.

4Securities Exchange Act Release No. 40065

(June 3, 1998), 63 FR 31819.

5 17 CFR 240.15c–1 (1997).

6 15 U.S.C. 78f(b)(6).

7 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

8 15 U.S.C. 78s(b)(2).

9 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 39648

(February 11, 1998), 63 FR 8509.

3OCC Rules 301 and 302.

4Robert C. Rubenstein from OCC in a letter dated

September 3, 1997, to the Commission stated that

according to OCC, the terms clearing organization

and SRO shall have the meanings ascribed to them

in the General Regulation of the Commodity

Exchange Act, 17 CFR 1.3(d) and 17 CFR.1.3(ff) (1)

and (2).

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder 2 to grant

authority to NASD staff to adjust the

fidelity bond required of a member in

certain circumstances. By letter dated

May 27, 1998, the Association filed

Amendment 1 to the proposed rule

change.3 The proposed rule change and

Amendment 1 were published for

comment in the Federal Register on

June 10, 1998.4 No comments were

received. This order approves the

proposal.

II. Description of the Proposal

Rule 3020 of the Conduct Rules of the

NASD specifies that members are

required to maintain fidelity bonds to

insure against certain losses and the

potential effect of such losses on firm

capital. The rule applies to all members

with employees who are required to join

the Securities Investor Protection

Corporation and who are not covered by

the fidelity bond requirements of a

national securities exchange. The

amount of coverage a member is

required to maintain is linked to the

member’s net capital requirements

under Rule 15c3–1 under the Act.5

Under paragraph (c) of Rule 3020, each

member must annually review the

adequacy of its fidelity bond coverage

and maintain coverage that is adequate

to cover its highest net capital

requirement during the preceding 12

months. For example, even if a fullservice member divests its clearing

business, so that it no longer holds

customer funds or securities, it would

still be required to maintain bond

coverage that is based on the higher net

capital requirement that applied during

the preceding year.

The proposed rule change would

amend Rule 3020 to permit staff of

NASD Regulation, Inc., (‘‘NASD

Regulation’’) to adjust the fidelity bond

requirements to reflect changes in a

member’s business. Requests for

exemption would be considered under

recently adopted Procedures for

Exemption in the 9600 Series of Rules

in the Code of Procedure. Under the

procedures, NASD Regulation staff

issues written determinations that are

subject to review by the National

Adjudicatory Council.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of Section 15A(b)(6) of

the Act,6 which provides, among other

things, that the rules of a national

securities association be designed to

protect investors and the public

interest.7 The Commission believes that

the proposed rule change will allow

members to be relieved from

maintaining unnecessarily high fidelity

bond coverage without compromising

investor protection.

The rule change applies a ‘‘good

cause’’ standard that will require a

member to demonstrate that a

modification from the bonding

requirement is justified by the level of

loss exposure that may be expected from

the member. The premiums are changed

from time to time to reflect changes in

loss experience and to ensure that

sufficient funds are available to pay any

losses reported to the insurer. NASD

Regulation represents that it will apply

this authority only where it is clear that

an exemption will not have any

unintended impact on the insurance

pool, and the modified coverage will

adequately protect the member against

potential losses. In addition, the

proposed rule change will permit NASD

Regulation staff to include conditions in

an exemption to ensure that any

subsequent increase in capital

requirements is accompanied by a

corresponding increase in coverage.

IV. Conclusion

It is therefore ordered, pursuant to

section 19(b)(2) of the Act,8 that the

proposed rule change (SR–NASD–98–

33) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19443 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40205; File No. SR–0CC–

97–12]

Self-Regulatory Organizations; The

Options Clearing Corporation; Order

Approving a Proposed Rule Change

Regarding Initial and Minimum Net

Capital Requirements for Futures

Commission Merchants

July 15, 1998.

On July 15, 1997, The Options

Clearing Corporation (‘‘OCC’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’) a

proposed rule change (File No. SR–

OCC–97–12) 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 February 19, 1998.2 No comment

letters were received. For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The proposed rule change amends

OCC’s initial and ongoing minimum net

capital requirements and early warning

notice provisions to establish additional

requirements for clearing members that

are also registered futures commission

merchants (‘‘FCMs’’). Currently, OCC’s

rules require its members to satisfy

initial and ongoing minimum net capital

requirements of $1,000,000 and

$750,000, respectively.3 Under the

proposed rule change, the initial and

ongoing minimum net capital of OCC

members that are also FCMs must

exceed the greater of the following

standards: OCC’s current initial and

ongoing minimum net capital

requirements or that required by the

clearing organization of the FCM

member’s designated self-regulatory

organization (‘‘DSRO’’).4

The proposed rule change also

modifies OCC’s early warning notice

provisions to require OCC members that

are also FCMs to notify OCC if that

member’s net capital falls below OCC’s

requirements or if its net capital falls

below the minimum net capital required

by the clearing organization of the FCM

member’s DSRO.
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39335

5 15 U.S.C. 78q–1(b)(3)(F).

6 17 CFR 200.30–3(a)(12).

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

2The Commission has modified the text of the

summaries prepared by OCC.

3The complete text of the amendments was

submitted with OCC’s rule filing and is available for

inspection and copying at the Commission’s Public

Reference Room and through OCC.

II Discussion

Section 17A(b)(3)(F) of the Act 5

requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in its custody or control or for

which it is responsible. The

Commission believes that the proposed

rule change is consistent with OCC’s

obligations under the Act because the

proposed rule change increases the

effectiveness of OCC’s financial

surveillance of its clearing members in

situations where the clearing member’s

net capital falls below that level

required by its futures clearing

organization.

Many of OCC’s clearing members are

also registered as FCMs under the

Commodity Exchange Act and as such

are subject to the financial reporting

requirements and the early warning

notice requirements of the Commodity

Futures Trading Commission and of

commodity DSROs. Because of

differences in the initial and ongoing

minimum net capital requirements used

by the commodity regulatory

organizations and those used by the

securities regulatory organizations, a

clearing member could fail to meet the

net capital requirements of its DSRO

and still satisfy the net capital

requirements established by OCC.

Consequently, a situation could occur

where an FCM clearing member is

required to give early warning notice to

its commodity regulatory authority but

nothing currently would require the

clearing member to give notice to OCC.

As a result, OCC could continue to clear

trades without notice for a clearing

member that may or may not be able to

satisfy its financial obligations.

Therefore, requiring a clearing

member to satisfy the higher applicable

net capital standard and to provide OCC

with early warning notices when it fails

to meet the net capital requirements set

by its DSRO or by OCC should assist

OCC in assessing the ongoing

creditworthiness of its clearing members

and also should help OCC to safeguard

securities and funds in OCC’s custody

or control.

III Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with the requirements of the

Act and in particular with the

requirements of Section 17A 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–97–12) be and hereby is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority. 6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19437 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40209; File No. SR–OCC–

97–13]

Self-Regulatory Organizations; The

Options Clearing Corporation; Notice

of Filing and Order Granting

Accelerated Approval of a Proposed

Rule Change Relating to Adjustments

to Exercise Prices

July 15, 1998.

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

Securities Exchange Act of 1934

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

September 22, 1997, the Options

Clearing Corporation (‘‘CCC’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change (File No. SR–

OCC–97–13) as described in Items I and

II below, which items have been

prepared primarily by OCC. The

Commission is publishing this notice

and order to solicit comments on the

proposed rule change from interested

persons and to grant accelerated

approval of the proposal.

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 amend OCC’s by-laws

regarding the adjustment of exercise

prices. Specifically, adjustment of

exercise prices will be rounded to the

next nearest trading increment as

specified by the primary market for the

underlying security.

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

Under the proposed rule change, OCC

will amend Article VI, Section 11(i) of

its by-laws to provide for the rounding

of adjustments of exercise prices to the

nearest ‘‘trading increment’’ for the

underlying security, as fixed by the

primary market for the security.3

Currently, OCC rounds adjustments to

exercise prices to the nearest eighth of

a dollar. The securities industry has

moved from quoting prices in eights of

a dollar (‘‘eighths’’) to sixteenths of a

dollar (‘‘sixteenths’’) and is moving

towards quoting prices in decimals.

Therefore, OCC believes that the

adjustment provisions of its by-laws

require amendment. Amending its bylaws to provide for rounding to the

nearest trading increment will

accommodate the interim change to

pricing in sixteenths and any final

change to decimal pricing.

The proposed rule change also will

add a new interpretation .09 to Article

VI, Section 11 expressly authorizing

OCC’s securities committee to adjust

exercise prices of outstanding options to

a new trading increment (e.g., decimals)

to correspond to a change in the trading

increment in the underlying security in

its primary market. The rule change will

not mandate such adjustments, but it

will give clear authority to the

committee to adjust exercise prices if

the committee deems such action to be

appropriate in light of the factors cited

in Article VI, Section 11(b) of OCC’s bylaws.

Currently, exercise prices of newly

introduced options series are expressed

in half dollar increments. However,

there generally will be options series

outstanding with exercise prices

expressed in eighths or sixteenths as a

result of previous adjustments. Eighths

cannot be converted to fewer than three

decimal places and sixteenths cannot be

converted to fewer than four without

rounding. As a result, the rule change

will provide for rounding adjusted

exercise prices to the nearest unit of the

applicable trading increment or, where

an exercise price is equidistant between

two units, to the next lowest unit.

Rounding would result in a small gain

($0.25 per contract in the case of