30778 Federal Register / Vol. 66, No. 110 / Thursday, June 7, 2001 / Notices

4 15 U.S.C. 78q–1(b)(3)(F).

5 17 CFR 200.30–3(a)(12).

1A copy of the text of OCC’s proposed rule

change and the attached exhibit are available at the

Commission’s Public Reference Section or through

OCC.

2Under OCC’s rules, an ‘‘escrow deposit’’ is a

deposit made by a clearing member’s customer with

a bank that has been approved by OCC (referred to

as an ‘‘escrow bank’’), and a ‘‘specific deposit’’ is

a deposit made by a clearing member at The

Depository Trust Company. When OCC accepts an

escrow deposit or a specific deposit, it does so in

lieu of requiring the clearing member to deposit

margin with OCC, and OCC therefore looks to the

deposit to make itself whole if the clearing member

fails to perform on an assignment on the short

position that is covered by the deposit.

department or by the exchanges, which

use their research departments to

monitor the underlying securities and

the issuers of the underlying securities.

OCC’s economic research department

regularly scans Bloomberg, Reuters, and

Dow Jones newswires for

announcements of adjustment events.

When it learns of such an event, OCC

contacts the options exchanges, the

primary market for the underlying, and

the issuer of the underlying to obtain

more information about the event and to

monitor the event. Likewise, the

research departments as the various

options exchanges scan a variety of

newswires and employ different news

alert services to monitor for adjustment

events. When the exchanges learn of an

adjustment event, they alert OCC and

contact the primary market for the

underlying security to obtain more

information about the event to monitor

the event.

Through these procedures, the

likelihood that a potential adjustment

event will escape notice is minimized.

However, the possibility of such an

occurrence can never be completely

estimated. Accordingly, OCC wishes to

make clear that neither it nor its

securities committee will have liability

for any failure to act or for any delay in

acting on events not known to the

securities committee.

The rule change also clarifies that

adjustment determinations are made in

light of circumstances known at the

time the determination is made. For

example, if the securities committee

does not learn of an event for which an

adjustment would normally be made

until after the ex-date, the fact that

options trading and/or exercise activity

has taken place in circumstances

suggesting that there would be no

adjustment could tip the balance of

fairness against making an adjustment.

II. Discussion

For the reasons set forth below, the

Commission believes that OCC’s rule

change is consistent with OCC’s

obligations under section 17A(b)(3)(F) 4

of the Act which requires that the rules

of a clearing agency be designed to

assure the safeguarding of securities and

funds which are in the custody or

control of the clearing agency or for

which it is responsible. The rule change

minimizes OCC’s exposure to liability

for a delay or failure to adjust an

outstanding option contract for an event

which it would otherwise have made an

adjustment where OCC does not learn or

does not learn in a timely manner of the

event. By explicitly stating that OCC has

no liability in such situations beyond its

control, OCC’s rule change allows OCC

to focus its resources on safeguarding

the securities and funds for which OCC

is responsible.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act and in

particular 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–00–10) be and hereby is approved.

For the Commission by the Division of

Market Regulations, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–14310 Filed 6–6–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44371; File No. SR–OCC–

00–09]

Self-Regulatory Organizations; The

Options Clearing Corporation; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change Relating to Specific

Deposit and Escrow Deposit Programs

May 31, 2001.

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

Securities Exchange Act of 1934

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

September 8, 2000, The Options

Clearing Corporation (‘‘OCC’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change 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

parties and to grant accelerated

approval.1

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change adds a

provision to OCC’s rules to describe

specifically how OCC would handle a

closing purchase transaction submitted

to it in the name of a suspended clearing

member that had been effected to close

out or reduce a covered short position.

The purposed rule also updates and

clarifies OCC’s rules that describe how

OCC proceeds after suspending a

clearing member.

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 these statements.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The principal purpose of the

proposed rule change is to add a

provision to OCC’s rules to describe

specifically how OCC would handle a

closing purchase transaction submitted

to it in the name of a suspended clearing

member that had been effected to close

out or reduce a covered short position.

A secondary purpose of the proposed

rule change is to update and clarify a

few other rules that describe how OCC

proceeds after suspending a clearing

member. These changes are described

under the heading ‘‘Other Changes’’

below.

The rules governing both OCC’s

escrow deposit program and its specific

deposit program permit OCC to have

recourse to a deposit if an exercise is

assigned to the short position that is

covered by the deposit and if the

clearing member does not perform on

the assignment.2 Both programs are

intended to provide OCC with

protection against the risk associated

with short positions. The escrow

deposit program is intended also to

provide the clearing member and the

clearing member’s correspondent

broker, if there is one for a particular

customer, with recourse if the clearing

Federal Register / Vol. 66, No. 110 / Thursday, June 7, 2001 / Notices 30779

3A ‘‘closing purchase transaction’’ is a

transaction in which the purchaser’s intention is to

eliminate (‘‘close out’’) or reduce a short position

in the series of options involved in the transaction.

4Securities Exchange Act Release No. 29853

(October 23, 1991), 56 FR 55968 [File No. SR–OCC–

90–05] (approving OCC’s proposed rule change

relating to the earlier guarantee of options

transactions).

5A parallel concern with closing purchase

transactions exists for the escrow deposit program

at the ‘‘clearing/member broker’’ level. (As stated in

the text, the escrow deposit program is designed to

provide protection for clearing members and their

correspondent brokers as well as for OCC.) OCC’s

Rule 613(j) as currently in effect and the form of

agreement currently used by OCC with banks that

act as escrow depositories (‘‘escrow agreement’’) do

not expressly permit the clearing member or

correspondent broker to have recourse to an escrow

deposit if the customer fails to pay the premium for

a closing purchase transaction to the clearing

member or broker. The cure for this ‘‘clearing

member/broker’’ level weakness requires an

amendment to the form of the escrow agreement as

well as an amendment to OCC’s rules. OCC is

preparing a restated form of escrow agreement that

will address this concern as well as will make a

number of other changes in the form of escrow

agreement. OCC intends to file that amended form,

together with amendments to Rule 613(j), in the

near future.

member or broker performs on an

assignment to the covered short position

and the customer fails to make

settlement with the clearing member or

broker.

OCC has identified an area in which

the protection afforded to OCC by the

two deposit programs should be

strengthened. The weakness relates to

closing purchase transactions.3

Although OCC’s rules permit OCC to

have recourse to a specific deposit or an

escrow deposit if an exercise is assigned

to the covered short position and the

clearing member fails to perform on the

assignment, the rules do not provide

OCC with express recourse to the

deposit if the clearing member closes

out the covered short position by means

of a closing purchase transaction and

then fails to pay the premium for the

closing purchase transaction. When

OCC’s deposit programs were originally

established, OCC’s rules permitted it to

reject any transaction for which the

purchaser failed to pay the premium. If

a clearing member failed to pay the

premium for a closing purchase

transaction covered by a specific deposit

or an escrow deposit, OCC could have

rejected the closing purchase

transaction and caused the short

position to remain on OCC’s books until

it was assigned in which case OCC

could have used the deposit to perform

on the assignment or until it expired

unassigned. Some years ago, however,

OCC amended its rules so that it cannot

reject trades for nonpayment of

premiums.4 An unintended result of

that amendment was to leave OCC

without specific authority in its rules to

have recourse to a specific deposit or

escrow deposit if a clearing member

closed out a covered short position and

then defaulted on payment of the

premium.

In order to remedy this concern, OCC

is adding an Interpretations and Policies

.01 to Rule 1105 to provide that if a

clearing member fails to make premium

settlement for an account on any day on

which it is obligated to settle a closing

purchase transaction in any series in the

account, first, OCC will deem the

closing transaction first to have closed

out any uncovered short positions in the

series and second, if the number of

cleared securities involved in the

transaction exceeds the number of

uncovered short positions in the

account, OCC will deem the transaction

to be an opening purchase transaction to

the extent of the excess even if there are

covered short positions carried in the

account. The effect of the interpretation

would be to expressly allow OCC to

maintain the covered short position on

OCC’s books until the position is

assigned or expires unassigned.5

Other Changes

1. Rule 1105. The proposed change in

the first paragraph of Rule 1105 is to

make clear that Rule 1105 applies to any

pending transaction of a suspended

clearing member and not just those

affected after the time at which the

clearing member was suspended.

2. Rule 1106. The changes in Rule

1106(a) are to make non-substantive

improvements in the language of the

rule and to add a reference to any rule

that replaces or supplements Rule 1107.

This change conforms Rule 1106(a) to

the change in the language following

Rule 1807 that is described below.

The changes in Rule 1106(b)(2): (1)

Eliminate a reference to Rule 1107(a)(2)

(because virtually all equity options are

settled through the facilities of a

designated clearing corporation and

therefore subject to Rule 1107(a)(1)); (2)

replace a reference to Rule 1807 with a

reference to ‘‘a provision of the Rules

that is specified in the Rules as

replacing or supplementing Rule 1107

with respect to particular classes of

options’’ (because Rule 1107 is currently

replaced or supplemented by Rule 1705

for yield-based treasury options and by

Rule 2306 for cash-settled foreign

currency options as well as by Rule

1807 for index options); and (3) add the

word ‘‘covered’’ to clarify the intended

meaning of the rule.

3. Rule 1107 and Rule 1807. The

changes in Rules 1107 and 1807 have

closely related purposes. Rule 1107(a)(2)

is amended to delete language currently

in that rule that seems to address the

closeout of assigned covered index

option contracts. This language has no

effect because Rule 1807 expressly

replaces Rule 1107(a) with respect to

index options. The explanatory sentence

following Rule 1807 that currently

states, ‘‘Rule 1807 supplements Rule

1104 and replaces Rule 1107,’’ will be

amended to state, ‘‘Rule 1807

supplements Rule 1104 and Rule

1107(b) and replaces Rule 1107(a) and

(c).’’ This change is to reflect that Rule

1107(b) is intended to apply to the

close-out of assigned covered index

option contracts. (Rule 1107(b)

authorizes OCC to allocate an

assignment if OCC cannot determine

promptly upon the suspension of a

clearing member whether the clearing

member allocated the assignment to a

short position for which a specific

deposit or an escrow deposit has been

made. This concept is relevant for

covered index option contracts.) New

paragraph (b) to Rule 1807(b)

incorporates sentences parallel to the

final two sentences of Rule 1107(a)(2).

These sentences are simpler than their

Rule 1107(a)(2) counterparts because

index options are cash-settled and the

‘‘delivery’’ concept is not relevant to

index options.

The proposed rule change is

consistent with the requirements of

Section 17A of the Act and the rules and

regulations thereunder applicable to

OCC because it enhances OCC’s ability

to assure the safeguarding of securities

and funds which are 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

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

requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in the custody or control of

the clearing agency or for which it is

30780 Federal Register / Vol. 66, No. 110 / Thursday, June 7, 2001 / Notices

6 15 U.S.C. 78q–1(b)(3)(F).

7 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Telephone conversation between Edith

Hallahan, First Vice President & Deputy General

Counsel, Phlx, and Florence Harmon, Senior

Special Counsel, Division of Market Regulation

(‘‘Division’’), Commission on May 31, 2001.

responsible.6 For the reasons set forth

below, the Commission believes that

OCC’s proposed rule change is

consistent with OCC’s obligations under

the Act.

OCC has requested that the

Commission find good cause for

approving the proposed rule change

prior to the thirtieth day after

publication of the notice of filing. The

Commission finds good cause for so

approving the proposed rule change

because accelerated approval will

permit OCC to immediately give OCC

the benefit of protection against such

failures to settle. Accordingly, the

Commission finds that the rule change

is consistent with OCC’s obligations to

assure the safeguarding of securities and

funds which are in the custody or

control of the clearing agency or for

which it is responsible because it

should provide OCC with strengthened

protection against the risk of a

suspended member’s failure to settle by

providing OCC with express recourse to

the suspended member’s deposits.

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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. 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. All submissions should

refer to File No. SR–OCC–00–09 and

should be submitted by June 28, 2001.

V. Conclusion

On the basis of the foregoing, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act and in

particular 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–00–09) be and hereby is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–14311 Filed 6–6–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 44372; File No. SR–Phlx–2001–

59]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Philadelphia Stock

Exchange, Inc. Relating to Dealing

Directly With Specialist and Registered

Options Traders in Foreign Currency

Options

May 32, 2001.

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 May 30,

2001, the Philadelphia Stock Exchange,

Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III, below, which Items

have been prepared by the selfregulatory 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 Exchange proposes to adopt new

Phlx Rule 1089 entitled ‘‘Dealing

Directly With Specialist and Registered

Options Trader in Foreign Currency

Options’’ on a one-year pilot basis. The

pilot will expire on May 31, 2002.3

Proposed new language is in italics.

* * * * *

Dealing Directly With Specialist and

Registered Option Trader in Foreign

Currency Options

Rule 1089.(a) Applicability. The provisions

in this Rule are applicable to options on

foreign currencies and supercede any Rules

of general applicability to trading of options

which are or may be construed as contrary

to or inconsistent with these Rules.

(b) Non-Customized Foreign Currency

Options. In the vent that there is no floor

broker present to accept and execute orders

for non-customized foreign currency options

on the trading floor for such options:

(1) Market and Limit Orders. Foreign

currency options participants and foreign

currency options participant organizations

may transmit market and limit orders for

such options directly to the specialist by

telephone or other means. In addition, any

person who is not a foreign currency options

participant or participant organization may,

pursuant to authorization of a foreign

currency options participant organization

and subject to the consent of the specialist,

transmit limit orders, marketable limit orders

and market orders for such options directly

to the specialist by telephone or other means.

(2) Complex Orders. Foreign currency

options participants and foreign currency

options participant organizations may

contact the specialist directly by telephone to

negotiate the total debit or credit for

transacting a complex order, provided that

the specialist is responsible for complying

with Rules 1033 and 1066 in setting the price

of the individual option legs of the order. In

addition, a person who is not a foreign

currency options participant or participant

organization may, (provided that such

person’s account is not with the specialist’s

firm) pursuant to authorization of a foreign

currency options participant organization

and subject to the consent of the specialist,

contact the specialist directly by telephone to

negotiate the total debit or credit for

transacting a complex order, provided that

the specialist is responsible for complying

with Rules 1033 and 1066 in setting the price

of the individual option legs of the order.

Complex orders include orders consisting of

two or more option series of non-customized

foreign currency options such as spreads,

straddles and combinations. In no event shall

the specialist accept complex orders for

representation or placement onto the

specialist’s book.

(c) Customized Foreign Currency Options.

In the event that there is no floor broker

present to accept and execute orders for

customized foreign currency options on the

trading floor for such options; foreign

currency options participants and foreign

currency options participant organizations

may submit a request for quote (‘‘RFQ’’)

under Rule 1069 for a customized foreign

currency option directly to an ROT on the

floor by telephone or other means, and, if

applicable, negotiate a transaction with an

ROT. In addition, a person who is not a

foreign currency options participant or

participant organization may, pursuant to

authorization of a foreign currency options

participant organization and subject to the

consent of the ROT, submit an RFQ under

Rule 1069 for a customized foreign currency

option directly to an ROT on the floor by

telephone or other means, and if applicable,

negotiate a transaction with an ROT.

* * * * *