Document ID: SEC-2011-1031-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2011-07-19T04:00Z

[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]
[Notices]
[Pages 42752-42755]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18118]

-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \4\ OCC understands that similar transactions are used by at 
least one other futures exchange.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \9\ Supra note 2.
    \10\ Supra note 3.
---------------------------------------------------------------------------

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 rule-comments@sec.gov. 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\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-18118 Filed 7-18-11; 8:45 am]
BILLING CODE 8011-01-P