Document ID: SEC-2006-0107-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Options Clearing Corp.
Posted Date: 2006-01-30T05:00Z

[Federal Register: January 30, 2006 (Volume 71, Number 19)]
[Notices]               
[Page 4951-4953]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ja06-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53151; File No. SR-OCC-2005-21]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Allocations Processing

 January 19, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 13, 2004, The 
Options Clearing Corporation (``OCC'') 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 
primarily by OCC. OCC filed the proposed rule change pursuant to 
section 19(b)(3)(A) of the Act \2\ whereby 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change adopts new Rule 405, Allocations, to 
govern the processing of post-trade allocation instructions for 
commodity contracts that are subject to the exclusive jurisdiction of 
the Commodity Futures Trading Commission (``CFTC'') that are submitted 
by clearing members through a new system OCC plans to install in 
January 2006. The rule change also makes conforming by-law and rule 
changes, including the addition of certain new definitions.

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.\3\
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    \3\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    OCC's new allocation system will permit the allocation of positions 
in securities options, security futures, commodity futures, and options 
on futures. In order to permit use of the allocation system, when 
installed, for commodity contracts cleared by OCC that are subject to 
the exclusive jurisdiction of the CFTC, OCC is filing the proposed rule 
change under section 19(b)(3)(A) for immediate effectiveness. However, 
new Rule 405 includes Interpretation and Policy .02 which states that 
the system may not be used for securities options or security futures 
until the Commission has issued an approval order with respect to Rule 
405. OCC filed a separate proposed rule change under section 19(b)(2), 
File No. SR-OCC-2005-22, that would adopt Rule 405 for use in 
allocating positions in contracts subject to the Commission's 
jurisdiction.\4\
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    \4\ If the Commission approves proposed rule change SR-OCC-2005-
22, OCC would delete Interpretation and Policy .02.
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    OCC plans to provide clearing members with a centralized system for 
processing allocation or ``give-up'' instructions across all exchanges 
for which OCC provides clearing services. Allocations are post-trade 
instructions entered by one clearing member (i.e., an authorized 
``executing'' or ``giving-up'' clearing member) that direct a 
transaction or position to the account of another clearing member 
(i.e., the ``carrying'' or ``given-up'' clearing member). OCC's 
centralized system will enhance OCC's service offerings and will 
provide efficiencies to clearing members.
    Post-trade allocations of securities options are currently 
processed through OCC's Clearing Member Trade Assignment (``CMTA'') 
functionality, which normally causes a transaction to automatically be 
moved into an account of the carrying clearing member so long as the 
executing and carrying clearing members have an effective CMTA 
arrangement registered with OCC for the exchange submitting the 
matching trade information for that transaction.\5\ Once Rule 405 is 
approved by the Commission for purposes of allocating positions in 
securities options, clearing members will be able to elect either to 
continue to use the existing CMTA system or to use the new allocation 
system for securities options.
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    \5\ See OCC Rule 403.
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    For most commodity futures cleared through OCC, post-trade 
allocations are currently processed through The Clearing Corporation's 
(``CCorp'') ``give-up'' system, which requires the given-up clearing 
member to affirmatively accept a transaction.\6\ OCC's allocation 
system will enable clearing members to process futures ``give-ups'' 
without going through the CCorp system.
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    \6\ See OCC Rule 404.
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    New Rule 405 will govern the processing of allocation instructions 
and will operate as follows. Transactions will first clear in the 
designated account of the giving-up clearing member. Instructions to 
allocate positions may be submitted either through an exchange's system 
for providing matching trade information to OCC or through OCC's 
clearing system, ENCORE. In either case, if the given-up and giving-up 
clearing members are parties to an allocation agreement that has been 
registered with OCC, OCC will automatically allocate the positions 
resulting from an allocation instruction to a designated account of the 
given-up clearing member without further action by the clearing 
members.\7\ If the clearing members are not parties to a registered 
allocation agreement, OCC will not effect the allocation instruction 
until the given-up clearing member gives OCC notice of its affirmative 
acceptance of the allocated positions. (In contrast, the CMTA system 
does not allow for acceptance of allocated positions without a 
registered CMTA agreement.) If the given-up clearing member does not 
give OCC notice of such acceptance by an OCC-specified deadline, the 
allocation instruction will not be processed, and the positions will 
remain in the account of the giving-up clearing member, which will 
remain obligated on those positions.
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    \7\ Unlike CMTAs, clearing members will not be required to 
register their allocation arrangement by exchange.
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    A given-up clearing member will be responsible for appropriately 
allocated positions. Given-up positions are moved to the given-up 
clearing member's account at the premium price in the case of options 
or at the contract price in the case of futures at which the positions 
were established by the executing clearing member. Positions

[[Page 4952]]

that are allocated on an intraday basis will not be reflected in 
position reports until the following business day. However, OCC will 
take those positions into account in processing any intraday 
settlements authorized by its By-laws and Rules, including intraday 
margin settlements. A given-up clearing member may enter an instruction 
to reverse an allocation that was accepted in error. If the given-up 
and giving-up clearing members are parties to a registered allocation 
agreement, the reversing instruction will be automatically processed. 
If the clearing members are not parties to a registered allocation 
agreement, the reversing instruction must be affirmatively accepted by 
the original giving-up clearing member.
    Allocation instructions may be for a single position (i.e., a 
position in a given series established at a single price) or for a 
group of positions (i.e., positions in the same series established at 
different prices). Allocation instructions for grouped positions must 
be submitted through ENCORE. For single positions, the instruction must 
identify the contract quantity, series, and price as specified in the 
matching trade information. For grouped positions, the allocation 
instruction must provide the same information, but the price may be an 
average price if not prohibited under exchange rules and applicable 
law.\8\ For the convenience of clearing members, OCC's system will 
produce a suggested average price for grouped allocations that clearing 
members may adopt for purposes of processing the instruction.
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    \8\ Average pricing is permitted under the Commodity Exchange 
Act in certain circumstances. In those circumstances, a clearing 
member may instruct OCC to use the average price in clearing and 
settling the trades. Clearing members have requested that OCC 
provide functionality that would also permit positions in securities 
options and security futures to be allocated at an average price. 
Accordingly, OCC has developed its allocation system to accommodate 
the use of such prices for security options and futures, provided 
that such use does not violate exchange rules or applicable law.
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    Registration of allocation agreements may be terminated either by 
mutual agreement or unilaterally. Mutually terminated registrations 
will be effected immediately in OCC's system. Unilaterally terminated 
registrations will be terminated in OCC's system effective as of 8 a.m. 
CST the business day after the termination notice is received by OCC 
and the other clearing member. These are the same standards currently 
applied to terminating CMTA arrangements under OCC Rule 403. Following 
termination of registration of an allocation agreement, an allocated 
position may be allocated to a given-up clearing member only upon its 
affirmative acceptance.
    Other changes made to OCC's By-laws and Rules reflect the adoption 
of Rule 405, including the addition of Given-Up Clearing Member and 
Giving-Up Clearing Member as defined terms in Article I, section 1.
    OCC believes that the proposed rule change is consistent with 
section 17A of the Act because it is designed to ensure that positions 
resulting from exchange transactions are carried in the appropriate 
clearing member account, which is the account of the clearing broker 
for the investor for whom such transactions were executed and thereby 
promotes the prompt and accurate clearance and settlement of 
transactions in derivative contracts, fosters cooperation and 
coordination with persons engaged in the clearance and settlement of 
such transactions, removes impediments to and perfects a mechanism of a 
national system for the prompt and accurate clearance and settlement of 
such transactions, and, in general, protects investors and the public 
interest. The proposed rule change is not inconsistent with the 
existing rules of OCC, including any other rules proposed to be 
amended.

(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

    The foregoing proposed rule change has become effective pursuant to 
section 19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(4) \10\ 
thereunder because it effects a change in an existing service of a 
registered clearing agency that (i) 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 (ii) 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 may 
summarily abrogate 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.
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(4).
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VI. 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 Number SR-OCC-2005-21 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-OCC-2005-21. 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 inspection and 
copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site at http://www.optionsclearing.com.

    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 Number SR-OCC-2005-21 
and should

[[Page 4953]]

be submitted on or before February 21, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-1085 Filed 1-27-06; 8:45 am]

BILLING CODE 8010-01-P