Self-Regulatory Organization; The Options Clearing Corporation; Order Approving Proposed Rule Change Relating to the Processing of Late Exercise Requests for Eligible Option Contracts

[Federal Register Volume 61, Number 30 (Tuesday, February 13, 1996)]
[Notices]
[Pages 5593-5594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3132]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36818; File No. SR-OCC-95-14]


Self-Regulatory Organization; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Relating to the Processing of Late 
Exercise Requests for Eligible Option Contracts

February 7, 1996.
    On September 15, 1995, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-95-14) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
December 19, 1995, OCC filed an amendment to the proposed rule change 
to clarify certain language in the proposal.\2\ Notice of the proposal 
was published in the Federal Register on December 27, 1995.\3\ No 
comment letters were received. For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Letter from Michael G. Vitek, OCC, to Jerry W. Carpenter, 
Assistant Director, Division of Market Regulation, Commission 
(December 19, 1995).
    \3\ Securities Exchange Act Release No. 36607 (December 20, 
1995), 60 FR 67007.
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I. Description of the Proposal

    The proposed rule change amends OCC Rule 801(e) regarding late 
exercises by changing the cut-off times for filing a late exercise 
notice and by eliminating any references to trading volume. The 
proposed rule change also modifies OCC Rule 801(a) to provide expressly 
for the submission of exercise notices through electronic means.
    OCC Rule 801(e) currently permits OCC clearing members to file, 
revoke, or modify exercise notices after the 7:00 p.m. (all time 
references are Central Time unless stated otherwise) deadline for the 
purpose of correcting bona fide errors. Once a late instruction is 
accepted, Rule 801(e) requires the clearing member submitting an 
instruction to pay a late filing fee and explain in writing the error 
that caused the late submission of the instruction. The filing fees for 
late instructions are imposed using a graduated fee schedule with 
variable cut-off times to reflect the fact that the earlier that a late 
exercise notice is submitted the easier and less costly it is for OCC 
to process the request.\4\

    \4\ For a detailed description of OCC's procedures for 
processing late option exercise notices on non-expiring option 
contracts, and earlier amendments to the late exercise fee schedule 
cut-off times, refer to Securities Exchange Act Release Nos. 29390 
(July 1, 1991), 56 FR 31454 [File No. SR-OCC-90-3] (order approving 
procedures for processing late exercise notices) and 33247 (November 
24, 1993), 58 FR 63419 [SR-OCC-93-2] (order approving changes to 
OCC's late exercise fee schedule cut-off times).
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    OCC clearing members have requested that OCC provide them with data 
from nightly processing earlier on the night of processing. Presently, 
Rule 801(e) requires OCC to wait until 10:00 p.m. to begin critical 
processing even if it has received all necessary data from exchanges 
\5\ and clearing members 

[[Page 5594]]
earlier in the night. Due to the many technical improvements 
implemented by the exchanges in recent years, the exchanges now send 
daily trading data to OCC much earlier. Thus, there are many nights 
when OCC could begin critical processing by 9:00 p.m. To accommodate 
the requests by clearing members for earlier data distribution, OCC has 
decided to advance the late exercise cut-off times by one hour and to 
eliminate the volume conditions affecting the cut-off times.

    \5\ The term ``exchange'' is defined in Article I, Section E(4) 
of OCC's by-laws as a national securities exchange or a national 
securities association that has qualified for participation in OCC 
pursuant to the provision of Article VII of OCC's by-laws.
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    The volume conditions were initially incorporated into Rule 801(e) 
to ensure that clearing members had adequate time to reconcile their 
records with exchange trade comparison reports. Since that time, the 
exchanges have continued to improve their systems and operations in the 
trade matching process, particularly with respect to intraday trade 
matching. These technological improvements have enabled the exchanges 
to send daily trade data to OCC and its clearing members much earlier 
in the day. Accordingly, OCC is eliminating any references to volume in 
the revised Rule 801(e). OCC does not believe removing the volume 
considerations will have any negative affect on its clearing members.
    The proposed rule change also amends OCC's late exercise fee 
schedule. The time at which a $500 fee will be imposed is being changed 
from between 7:00 p.m. to 9:00 p.m. to between 7:00 p.m. to 8:00 p.m. 
The late exercise cut-off time associated with a $2000 fee will be 
changed from between 9:01 p.m. and the start of critical processing to 
between 8:01 p.m. and the start of critical processing.
    In addition to the changes described above, Rule 801(a) is being 
revised to provide expressly for the submission of exercise 
instructions through electronic means.

II. Discussion

    Section 17A(b)(3)(F) \6\ of the Act requires that the rules of a 
clearing agency be designed to facilitate the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes OCC's proposed rule change is consistent with the requirements 
of Section 17A(b)(3)(F) because the proposal advances the late exercise 
cut-off times by one hour without regard to volume restrictions. This 
should allow clearing members to obtain earlier data distribution from 
OCC thus promoting the prompt and accurate clearance and settlement of 
securities transactions.

    \6\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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    Because the exchanges' improvements to their intraday trade 
matching processes enable them to send daily trade comparison reports 
to clearing members much earlier in the day, the Commission believes 
that clearing members should continue to have adequate time to 
reconcile their records with exchange trade comparison reports and 
should not be negatively effected by the removal of volume restrictions 
or the earlier cut-off times for late exercise notices. These changes 
also should enable OCC to begin its critical processing earlier in the 
evening and, in turn, provide earlier distribution of data from nightly 
processing to its clearing members thus facilitating the prompt and 
accurate clearance and settlement of securities transactions consistent 
with Section 17A of the Act.

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-95-14) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\ 17 CFR 200.20-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3132 Filed 2-12-96; 8:45 am]
BILLING CODE 8010-01-M