Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Order Granting Accelerated Approval on a Temporary Basis of a Proposed Rule Change Concerning Equity TIMS

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34065; File No. SR-OCC-94-03]

Self-Regulatory Organizations; The Options Clearing Corporation;

Notice of Filing and Order Granting Accelerated Approval on a Temporary

Basis of a Proposed Rule Change Concerning Equity TIMS

May 13, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of

1934,\1\ notice is hereby given that on April 8, 1994, The Options

Clearing Corporation (``OCC'') filed with the Securities and Exchange

Commission (``Commission'') the proposed rule change (File No. SR-OCC-

94-03) as described in Items I and II below, which Items have been

prepared mainly by OCC, a self-regulatory organization (``SRO''). The

Commission is publishing this notice and order to solicit comments from

interested persons and to grant accelerated approval of the proposed

rule change through May 31, 1995.

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

\1\15 U.S.C. 78s(b)(1) (1988).

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

I. SRO's Statement of the Terms of Substance of the Proposed Rule

Change

The proposed rule change will extend from June 1, 1994, through May

31, 1995, the Commission's temporary approval of OCC's use of its

Theoretical Intermarket Margin System (``TIMS'') for calculating

clearing margin positions for equity options.\2\

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

\2\Equity TIMS is a modified version of OCC's Non-Equity TIMS,

which is OCC's margin system used to calculate margin requirements

on options for which the underlying asset is anything but an equity

security. Securities Exchange Act Release No. 23167 (April 22,

1986), 51 FR 16127 [File No. SR-OCC-85-21] (order approving Non-

Equity TIMS).

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

II. SRO'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.

A. SRO's Statement of the Purpose of, and Statutory Basis for, the

Proposed Rule Change

On March 1, 1991, the Commission temporarily approved a proposed

rule change which authorized OCC to use TIMS to calculate clearing

member margin requirements on equity options.\3\ Equity TIMS utilizes

options price theory (i.e., an option pricing model) to project the

cost of liquidating each clearing member's short equity option

positions and long equity option positions on which OCC is entitled to

assert a lien in the event of a ``worst case'' theoretical change in

the price of the underlying securities. This projected liquidation cost

is then used by Equity TIMS to calculate for each clearing member a

margin requirement to cover that cost.\4\

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

\3\Securities Exchange Act Release No. 28928 (March 1, 1991), 56

FR 9995 [File No. SR-OCC-89-12] (order approving the use of Equity

TIMS to calculate margin on equity options on a temporary basis

through May 31, 1992).

\4\After the Commission's approval of File No. SR-OCC-89-12 on

March 1, 1991, OCC phased out its previous margin system, which was

known as the ``production system,'' and since then has used Equity

TIMS to calculate its clearing members' margin requirements on

equity option positions. For a complete description of Equity TIMS,

refer to File No. SR-OCC-89-12 and Securities Exchange Act Release

No. 28928, supra note 3.

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

Since its initial temporary approval of Equity TIMS in 1991, the

Commission has extended the temporary approval twice.\5\ OCC requested

these extensions in order that it might complete its analysis of Equity

TIMS. Specifically, in its discussions with the Commission's staff

preceding the Commission's initial temporary approval of Equity TIMS,

OCC represented that it would undertake to analyze the effects of

including equity option volatilities over longer periods in determining

margin intervals and would report the results of its analysis to the

Commission. OCC initially was delayed because it expanded the scope of

its analysis from ten years to thirty years and had difficulty in

obtaining an accurate data base of information covering the expanded

period of review. OCC also determined that its analysis of equity

options volatility would benefit from a review by an outside

consultant, and because it took OCC some time to obtain the services of

an appropriate consultant, its analysis has been delayed further.

Because these matters now have been resolved, OCC believes that it will

be able to complete its analysis and submit its report to the

Commission by December 31, 1994.

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

\5\Securities Exchange Act Release Nos. 30761 (May 29, 1992), 57

FR 24286 [File No. SR-OCC-92-15] (order extending the approval of

Equity TIMS through may 31, 1993) and 32388 (May 28, 1993), 58 FR

31989 [File No. SR-OCC-93-06] (order extending the approval of

Equity TIMS through May 31, 1994).

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

OCC believes that the proposed rule change is consistent with the

requirements of the Act and in particular with those of Section 17A of

the Act.\6\ Specifically, OCC believes that Equity TIMS enhances OCC's

ability to safeguard the securities and funds for which it is

responsible.

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

\6\15 U.S.C. 78q-1 (1988).

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

B. SRO's Statement on Burden on Competition

OCC believes that the proposed rule change will not impose any

burden on competition.

C. SRO's Statement on Comments on the Proposed Rule Change Received

from Members, Participants or Others

OCC has not solicited or received any comments on the proposed rule

change.

III. Discussion

The Commission continues to believe, on a preliminary basis, that

Equity TIMS meets the requirements of the Act and, in particular, the

requirements of section 17A of the Act.\7\ Specifically, section

17A(b)(3)(F) of the Act\8\ requires that the rules of a clearing agency

be designed to promote the prompt and accurate clearance and settlement

of securities transactions and to assure the safeguarding of securities

and funds in the custody or control of the clearing agency or for which

it is responsible. Additionally, section 17A(a)(1) of the Act\9\

encourages the use of efficient, effective, and safe procedures for

securities clearance and settlement.

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

\7\15 U.S.C. 78q-1 (1988).

\8\15 U.S.C. 78q-1(b)(3)(F) (1988).

\9\15 U.S.C. 78q-1(a)(1) (1988).

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

As the Commission has stated previously, Equity TIMS represents an

improvement over OCC's previous production margin system in several

respects.\10\ Nevertheless, while the Commission continues to believe

that the margin methodology employed by Equity TIMS is basically sound,

the Commission remains concerned that the system may be overly

dependent on short-term analyses of historical and implied volatility.

Consequently, the Commission is extending the temporary approval for

OCC's use of Equity TIMS through May 31, 1995. By so extending the

temporary approval, the Commission believes that there will be time for

OCC to prepare and submit its report by December 31, 1994, and for the

Commission to analyze the report before determining whether to grant

permanent approval for Equity TIMS.\11\

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

\10\Supra note 3.

\11\For a detailed discussion of the Commission's concerns

related to Equity TIMS, including the use of short-term volatility

analysis, refer to Securities Exchange Act Release No. 28928, supra

note 3.

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

OCC also has requested that the Commission find good cause for

approving its request for an extension of the Commission's temporary

approval of OCC's use of Equity TIMS prior to the thirtieth day after

the publication of notice of filing of the proposed rule change. The

Commission believes that OCC's use of Equity TIMS over the past four

years has resulted in better assessments of OCC's risk exposure

associated with the clearance and settlement of its clearing members'

equity option positions and has resulted in calculations of clearing

margin that more accurately reflect that risk exposure. Accordingly, to

prevent the current temporary approval of Equity TIMS from expiring on

May 31, 1994, without another approved equity margin system in place,

the Commission finds that good cause exists for approving the proposed

rule change prior to the thirtieth day after publication of notice of

filing. The Commission also notes that during the three previous

temporary approval periods, OCC has not received any adverse comments

regarding Equity TIMS from its clearing members.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 will also be available for

inspection and copying at the principal office of OCC. All submissions

should refer to File No. SR-OCC-94-03 and should be submitted by June

10, 1994.

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\12\ that the above-mentioned proposed rule change (File No. SR-

OCC-94-03) be, and hereby is, approved on an accelerated basis through

May 31, 1995.

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

\12\15 U.S.C. 78s(b) (1988).

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\13\

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

\13\17 CFR 200.30-2(a)(12) (1991).

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-12301 Filed 5-19-94; 8:45 am]

BILLING CODE 8010-01-M