Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to Inverse Foreign Currency Options and Inverse Cross-rate Foreign Currency Options

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34351; International Series Release No. 680; File No.

SR-OCC-94-05]

Self-Regulatory Organizations; The Options Clearing Corporation;

Notice of Filing of a Proposed Rule Change Relating to Inverse Foreign

Currency Options and Inverse Cross-rate Foreign Currency Options

July 12, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on May 13, 1994, 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. 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 (1988).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The purpose of the proposed rule change is to accommodate within

OCC's existing By-Laws and Rules the clearance and settlement of

inverse foreign currency options and inverse cross-rate foreign

currency options.

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. 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 the Purpose of, and

Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule change is to accommodate within

OCC's existing By-Laws and Rules the clearance and settlement of

inverse foreign currency and cross-rate foreign currency options

proposed for trading by the Philadelphia Stock Exchange (``PHLX'').\2\

Trading in these inverse foreign currency and cross-rate foreign

currency options will be offered through the PHLX's customized option

facility.

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\2\For a description of the PHLX proposed rule change, refer to

Securities Exchange Act Release No. 34308 (July 5, 1994), 59 FR

35551, [File No. SR-PHLX-94-18] (notice of filing of proposed rule

change).

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As explained in the PHLX proposal, existing foreign currency option

contracts are quoted in U.S. dollars (``USDs''), premium is paid in

USDs, and the foreign currency is delivered upon exercise. The proposed

inverse foreign currency option contracts will be quoted in the foreign

currency, premium will be paid in the foreign currency, and U.S.

dollars will be delivered upon exercise. For instance, the existing

French franc (``FF'')/USD foreign currency option contract is quoted in

USD, premium is paid in USD, and FF are delivered upon exercise.

Whereas the inverse USD/FF contract will be quoted in FF, the premium

will be paid in FF, and USD will be delivered upon exercise.

The proposed inverse cross-rate foreign currency option contract

will be the inverse of existing cross-rate foreign currency option

contracts. For instance, the existing Deutsche mark (``DM'')/Japanese

Yen (``JY'') contract is quoted in JY, premium is paid in JY, and DM

are delivered upon exercise. Whereas the inverse contract, the JY/DM

contract, will be quoted in DM, premium will be paid in DM, and JY will

be the deliverable currency. The other inverse cross-rate foreign

currency contracts will be the DM/British pound (``BP'') and the JY/BP

contracts.

From a clearance and settlement perspective, inverse foreign

currency and cross-rate foreign currency options will be processed and

margined like existing foreign currency and cross-rate foreign currency

option contracts and in accordance with existing banking arrangements.

Accordingly, only a few of OCC's By-Laws and Rules need to be adjusted

to accommodate inverse foreign currency options and inverse cross-rate

foreign currency options. A description of those proposed changes

follows.

A definition of currency is being added to Article I, Section 1

(``Definitions'') of OCC's By-Laws. The proposed definition of currency

will include any standard unit of the official medium of exchange of a

sovereign government including the European Currency Unit (``ECU'').

The addition of the term currency is necessary in order to clarify that

with the addition of inverse contracts the price quote, the premium to

be paid, and the deliverable or underlying currency for a foreign

currency option contract will in some cases be in terms of USDs and in

other cases will be in terms of a foreign currency. For example,

existing foreign currency options are quoted in USDs, premium is paid

in USDs, and a foreign currency is the deliverable or underlying

currency. Whereas in the case of inverse foreign currency options, the

price will be quoted in a foreign currency, premium will be paid in a

foreign currency, and USDs will be the underlying or deliverable

currency. Accordingly, where appropriate, references to foreign

currency in OCC's By-Laws and Rules as the deliverable or the

underlying currency for a foreign currency option contract and

references to USDs as the trading currency for a foreign currency

option contract are in many cases being changed to the more general

term currency. Other references to foreign currency or to USDs are

being changed, where appropriate, to the more generic terms trading

currency, underlying currency, price, or settlement amount.

The term trading currency in Article I, Section 1 of OCC's By-Laws

is being amended. The amended definition of trading currency will be

the currency (i.e., rather than the foreign currency) in which premium

and/or exercise prices are denominated for a class of foreign currency

options or cross-rate foreign currency options. The proposed changes

will clarify that the two components of the trading currency, the

premium and the exercise price, may be either a foreign currency or

USDs. Because PHLX is proposing to offer percentage quoting for all

customized foreign currency options, the premium and the exercise price

will not longer always be in the same currency. In addition, the term

trading currency is being deleted from Article XX (``Cross-Rate Foreign

Currency Options''), Section 1 of OCC's By-Laws because that term will

be defined in Article I, Section 1. A definition of underlying currency

also is being added to Article I, Section 1, and is being deleted from

the Definition Sections of Article XV (``Foreign Currency Options'')

and Article XX.

A definition of settlement time is being added to the Definition

Section of Article XV. In order to accommodate inverse foreign currency

options, such definition will distinguish between the settlement time

for foreign currency options settling in the United States and foreign

currency options settling outside the United States. Specifically,

foreign currency options setting in the United States will settle at

9:00 A.M. Central Time (10:00 A.M. Eastern Time) on the first business

day immediately following the day on which OCC receives a report of a

matched trade with respect to such transaction from the exchange on

which such transaction was effected. Foreign currency options settling

outside the United States will settle at 11:00 A.M. local time in the

country of origin of the trading currency or at such other time as OCC

may specify on the first foreign business day in that country

immediately following the day on which OCC receives a report of a

matched trade with respect to such transaction from the exchange on

which such transaction was effected. Because of this difference in

settlement times, the definition of settlement time in Article I,

Section 1 is being amended to clarify that such time does not apply to

foreign currency option settling outside the United States.

The definition of the term class of options in the Definitions

Sections of Article XV and Article XXII (``Cash-Settled Foreign

Currency Options'') is being amended to provide that with respect to

foreign currency and cash-settled foreign currency options, a class of

options means all option contracts of the same type and style covering

the same underlying currency and having the same unit of trading and

the same trading currency. Under this amended definition, existing

foreign currency contracts covering the same underlying foreign

currency will be in one class, and the inverse contracts, which will

have a different trading currency, will be in another class. For

example, all USD/FF contracts will be in one class of options, and all

FF/USD contracts will be in another class.

Language respecting the netting scheme for foreign currency option

settlement obligations in Rule 1605 (``Allocation of Exercise

Settlement Obligations With Respect to Foreign Currency Options'') is

being amended to accommodate inverse foreign currency options.

Specifically, the proposed changes to Rule 1605(a)(2) will clarify that

netting will first occur within the same class of options (as is

currently done). However, in accordance with the proposed modifications

to the definition of class of options in order to be in the same class

the options must have the same trading currency in addition to being of

the same type and covering the same unit of trading of the same

currency. The proposed changes to Rule 1605(a)(3) will clarify that

following the netting of settlement obligations within a class, netting

will occur across classes (as is currently done) of foreign currency

and inverse foreign currency options.

The Introduction to Chapter XVI, which governs foreign currency

options, is being amended to clarify that with the introduction of

inverse foreign currency options, the rules of that chapter will be

applicable only to option contracts where either the trading currency

or the underlying security is a foreign currency and the other side of

the contract is USDs. Likewise, the Introduction to Chapter XXIII,

which governs cash-settled foreign currency options, is being amended

to clarify that with the introduction of inverse options, the rules of

that chapter will be applicable only to cash-settled option contracts

where either the trading currency or the underlying security is a

foreign currency. Finally, the Introduction to Chapter XXI, which

governs cross-rate foreign currency options, is being amended to

clarify that with the commencement of percentage quoting, premium and

exercise prices of cross-rate foreign currency options will not always

be in the same currency.

The proposed rule change is consistent with the purposes and the

requirements of Section 17A of the Securities Exchange Act of 1934, as

amended, because it will provide for the prompt and accurate settlement

of transactions in inverse foreign currency and cross-rate foreign

currency options and will provide for the safeguarding of related

securities and funds. The proposed rule change meets such requirements

by establishing a framework in which existing, reliable OCC systems,

rules, and procedures will be extended to the processing of such

inverse options.

B. Self-Regulatory Organization's Statement on Burden on Competition

OCC does not believe that the proposed rule change will 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

Within thirty-five days of the date of publication of this notice

in the Federal Register or within such longer period (i) as the

Commission may designate up to ninety days of such date if it finds

such longer period to be appropriate and publishes its reasons for so

finding or (ii) as to which the self-regulatory organization consents,

the Commission will:

(A) by order approved the proposed rule change or

(B) institute proceedings to determine whether the proposed rule

change should be disapproved.

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, N.W., Washington, D.C. 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, N.W.,

Washington, D.C. 20549. Copies of such filing will also be available

for inspection and copying at the principal office of the above-

referenced self-regulatory organization.

All submissions should refer to File No. SR-OCC-94-05 and should be

submitted by August 9, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-17427 Filed 7-18-94; 8:45 am]

BILLING CODE 8010-01-M