Self-Regulatory Organizations; The Options Clearing Corporation and The Intermarket Clearing Corporation; Notice of Filing of Proposed Rule Changes Relating to the Cross-Netting of Foreign Currency Options and Futures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33666; File Nos. SR-OCC-94-01 and SR-ICC-94-01]

Self-Regulatory Organizations; The Options Clearing Corporation

and The Intermarket Clearing Corporation; Notice of Filing of Proposed

Rule Changes Relating to the Cross-Netting of Foreign Currency Options

and Futures

February 23, 1994.

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

(``Act''),\1\ notice is hereby given that on January 18, 1994, The

Options Clearing Corporation (``OCC'') and The Intermarket Clearing

Corporation (``ICC'') filed with the Securities and Exchange Commission

(``Commission'') the proposed rule changes (File Nos. SR-OCC-94-01 and

SR-ICC-94-01) as described in Items I, II, and III below, which Items

have been prepared primarily by OCC and ICC, self-regulatory

organizations (``SROs''). The Commission is publishing this notice to

solicit comments on the proposed rule changes from interested persons.

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

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I. Self-Regulatory Organizations' Statement of the Terms of Substance

of the Proposed Rule Changes

The proposed rule changes will eliminate the ability of a clearing

member of both OCC and ICC (``joint clearing member'') that has elected

to cross-net its obligations arising from foreign currency options and

futures to select ICC as its designated clearing organization (``DCO'')

in settling such obligations. Under the proposed rule changes, only OCC

will be able to act as the DCO in settling such obligations.

II. Self-Regulatory Organizations' Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Changes

In its filing with the Commission, OCC and ICC have included

statements concerning the purpose of and basis for the proposed rule

changes and discussed any comments they received on the proposed rule

changes. The text of these statements may be examined at the places

specified in Item IV below. OCC and ICC have prepared summaries, set

forth in sections A, B, and C below, of the most significant aspects of

such statements.

A. Self-Regulatory Organizations' Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Changes

1. Cross-Netting Under Current Rules

Under OCC and ICC rules, a joint clearing member may elect to

cross-net its OCC exercise and assignment settlement obligations in

OCC-cleared foreign currency options (``OCC obligations'') with its

settlement obligations in ICC-cleared foreign currency futures (``ICC

obligations'') on the same foreign currency. Cross-netting occurs when

OCC obligations settle on a date that also is a delivery date for ICC

obligations. Because such dates coincide only one day each month,

cross-netting is performed only one day each month.

Currently, a joint clearing member that has elected to settle by

cross-netting may select either OCC or ICC as its DCO and will settle

its cross-netted obligations with its DCO in accordance with the rules

of the DCO. (OCC and ICC have virtually identical rules regarding the

settlement of foreign currency obligations.) The DCO, in turn, performs

its ordinary clearance and settlement activities and acts as agent for

the opposite clearing organization in settling the cross-netted

obligations.\2\

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\2\For a more detailed description of cross-netting, refer to

Securities Exchange Act Release No. 24781 (August 6, 1987), 53 FR

30268 [File No. SR-OCC-86-14].

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The agreement of one clearing organization to act as agent for the

other is contained in the Mutual Agency Agreement for Foreign Currency

Settlement (``Mutual Agency Agreement'') between OCC and ICC. The

Mutual Agency Agreement sets forth the rights and obligations of OCC

and ICC in effecting cross-netted settlements and the effect of the

default of a joint clearing member on such rights and obligations.

2. The Proposed Rule Changes

ICC no longer desires to be a cross-netting DCO, and therefore, OCC

and ICC have proposed to eliminate the ability of a joint clearing

member to select ICC as a DCO. These proposed rule changes will have no

effect: (1) On the basic procedures under which cross-netted

obligations are settled or (2) upon any joint clearing member because

no joint clearing member has ever selected ICC as its cross-netting

DCO.

To accomplish the proposed rule changes, OCC and ICC will amend OCC

Rule 1605(c) and ICC Rule 1205(c). The two rules deal with the cross-

netting of foreign currency obligations and will be modified to state

that henceforth only OCC will be the DCO and effect the settlement of

such obligations. OCC and ICC also will delete from OCC By-Laws Article

XV, Section 1 and from ICC Rule 1202 the term and definition of

``designated clearing organization.''

OCC and ICC will replace the existing Mutual Agency Agreement

between OCC and ICC with a proposed Agreement for Cross-Netting Foreign

Currency Settlements (``Cross-Netting Agreement''). The proposed Cross-

Netting Agreement, which is based on the Mutual Agency Agreement, has

been drafted by OCC and ICC to implement the above-described rule

changes. Specifically, the Cross-Netting Agreement provides: (1) That

OCC and ICC will furnish a form notice by which a joint clearing member

may elect to cross-net its OCC and ICC obligations and which will

provide that only OCC will effect the cross-netted settlements; (2)

that OCC agrees to act as agent for ICC in effecting cross-netted

settlements with a joint clearing member; (3) that neither OCC nor ICC

will change its rules relating to the margining and settling of foreign

currency obligations without the consent of the other; and (4) the

settlement, default, indemnity, and termination procedures.

Under the Cross-Netting Agreement, the settlement and default

procedures will remain unchanged except that only OCC will be

authorized to effect the cross-netting settlements. Likewise, the terms

of indemnity between OCC and ICC will remain unchanged except for the

fact that OCC will no longer indemnify ICC for actions taken by ICC as

agent for OCC in effecting cross-netting settlements. Finally, the

terms for terminating the Cross-Netting Agreement will remain unchanged

except that the notice requirement between the two parties will be

shortened from ninety days to thirty days.

OCC and ICC state the proposed rule changes are consistent with the

Act and in particular with section 17A of the Act\3\ in that the rule

changes neither adversely affect the safeguarding of securities or

funds in the custody or control of OCC or ICC or for which they are

responsible nor significantly affect the rights or obligations of OCC,

ICC, or those joint clearing members that have elected cross-netting.

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

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B. Self-Regulatory Organizations' Statement on Burden on Competition

OCC and ICC believe that the proposed rule changes will not impose

any burden on competition.

C. Self-Regulatory Organizations' Statement on Comments on the Proposed

Rule Changes Received From Members, Participants or Others

OCC and ICC have not solicited or received any comments on the

proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Changes 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 such period that the SROs consent, the Commission

will:

(A) By order approve such proposed rule changes or

(B) Institute proceedings to determine whether the proposed rule

changes 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 NW., Washington, DC 20549. Copies

of the submission, all subsequent amendments, all written statements

with respect to the proposed rule changes that are filed with the

Commission, and all written communications relating to the proposed

rule changes 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 offices of OCC and ICC. All

submissions should refer to File Nos. SR-OCC-94-01 and SR-ICC-94-01 and

should be submitted by March 24, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-4871 Filed 3-2-94; 8:45 am]

BILLING CODE 8010-01-M