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. 34-36003; File No. SR-OCC-95-07]

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

July 21, 1995.

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

\1\ (``Act''), notice is hereby given that on May 26, 1995, The Options

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

Commission (``Commission'') the proposed rule change as described in

Items I and II below, which items have been prepared primarily by OCC.

The Commission is publishing this notice and order to solicit comments

on the proposed rule change from interested persons and to grant

accelerated approval of the proposed rule change through May 31, 1996.

\1\ 15 U.S.C. 78s(b)(1) (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 have the Commission

extend its order granting temporary approval of OCC's use of its

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

clearing margin positions in 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 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).

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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\

\3\ The Commission has modified the text of the summaries

prepared by OCC.

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(A) Self-Regulatory Organization'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.\4\ Since its initial

temporary approval of Equity TIMS, the Commission has extended the

temporary approval three times.\5\

\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 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).

\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); 32388 (May 28, 1993), 58 FR 31989

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

through May 31, 1994); and 34065 (May 13, 1994), 59 FR 26534 [File

No. SR-OCC-94-03] (order extending the approval of Equity TIMS

through May 31, 1995).

Equity TIMS utilizes options price theory (i.e., an option pricing

model) to project the cost of liquidating in the event of a ``worst

case'' theoretical change in the price of the underlying securities,

each clearing member's short equity option positions and long equity

option positions on which OCC is entitled to assert a lien. This

projected liquidation cost is then used by Equity TIMS to calculate for

each clearing member a margin requirement to cover that cost.

OCC has requested an additional extension so that it can 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.\6\ OCC recently submitted a report of

its analysis to the Commission's staff. Accordingly, OCC seeks an

extension of the Commission's temporary approval of

[[Page 38881]]

Equity TIMS through May 31, 1996, so that the Commission may review and

discuss the report and several potential changes to Equity TIMS with

OCC.\7\

\6\ 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 was delayed further.

\7\ OCC has not filed a proposed rule change regarding the

potential changes to Equity TIMS; however, OCC will file a draft

proposed rule change so that the Commission will have an opportunity

to comment on the changes before OCC officially seeks approval of

the changes under Section 19(b)(2) of the Act.

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OCC believes that the proposed rule change is consistent with the

requirements of Section 17A of the Act and the rules and regulations

thereunder because it will enhance OCC's ability to safeguard the

securities and funds in its custody or control or for which it

responsible.

(B) Self-Regulatory Organization's Statement on Burden on Competition

OCC does not believe that the proposed rule change will have an

impact on or impose a burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received from Members, Participants or Others

No written comments have been solicited or received. OCC will

notify the Commission of any written comments received by OCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Section 17A(b)(3)(F) \8\ of the Act requires the rules of a

clearing agency be designed to assure the safeguarding of securities

and funds which are 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. The Commission continues to

believe that OCC's proposal to utilize Equity TIMS meets the

requirements of the Act and that it represents an improvement over

OCC's previous 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 staff must

fully analyze OCC's report to the Commission and several potential

changes to Equity TIMS before determining whether to grant permanent

approval for Equity TIMS.

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

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

\10\ Supra note 4.

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OCC has requested that the Commission find good cause for approving

the proposal prior to the thirtieth day after the publication of notice

of filing of the proposed rule change. The Commission finds such good

cause because the Commission believes that OCC's use of Equity TIMS

over the past five 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 allow OCC to continue to use Equity TIMS

while the Commission and OCC further examine Equity TIMS, 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 four 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, 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 OCC. All

submissions should refer to File No. SR-OCC-95-07 and should be

submitted by August 18, 1995.

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

\11\ that the proposed rule change (File No. SR-OCC-95-07) be, and

hereby is, approved through May 31, 1996.

\11\ 15 U.S.C. 78s(b)(2) (1988).

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\12\

\12\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-18606 Filed 7-27-95; 8:45 am]

BILLING CODE 8010-01-M