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. 34-37449; File No. SR-OCC-96-06]

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 17, 1996.

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

(``Act''), \1\ notice is hereby given that on May 31, 1996, 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

from interested persons and to grant accelerated approval of the

proposed rule change through November 30, 1996.

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\1\ 15 U.S.C. Sec. 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 proposed rule change will extend the order granting temporary

approval of OCC's use of its Theoretical Intermarket Margin System

(``TIMS'') for calculating clearing margin positions in equity

options.\2\

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\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\

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

prepared by OCC.

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[[Page 38499]]

(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 that 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 four times.\5\

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\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); 34065 (May 13, 1994), 59 FR 26534 [File No.

SR-OCC-94-03] (order extending the approval of Equity TIMS through

May 31, 1995); and 36003 (July 21, 1995), 60 FR 38880 [File No. SR-

OCC-95-07] (order extending the approval of Equity TIMS through May

31, 1996).

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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 presented a report to Commission staff in April 1995 pursuant

to staff inquiries as to whether volatility for a ten-year period

should be used to determine equity options margin intervals. OCC's

analysis suggests that a ten-year time frame presents problems in

adequately assessing the potential future volatility of individual

equities. OCC asserts that some equities (e.g., initial public

offerings) with traded options experienced high volatility less than

ten years ago but now are well established, less volatile securities.

However, some equities with traded options that historically have

experienced lower volatility have seen volatility increase due to

market factors or changes in the business climate.

Accordingly, OCC explored alternatives to using a ten-year period

for determining equity options margin intervals. As a result of its

research into such alternatives, OCC believes that the use of a four-

year stable distribution for the purposes of determining equity margin

intervals within Equity TIMS should address the Commission's concerns.

Stable distributions essentially seek to fit a probability distribution

to a sample of historical data without any implicit assumptions of

normalcy. OCC believes that stable distribution parameters will provide

it with a greater breadth and quality of information from a given

period of historical data and proposes to use a four-year period for

purposes of setting equity option margin intervals.

OCC believes the proposed rule change is consistent with the

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

promulgated thereunder because Equity TIMS should enhance OCC's ability

to safeguard the securities and funds for which it is responsible.

(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 were received.

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

Commission Action

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

clearing agency be designed to promote the prompt and accurate

clearance and settlement of securities transactions.\6\ Additionally,

Section 17A(a)(1) of the Act \7\ 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 because OCC's use of

Equity TIMS over the past six 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.

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\6\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).

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

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Nevertheless, while the Commission continues to believe that the

margin methodology employed by Equity TIMS is basically sound, the

Commission staff must fully analyze the efficacy of utilizing the four-

year stable distribution intervals for Equity TIMS before determining

whether to grant permanent approval. Consequently, the Commission is

granting temporary approval for Equity TIMS through November 30, 1996.

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 accelerated approval will allow OCC to continue to use

Equity TIMS without interruption while the Commission and OCC further

examine Equity TIMS. The Commission notes that during the five previous

temporary approval periods, neither OCC nor the Commission has received

any adverse comments regarding Equity TIMS from its clearing members,

and none are expected with regard to this filing.

IV. Solicitation of Comments

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

arguments concerning the foregoing. Persons making written submission

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of the submissions, 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. Sec. 552, will be available for inspection and copying in

the Commission's Public Reference Room, 450 Fifth Street, N.W.,

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

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

submissions should refer to file number SR-OCC-96-06 and should be

submitted by August 14, 1996.

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

that the proposed rule change (File No. SR-OCC-96-06) be, and hereby

is, approved on an accelerated basis through November 30, 1996.

[[Page 38500]]

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\8\

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\8\ 17 CFR 200.30-3(a)(12) (1995).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-18717 Filed 7-23-96; 8:45 am]

BILLING CODE 8010-01-M