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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37985; File No. SR-OCC-96-16]

Self-Regulatory Organizations; The Options Clearing Corporation;

Notice of Filing and Order Granting Permanent Approval on an

Accelerated Basis of a Proposed Rule Change Concerning Equity TIMS

November 25, 1996.

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

(``Act''),\1\ notice is hereby given that on November 8, 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 permanent

approval of the proposed rule change on an accelerated basis.

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\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 proposed rule change seeks permanent approval of OCC's use of

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

clearing margin positions in equity options.\2\ Since its initial

temporary approval of Equity TIMS in 1991, the Commission has extended

the temporary approval five times.\3\

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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). 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. At that time,

OCC phased out its previous margin system, 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).

\3\ 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); 36003 (July 21, 1995), 60 FR 38880 [File No. SR-OCC-

95-07] (order extending the approval of Equity TIMS through May 31,

1996) and 37449 (July 17, 1996), 61 FR 38498 [File No. SR-OCC-96-06]

(order extending the approval of Equity TIMS through November 30,

1996).

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[[Page 64407]]

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.\4\

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\4\ 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

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

model) to project the cost of liquidating each clearing member's long

and short 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.

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., those in initial public

offerings) with traded options experienced high volatility less then

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

However, some equities with traded options that historically have

experienced lower volatility have experienced volatility increases 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 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 have been 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 assure the safeguarding of securities

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

for which it is responsible. The Commission believes that OCC's

proposal to utilize Equity TIMS meets this requirement. Because the

Commission wanted to analyze and to monitor the results of the use of

Equity TIMS before determining whether to grant permanent approval, the

Commission previously approved the proposed rule change on a temporary

basis. Because OCC's use of Equity TIMS during the temporary approval

period 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 the risk exposure, the Commission

is now permanently approving Equity TIMS.

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 good cause

for approving OCC's proposal prior to the thirtieth day after

publication of notice of filing because accelerated approval will allow

OCC to continue to use Equity TIMS without interruption at the

conclusion of the current temporary approval period. The Commission

notes that during the previous temporary approval periods neither OCC

nor the Commission have received any adverse comments regarding Equity

TIMS, 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-96-16 and should be

submitted by December 26, 1996.

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

that the proposed rule change (File No. SR-OCC-96-16) be, and hereby

is, approved on an accelerated basis.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\5\

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\5\ 17 CFR 200.30-3(a)(12) (1996).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-30813 Filed 12-3-96; 8:45 am]

BILLING CODE 8010-01-M