

[Federal Register: January 30, 2006 (Volume 71, Number 19)]
[Notices]               
[Page 4953-4954]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30ja06-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53150; File No. SR-OCC-2005-22]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Allocations 
Processing

 January 19, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 13, 2004, 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(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would amend Rule 405, Allocations, so that 
it would apply to allocations of positions in contracts subject to the 
Commission's jurisdiction.

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.\2\
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    \2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In January 2006 OCC plans to install a new system to process post-
trade allocation instructions by clearing members. In order to 
accommodate the immediate use of the allocation system for commodity 
contracts cleared by OCC that are subject to the exclusive jurisdiction 
of the CFTC, OCC adopted Rule 405 by submitting File No. SR-OCC-2005-21 
for immediate effectiveness pursuant to section 19(b)(3)(A) of the 
Act.\3\ However, Interpretation and Policy .02 to Rule 405 provides 
that the system may not be used for securities options or security 
futures until the Commission issues an approval order with respect to 
Rule 405. OCC submitted the proposed rule change for purposes of 
adopting Rule 405 for use in allocating positions in contracts which 
are subject to the Commission's jurisdiction.\4\ This rule change is 
being filed pursuant to section 19(b)(2) for approval by the 
Commission.
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    \3\ The notice of filing and immediate effectiveness of File No. 
SR-OCC-2005-21 will be published in the Federal Register at 
approximately the same time as the notice for this proposed rule 
change.
    \4\ OCC proposes to delete Interpretation and Policy .02 to Rule 
405 in this filing.
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    The new allocation system and Rule 405 provide clearing members 
with a centralized system for processing allocation or ``give-up'' 
instructions across all exchanges for which OCC provides clearing 
services. Allocations are post-trade instructions entered by one 
clearing member (i.e., an authorized ``executing'' or ``giving-up'' 
clearing member) that direct a transaction or position to the account 
of another clearing member (i.e., the ``carrying'' or ``given-up'' 
clearing member). OCC's centralized system will enhance OCC's service 
offerings and will provide efficiencies to clearing members.
    Post-trade allocations of securities options are currently 
processed through OCC's Clearing Member Trade Assignment (``CMTA'') 
functionality, which normally causes a transaction to automatically be 
moved into an account of the carrying clearing member so long as the 
executing and carrying clearing members have an effective CMTA 
arrangement registered with OCC for the exchange submitting the 
matching trade information for that transaction.\5\ Once Rule 405 is 
approved by the Commission for purposes of allocating positions in 
securities options, clearing members will be able to elect either to 
continue to use the existing CMTA system or to use the new allocation 
system for securities options.
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    \5\ See OCC Rule 403.
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    For most commodity futures cleared through OCC, post-trade 
allocations are currently processed through The Clearing Corporation's 
(``CCorp'') ``give-up'' system, which requires the given-up clearing 
member to affirmatively accept a transaction.\6\ OCC's allocation 
system will enable clearing members to process commodity futures 
``give-ups'' without going through the CCorp system.
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    \6\ See OCC Rule 404.
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    Rule 405 currently governs the processing of allocation 
instructions for contracts subject to the exclusive jurisdiction of the 
CFTC. As amended by the proposed rule change, Rule 405 would operate in 
the same fashion for contracts subject to the Commission's 
jurisdiction. Transactions will first clear in the designated account 
of the giving-up clearing member. Instructions to allocate positions 
may be submitted either through an exchange's system for providing 
matching trade information to OCC or through OCC's clearing system, 
ENCORE. In either case, if the given-up and giving-up clearing members 
are parties to an allocation agreement that has been registered with 
OCC, OCC will automatically allocate the positions resulting from an 
allocation instruction to a designated account of the given-up clearing 
member without further action by the clearing members.\7\ If the 
clearing members are not parties to a registered allocation agreement, 
OCC will not effect the allocation instruction until the given-up 
clearing member gives OCC notice of its affirmative acceptance of the 
allocated positions. (In contrast, the CMTA system does not allow for 
acceptance of allocated positions without a registered CMTA agreement.) 
If the given-up clearing member does not give OCC notice of such 
acceptance by an OCC-specified deadline, the allocation instruction 
will not be processed, and the positions will remain in the account of 
the giving-up clearing member, which will remain obligated on those 
positions.
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    \7\ Unlike CMTAs, clearing members will not be required to 
register their allocation arrangement by exchange.
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    A given-up clearing member will be responsible for appropriately 
allocated positions. Given-up positions are moved to the given-up 
clearing member's account at the premium price in the case of options 
or at the contract price in the case of futures at which the positions 
were established by the executing clearing member. Positions that are 
allocated on an intraday basis

[[Page 4954]]

will not be reflected in position reports until the following business 
day. However, OCC will take those positions into account in processing 
any intraday settlements authorized by the By-laws and Rules, including 
intraday margin settlements. A given-up clearing member may enter an 
instruction to reverse an allocation that was accepted in error. If the 
given-up and giving-up clearing members are parties to a registered 
allocation agreement, the reversing instruction will be automatically 
processed. If the clearing members are not parties to a registered 
allocation agreement, the reversing instruction must be affirmatively 
accepted by the original giving-up clearing member.
    Allocation instructions may be for a single position (i.e., a 
position in a given series established at a single price) or for a 
group of positions (i.e., positions in the same series established at 
different prices). Allocation instructions for grouped positions must 
be submitted through ENCORE. For single positions, the instruction must 
identify the contract quantity, series, and price as specified in the 
matching trade information. For grouped positions, the allocation 
instruction must provide the same information, but the price may be an 
average price if not prohibited under exchange rules and applicable 
law.\8\ For the convenience of clearing members, OCC's system will 
produce a suggested average price for grouped allocations that clearing 
members may adopt for purposes of processing the instruction.
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    \8\ Average pricing is permitted under the Commodity Exchange 
Act in certain circumstances. In those circumstances, a clearing 
member may instruct OCC to use the average price in clearing and 
settling the trades. Clearing members have requested that OCC 
provide functionality that would also permit positions in securities 
options and security futures to be allocated at an average price. 
Accordingly, OCC has developed its allocation system to accommodate 
the use of such prices for security options and futures, provided 
that such use does not violate exchange rules or applicable law.
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    Registration of allocation agreements may be terminated either by 
mutual agreement or unilaterally. Mutually terminated registrations 
will be effected immediately in OCC's system. Unilaterally terminated 
registrations will be terminated in OCC's system effective as of 8 a.m. 
CST the business day after the termination notice is received by OCC 
and the other clearing member. These are the same standards currently 
applied to terminating CMTA arrangements under OCC Rule 403. Following 
termination of registration of an allocation agreement, an allocated 
position may be allocated to a given-up clearing member only upon its 
affirmative acceptance.
    OCC believes that the proposed rule change is consistent with 
section 17A of the Act because it is designed to ensure that positions 
resulting from exchange transactions in derivative contracts are 
carried in the appropriate account by the clearing member which is the 
clearing broker for the investor for whom the transaction was executed, 
and thereby, promotes the prompt and accurate clearance and settlement 
of transactions in derivative contracts, fosters cooperation and 
coordination with persons engaged in the clearance and settlement of 
such transactions, removes impediments to and perfect a mechanism of a 
national system for the prompt and accurate clearance and settlement of 
such transactions, and, in general, protects investors and the public 
interest. The proposed rule change is not inconsistent with the 
existing rules of OCC, including any other rules proposed to be 
amended.

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

    OCC does not believe that the proposed rule change would 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 approve the proposed rule change; or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods.

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
) or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-OCC-2005-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-OCC-2005-22. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site at http://www.optionsclearing.com.

    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-OCC-2005-22 
and should be submitted on or before February 21, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-1086 Filed 1-27-06; 8:45 am]

BILLING CODE 8010-01-P
