

[Federal Register: March 16, 2006 (Volume 71, Number 51)]
[Notices]               
[Page 13648-13649]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16mr06-92]                         


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53455; File No. SR-OCC-2005-22]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to 
Allocations Processing

March 8, 2006.

I. Introduction

    On December 13, 2005, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2005-22 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on January 30, 2006.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 53150 (January 19, 
2006), 71 FR 4953.
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II. Description

    The proposed rule change relates to new Rule 405, ``Allocations,'' 
which governs the processing of post-trade allocation instructions by 
clearing members. OCC installed a new system to process post-trade 
allocation instructions in January 2006, and 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 
Commodity Futures Trading Commission (``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\ OCC included 
Interpretation and Policy .02 to Rule 405 to provide that the new 
system could not be used for positions in contracts which are subject 
to the Commission's jurisdiction (i.e., securities options or security 
futures) until the Commission issued an order approving the use of Rule 
405 and the new system for processing post-trade allocations with 
respect to such positions. The purpose of the proposed rule change is 
to obtain such Commission approval and to delete Interpretation and 
Policy .02 to Rule 405.
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    \3\ Securities Exchange Act Release No. 53151 (January 19, 
2006), 71 FR 4951 (January 30, 2006).
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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 OCC to move a transaction or position to 
the account of another clearing member (i.e., the ``carrying'' or 
``given-up'' clearing member).
    Post-trade allocations of securities options have been 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.\4\ Under the new 
allocation system, 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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    \4\ OCC Rule 403.
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    Most post-trade allocations of commodity futures cleared through 
OCC have been processed through The Clearing Corporation's (``CCorp'') 
``give-up'' system, which requires the given-up clearing member to 
affirmatively accept a transaction.\5\ OCC's new allocation system has 
enabled clearing members to process commodity futures ``give-ups'' 
without going through the CCorp system.
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    \5\ OCC Rule 404.
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    New Rule 405 currently governs the processing of allocation 
instructions for contracts subject to the exclusive jurisdiction of the 
CFTC. As amended by this proposed rule change, Rule 405 will 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.\6\ 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 responsible for the 
positions.
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    \6\ 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 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 its 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.\7\ For

[[Page 13649]]

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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    \7\ 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 security 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.

III. Discussion

    Section 17A(b)(3)(F) of the Act provides that the rules of a 
clearing agency should be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. OCC's rules 
permitting allocation of clearing member positions are designed to 
ensure that positions are carried in the appropriate clearing member 
account at OCC. The new allocation service offered under Rule 405 is 
designed to improve upon and add efficiencies to OCC's existing CMTA 
functionality for allocating post-trade instructions by centralizing 
and further automating post-trade allocations. Although OCC designed 
the new allocation system to be an improvement upon its current system, 
clearing members may choose to continue using the CMTA functionality. 
Accordingly, because the proposed rule change is designed to enhance 
OCC's service offerings and to provide efficiencies to clearing 
members, the Commission finds that the proposed rule change is designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2005-22) be and hereby 
is approved.

    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).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3807 Filed 3-15-06; 8:45 am]

BILLING CODE 8010-01-P
