Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Clearing and Settling a Price Differential Spread Futures Transaction, 42752-42755 [2011-18118]

Download as PDF 42752 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Notices The NRC Commission Meeting Schedule can be found on the Internet at: https://www.nrc.gov/public-involve/ public-meetings/schedule.html. * * * * * The NRC provides reasonable accommodation to individuals with disabilities where appropriate. If you need a reasonable accommodation to participate in these public meetings, or need this meeting notice or the transcript or other information from the public meetings in another format (e.g. braille, large print), please notify Bill Dosch, Chief, Work Life and Benefits Branch, at 301–415–6200, TDD: 301– 415–2100, or by e-mail at william.dosch@nrc.gov. Determinations on requests for reasonable accommodation will be made on a caseby-case basis. * * * * * This notice is distributed electronically to subscribers. If you no longer wish to receive it, or would like to be added to the distribution, please contact the Office of the Secretary, Washington, DC 20555 (301–415–1969), or send an e-mail to darlene.wright@nrc.gov. Dated: July 14, 2011. Rochelle C. Bavol, Policy Coordinator, Office of the Secretary. The subject matter of the Closed Meeting scheduled for Thursday, July 21, 2011 will be: Consideration of amicus participation; Institution and settlement of injunctive actions; Institution and settlement of administrative proceedings; An adjudicatory matter; and Other matters relating to enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Dated: July 14, 2011. Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–18218 Filed 7–15–11; 11:15 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64883; File No. SR–OCC– 2011–06] BILLING CODE 7590–01–P SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Clearing and Settling a Price Differential Spread Futures Transaction July 14, 2011. [FR Doc. 2011–18267 Filed 7–15–11; 4:15 pm] sroberts on DSK5SPTVN1PROD with NOTICES Sunshine Act Meeting Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold a Closed Meeting on Thursday, July 21, 2011 at 2 p.m. Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters also may be present. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (7), 9(B) and (10) and 17 CFR 200.402(a)(3), (5), (7), 9(ii) and (10), permit consideration of the scheduled matters at the Closed Meeting. Commissioner Paredes, as duty officer, voted to consider the items listed for the Closed Meeting in a closed session. VerDate Mar<15>2010 17:20 Jul 18, 2011 Jkt 223001 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,1 notice is hereby given that on June 30, 2011, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission the proposed rule change as described in Items I and II below, which items have been prepared primarily by OCC. OCC filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 2 and Rule 19b–4(f)(4) thereunder 3 so that the proposal was effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of Terms of Substance of the Proposed Rule Change The proposed rule change would accommodate the clearing and settling of a transaction type called a Price PO 00000 U.S.C. 78s(b)(1). U.S.C. 78s(b)(3)(A)(iii). 3 17 CFR 240.19b–4(f)(4). Differential Spread for purposes of effecting exchange transactions in futures contracts. II. Self-Regulatory Organization’s Statement of 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. A. Self-Regulatory Organization’s Statement of Purpose of, and Statutory Basis for, the Proposed Rule Change The purpose of this proposed rule change is to amend OCC’s By-Laws and Rules to accommodate the proposed introduction by ELX Futures L.P. (‘‘ELX’’), an electronic futures market that is designated as a contract market by the Commodity Futures Trading Commission (‘‘CFTC’’), of a transaction type called a Price Differential Spread (‘‘Price Differential Spread’’) for purposes of effecting exchange transactions in futures contracts.4 A Price Differential Spread is a pair of transactions resulting from a type of order where the party placing the order seeks to simultaneously buy and sell futures contracts on the same underlying interest but with different contract months (each such transaction referred to herein as a ‘‘leg’’ of the Price Differential Spread), provided that the price at which contracts are bought in one leg less the price at which contracts are sold in the other leg (the ‘‘price differential’’) is no greater than the limit specified by such party (such limit referred to herein as the ‘‘maximum price differential’’). Price Differential Spreads are principally used to roll futures positions forward into futures with the same underlying interest but with a later delivery date. In such a transaction, the cost to the party rolling the positions forward is determined solely by the difference between the prices at which the two legs of the Price Differential Spread are executed. The price of either leg alone is not relevant. As discussed below, by allowing a Clearing Member to use contract prices that are based on the previous day’s exchange-reported closing price, the actual price differential is highlighted and allocation of equivalent transactions 1 15 2 15 Frm 00079 Fmt 4703 Sfmt 4703 4 OCC understands that similar transactions are used by at least one other futures exchange. E:\FR\FM\19JYN1.SGM 19JYN1 sroberts on DSK5SPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Notices among different customers is facilitated. For purposes of illustration, assume that the ‘‘front leg’’ of a Price Differential Spread (i.e., the leg with the nearer contract month) is the sale of futures contracts and that the ‘‘back leg’’ (i.e., the leg with the more distant contract month) is the purchase of futures contracts. When submitting a Price Differential Spread order to ELX, the trader will specify the maximum price differential, and ELX will attempt to match the two legs of the Price Differential Spread based on available orders (not limited to Price Differential Spread orders) from other traders. Assume that a Clearing Member submits a Price Differential Spread order (such Clearing Member referred to herein as the ‘‘Price Differential Spread Executor’’) to sell a March SYM contract and buy a June SYM contract with a maximum price differential of $1.00 and that ELX matches the front leg to counterparty A, that buys the March SYM contract at $118.00, and the back leg to counterparty B, that sells the June SYM contract at $118.95. In this case, the price differential between the two legs, based on matched trade prices, is $0.95, which is lower than the $1.00 maximum price differential that the Price Differential Spread Executor has specified. Price Differential Spreads are differentiated from other futures transactions cleared by OCC in that the Price Differential Spread Executor may choose at the time it submits the order to (1) Record the contract prices of both legs of a Price Differential Spread at the prices at which the contracts are matched on the exchange (‘‘Spread Engine Prices’’) or (2) record the contract price of the front leg at the exchange-reported closing price on the immediately preceding trading day for the contracts bought or sold (‘‘prior day closing price’’) and record the contract price of the back leg at (a) the contract price of the front leg plus the price differential, if the front leg is the sale of futures contracts or (b) the contract price of the front leg less the price differential if the front leg is the purchase of futures contracts (‘‘Spread Settle Prices’’). After matching both legs of a Price Differential Spread, ELX will send to OCC a pair of matched trade reports, each of which will identify the buyer, the seller, the futures contract traded, the exchange-assigned identification number (‘‘Price Differential Spread ID’’) connecting the two legs of the Price Differential Spread, the Spread Engine Price, and the Spread Settle Price. The matched trade reports also will indicate VerDate Mar<15>2010 17:20 Jul 18, 2011 Jkt 223001 the price type (i.e., the Spread Engine Price or the Spread Settle Price) that OCC should use to record the trades on behalf of the Price Differential Spread Executor.5 Continuing the example, assume that the prior day closing price for the March SYM contract was $117.90. If the Price Differential Spread Executor elects to use the Spread Engine Prices at the time it submits the order, OCC will initially record the front leg at $118.00 and the back leg at $118.95. Alternatively, if the Price Differential Spread Executor elects to use the Spread Settle Prices at the time it submits the order, OCC will initially record the front leg at $117.90 and the back leg at $118.85 (which is the sum of the $117.90 contract price for the front leg plus the price differential of $0.95 because the front leg is the sale of a futures contract).6 In addition, after the two legs of the Price Differential Spread have been accepted by OCC for clearance and prior to a deadline established by OCC, which deadline would occur before the initial variation payment, the Price Differential Spread Executor may access OCC’s systems to change its initial election with respect to such trades as between using the Spread Engine Prices and using the Spread Settle Prices. ELX has informed OCC that Price Differential Spread traders require the flexibility to choose between the prices being used for clearing their Price Differential Spreads for purposes of allowing them to allocate trades among multiple customers at an equitable price similar to the average pricing functionality that already exists in OCC’s trade allocation process and that the implementation of this new post-trade process will be consistent with existing practices in the futures industry. ELX also has informed OCC that Price Differential Spread transactions will not affect the prices at which trades are publicly reported. Except in the case where the counterparty to a leg of a Price Differential Spread enters into the trade as part of its own Price Differential Spread and elects to record the trade using the Spread Settle Price, the 5 In the case where each counterparty to the trade has entered into the trade as part of its own Price Differential Spread, the matched trade report will identify separately with respect to each counterparty the price to be initially recorded as the contract price and the Price Differential Spread ID. 6 Assume instead that the front leg is the purchase of a futures contract at $118.95 and the back leg is the sale of a futures contract at $118.00. The price differential is still $0.95. If the Price Differential Spread Executor elects to use the Spread Settle Prices at the time it submits the order, OCC will initially record the front leg at $117.90 and the back leg at $116.95 (which is the $117.90 contract price minus the price differential of $0.95 because the front leg is the purchase of a futures contract). PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 42753 counterparty sees the trade as an ordinary stand-alone futures transaction, and OCC will record the trade on behalf of the counterparty using the Spread Engine Price. Therefore, continuing the example, in a case where the Price Differential Spread Executor chooses to use the Spread Settle Prices for clearing a Price Differential Spread, the trades as recorded on OCC’s books and records for the Price Differential Spread Executor will use a different set of prices (i.e., $117.90 and $118.85) from those recorded for counterparty A and counterparty B (i.e., $118.00 and $118.95). However, the aggregate amount of the variation payments that the Price Differential Spread Executor will pay to or collect from OCC will be the same (except for very small discrepancies due to rounding differences as described below) regardless of which set of prices is used to calculate variation payments because the price differential between the two legs of the Price Differential Spread is the same (i.e., $0.95). Accordingly, and subject to the treatment of rounding differences as described in the following paragraphs, OCC’s clearing system will be in balance because the variation payments due to or from the Price Differential Spread Executor on the futures contracts executed as part of the Price Differential Spread will equal the amount due to or from the counterparties to those transactions on an aggregate basis even if not on a contract-by-contract basis. When the Price Differential Spread Executor records the trades using the Spread Settle Prices, rounding the Spread Settle Prices to the nearest applicable minimum price increment when the initial variation payments on the trades are calculated may result in the Price Differential Spread Executor paying slightly more or receiving slightly less than it would have paid or received if it had elected to record the trades using the Spread Engine Prices. In either case the amount will be no more than one cent per contract. The amount by which the Price Differential Spread Executor receives slightly less or pays slightly more than it would have otherwise paid or received with respect to the trades will fund the amount by which other Price Differential Spread Executors are entitled to receive more or pay less as a result of OCC’s rounding procedures. While all such discrepancies in variation payments due to OCC’s rounding procedures should net to zero when averaged over time, they may not net to precisely zero on any business day. Any net excess received by OCC on E:\FR\FM\19JYN1.SGM 19JYN1 sroberts on DSK5SPTVN1PROD with NOTICES 42754 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Notices any business day will be contributed to a ‘‘Rounding Fund’’ and will be carried forward to fund any net amount that OCC may be required to pay on subsequent days. In order to ensure that there is always a sufficient positive balance in the Rounding Fund to fund any such net amount that may be owed by OCC, a cushion is needed. Accordingly, ELX has agreed in an amendment to the Clearing Agreement between OCC and ELX to provide OCC an initial amount of $5,000 as a contribution to the Rounding Fund and to contribute additional amounts as reasonably required by OCC to provide a larger cushion should growth in product volume indicate such additional amounts are required. The Rounding Fund will be held by OCC in one or more bank accounts used by OCC to make daily cash settlements with Clearing Members so that it will be automatically available to fund variation payments as needed and to eliminate the expense and operational risk of unnecessary funds transfers. OCC will maintain a record of the amount held in the Rounding Fund on OCC’s own books and records. If at any time ELX ceases to clear transactions through OCC or ceases to permit Price Differential Spread transactions, OCC will pay any amount left in the Rounding Fund to ELX. OCC proposes to make the following amendments to its By-Laws and Rules in order to accommodate clearance of Price Differential Spreads. OCC proposes to add a new Rule 1301A to (1) Define Price Differential Spreads,7 (2) require the listing exchange to include the Spread Engine Price and the Spread Settle Price and to identify (separately with respect to each counterparty to the trade, if applicable) which of the two prices is to be initially recorded as the contract price and the Price Differential Spread ID in each of the matched trade reports that the listing exchange sends to OCC with respect to Price Differential Spreads, (3) permit a Clearing Member to choose post trade the contract prices to be used for clearing its Price Differential Spread trades, and (4) highlight the rounding situation described above. OCC would also make a minor conforming amendment to Rule 1301. In addition, OCC and ELX would enter into Amendment 1 to the Agreement for Clearing and Settlement Services dated December 5, 2008, between OCC and ELX to accommodate Price Differential Spreads. A copy of Amendment 1 is attached hereto as Exhibit 5. OCC states that the proposed changes to OCC’s By-Laws and Rules are consistent with the purposes and requirements of Section 17A of the Act 8 because they effect a change in an existing service of OCC that does not adversely affect the safeguarding of securities or funds in OCC’s custody or control or for which OCC is responsible or significantly affect the respective rights or obligations of OCC or persons using its securities clearing services. The proposed rule change is not inconsistent with any rules of OCC including any rules proposed to be amended. B. Self-Regulatory Organization’s Statement on Burden on Competition OCC does not believe that the proposed rule change will have any impact or impose any burden on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others OCC has not solicited or received written comments relating to the proposed rule change. OCC will notify the Commission of any written comments it receives. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act 9 and Rule 19b–4(f)(4) 10 because it effects a change in an existing service of a registered clearing agency that does not adversely affect the safeguarding of securities or funds in the custody or control of the clearing agency or for which it is responsible and does not significantly affect the respective rights or obligations of the clearing agency or persons using the service. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and 7 OCC also proposes to add the term ‘‘Price Differential Spread’’ to Article I of its By-Laws as a cross reference to Rule 1301A where the term is actually defined. VerDate Mar<15>2010 17:20 Jul 18, 2011 Jkt 223001 PO 00000 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 (https://www.sec.gov/ rules/sro.shtml) or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–OCC–2011–06 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–OCC–2011–06. 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 (https://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 Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filings also will be available for inspection and copying at OCC’s principal office and OCC’s Web site (https:// www.theocc.com/components/docs/ legal/rules_and_bylaws/sr_occ_11_ 06.pdf). 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 No. SR–OCC–2011–06 and should be submitted on or before August 9, 2011. 8 15 U.S.C. 78q–1. note 2. 10 Supra note 3. 9 Supra Frm 00081 Fmt 4703 Sfmt 4703 E:\FR\FM\19JYN1.SGM 19JYN1 Federal Register / Vol. 76, No. 138 / Tuesday, July 19, 2011 / Notices For the Commission by the Division of Trading and Markets, pursuant to delegated authority.11 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–18118 Filed 7–18–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64884; File No. SR–FINRA– 2011–033] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt FINRA Rule 0180 (Application of Rules to SecurityBased Swaps) July 14, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 8, 2011, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by FINRA. FINRA has designated the proposed rule change as constituting a ‘‘noncontroversial’’ rule change under paragraph (f)(6) of Rule 19b–4 under the Act,3 which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. sroberts on DSK5SPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to adopt FINRA Rule 0180 (Application of Rules to Security-Based Swaps). The proposed rule change would, with certain exceptions, temporarily limit the application of FINRA rules with respect to security-based swaps. The text of the proposed rule change is available on FINRA’s Web site at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 17 CFR 240.19b–4(f)(6). 1 15 VerDate Mar<15>2010 17:20 Jul 18, 2011 Jkt 223001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA 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. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘Dodd-Frank Act’’),4 Title VII of which established a comprehensive new regulatory framework for swaps and security-based swaps. The new legislation was intended among other things to enhance the authority of regulators to implement new rules designed to reduce risk, increase transparency, and promote market integrity with respect to such products. Generally, the Dodd-Frank Act provides that the Commodity Futures Trading Commission (‘‘CFTC’’) will regulate ‘‘swaps’’ and the SEC will regulate ‘‘security-based swaps.’’ 5 The DoddFrank Act contemplates certain selfregulatory organization responsibilities in this area as well.6 Title VII of the Dodd-Frank Act generally becomes effective on July 16, 2011 (360 days after the enactment of the Dodd-Frank Act, i.e. the ‘‘Effective Date’’), unless a provision requires a rulemaking.7 The Commission has L. No. 111–203, 124 Stat. 1376 (2010). terms ‘‘swap’’ and ‘‘security-based swap’’ are defined in Sections 721 and 761 of the DoddFrank Act. The Commission and the CFTC jointly have proposed to further define these terms. See Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011) (Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping); Securities Exchange Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) (Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant’’). 6 See, e.g., Sections 712 and 763 of the DoddFrank Act. 7 The Dodd-Frank Act provides that if a Title VII provision requires a rulemaking, the provision will go into effect ‘‘not less than’’ 60 days after the publication of the related final rule or on July 16, 2011, whichever is later. See Sections 754 and 774 of the Dodd-Frank Act. PO 00000 4 Pub. 5 The Frm 00082 Fmt 4703 Sfmt 4703 42755 recently taken a number of actions in furtherance of Title VII, including the issuance of a release to provide guidance in connection with the effectiveness of Exchange Act provisions related to security-based swaps added by subtitle B of Title VII (which generally creates, and relates to, the regulatory regime for security-based swaps), and to provide temporary exemptions in connection with certain of those provisions.8 In addition, the Commission has recently acted to address a change to an existing definition in the Act resulting from the effectiveness of the Title VII amendments.9 Specifically, as of the July 16 Effective Date, the Act’s definition of ‘‘security’’ will expressly encompass security-based swaps.10 In making this change, Congress intended for security-based swaps to be treated as securities under the Act and the underlying rules and regulations. Nonetheless, this expansion of the general scope of the Act raises certain complex issues of interpretation, including issues as to the application of those provisions to registered brokerdealers. Absent additional time to analyze those issues, and to consider whether to provide interpretive or operational guidance, these changes may lead to unnecessary market uncertainty. FINRA notes that the Act’s definition of ‘‘security’’ has similar implications for numerous provisions under FINRA rules.11 FINRA notes that, pending the final implementation of new rules and guidance that would provide greater regulatory clarity in relation to securitybased swap activities, it is in the public interest to propose a rule that would provide relief from certain FINRA requirements so as to help avoid undue market disruptions resulting from the change to the definition of ‘‘security’’ 8 See, e.g., Securities Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287 (June 22, 2011) (Compliance Dates Release). 9 See Securities Exchange Act Release No. 64795 (July 1, 2011) (Order Granting Temporary Exemptions) (the ‘‘Exemptive Release’’). 10 See Exchange Act Section 3(a)(10) (15 U.S.C. 78c(a)(10)), as revised by Section 761 of the DoddFrank Act. 11 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (‘‘Incorporated NYSE Rules’’) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the ‘‘Transitional Rulebook’’). While the NASD Rules generally apply to all FINRA members, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (‘‘Dual Members’’). The FINRA Rules apply to all FINRA members, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice, March 12, 2008 (Rulebook Consolidation Process). E:\FR\FM\19JYN1.SGM 19JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]
[Notices]
[Pages 42752-42755]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18118]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64883; File No. SR-OCC-2011-06]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding Clearing and Settling a Price Differential Spread Futures 
Transaction

July 14, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on June 30, 2011, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission the proposed rule change as described in Items I and II 
below, which items have been prepared primarily by OCC. OCC filed the 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\2\ and Rule 19b-4(f)(4) thereunder \3\ so that the proposal was 
effective upon filing with the Commission. 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).
    \2\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(4).
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I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    The proposed rule change would accommodate the clearing and 
settling of a transaction type called a Price Differential Spread for 
purposes of effecting exchange transactions in futures contracts.

II. Self-Regulatory Organization's Statement of 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.

A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this proposed rule change is to amend OCC's By-Laws 
and Rules to accommodate the proposed introduction by ELX Futures L.P. 
(``ELX''), an electronic futures market that is designated as a 
contract market by the Commodity Futures Trading Commission (``CFTC''), 
of a transaction type called a Price Differential Spread (``Price 
Differential Spread'') for purposes of effecting exchange transactions 
in futures contracts.\4\ A Price Differential Spread is a pair of 
transactions resulting from a type of order where the party placing the 
order seeks to simultaneously buy and sell futures contracts on the 
same underlying interest but with different contract months (each such 
transaction referred to herein as a ``leg'' of the Price Differential 
Spread), provided that the price at which contracts are bought in one 
leg less the price at which contracts are sold in the other leg (the 
``price differential'') is no greater than the limit specified by such 
party (such limit referred to herein as the ``maximum price 
differential''). Price Differential Spreads are principally used to 
roll futures positions forward into futures with the same underlying 
interest but with a later delivery date. In such a transaction, the 
cost to the party rolling the positions forward is determined solely by 
the difference between the prices at which the two legs of the Price 
Differential Spread are executed. The price of either leg alone is not 
relevant. As discussed below, by allowing a Clearing Member to use 
contract prices that are based on the previous day's exchange-reported 
closing price, the actual price differential is highlighted and 
allocation of equivalent transactions

[[Page 42753]]

among different customers is facilitated. For purposes of illustration, 
assume that the ``front leg'' of a Price Differential Spread (i.e., the 
leg with the nearer contract month) is the sale of futures contracts 
and that the ``back leg'' (i.e., the leg with the more distant contract 
month) is the purchase of futures contracts.
---------------------------------------------------------------------------

    \4\ OCC understands that similar transactions are used by at 
least one other futures exchange.
---------------------------------------------------------------------------

    When submitting a Price Differential Spread order to ELX, the 
trader will specify the maximum price differential, and ELX will 
attempt to match the two legs of the Price Differential Spread based on 
available orders (not limited to Price Differential Spread orders) from 
other traders. Assume that a Clearing Member submits a Price 
Differential Spread order (such Clearing Member referred to herein as 
the ``Price Differential Spread Executor'') to sell a March SYM 
contract and buy a June SYM contract with a maximum price differential 
of $1.00 and that ELX matches the front leg to counterparty A, that 
buys the March SYM contract at $118.00, and the back leg to 
counterparty B, that sells the June SYM contract at $118.95. In this 
case, the price differential between the two legs, based on matched 
trade prices, is $0.95, which is lower than the $1.00 maximum price 
differential that the Price Differential Spread Executor has specified.
    Price Differential Spreads are differentiated from other futures 
transactions cleared by OCC in that the Price Differential Spread 
Executor may choose at the time it submits the order to (1) Record the 
contract prices of both legs of a Price Differential Spread at the 
prices at which the contracts are matched on the exchange (``Spread 
Engine Prices'') or (2) record the contract price of the front leg at 
the exchange-reported closing price on the immediately preceding 
trading day for the contracts bought or sold (``prior day closing 
price'') and record the contract price of the back leg at (a) the 
contract price of the front leg plus the price differential, if the 
front leg is the sale of futures contracts or (b) the contract price of 
the front leg less the price differential if the front leg is the 
purchase of futures contracts (``Spread Settle Prices'').
    After matching both legs of a Price Differential Spread, ELX will 
send to OCC a pair of matched trade reports, each of which will 
identify the buyer, the seller, the futures contract traded, the 
exchange-assigned identification number (``Price Differential Spread 
ID'') connecting the two legs of the Price Differential Spread, the 
Spread Engine Price, and the Spread Settle Price. The matched trade 
reports also will indicate the price type (i.e., the Spread Engine 
Price or the Spread Settle Price) that OCC should use to record the 
trades on behalf of the Price Differential Spread Executor.\5\ 
Continuing the example, assume that the prior day closing price for the 
March SYM contract was $117.90. If the Price Differential Spread 
Executor elects to use the Spread Engine Prices at the time it submits 
the order, OCC will initially record the front leg at $118.00 and the 
back leg at $118.95. Alternatively, if the Price Differential Spread 
Executor elects to use the Spread Settle Prices at the time it submits 
the order, OCC will initially record the front leg at $117.90 and the 
back leg at $118.85 (which is the sum of the $117.90 contract price for 
the front leg plus the price differential of $0.95 because the front 
leg is the sale of a futures contract).\6\ In addition, after the two 
legs of the Price Differential Spread have been accepted by OCC for 
clearance and prior to a deadline established by OCC, which deadline 
would occur before the initial variation payment, the Price 
Differential Spread Executor may access OCC's systems to change its 
initial election with respect to such trades as between using the 
Spread Engine Prices and using the Spread Settle Prices. ELX has 
informed OCC that Price Differential Spread traders require the 
flexibility to choose between the prices being used for clearing their 
Price Differential Spreads for purposes of allowing them to allocate 
trades among multiple customers at an equitable price similar to the 
average pricing functionality that already exists in OCC's trade 
allocation process and that the implementation of this new post-trade 
process will be consistent with existing practices in the futures 
industry. ELX also has informed OCC that Price Differential Spread 
transactions will not affect the prices at which trades are publicly 
reported.
---------------------------------------------------------------------------

    \5\ In the case where each counterparty to the trade has entered 
into the trade as part of its own Price Differential Spread, the 
matched trade report will identify separately with respect to each 
counterparty the price to be initially recorded as the contract 
price and the Price Differential Spread ID.
    \6\ Assume instead that the front leg is the purchase of a 
futures contract at $118.95 and the back leg is the sale of a 
futures contract at $118.00. The price differential is still $0.95. 
If the Price Differential Spread Executor elects to use the Spread 
Settle Prices at the time it submits the order, OCC will initially 
record the front leg at $117.90 and the back leg at $116.95 (which 
is the $117.90 contract price minus the price differential of $0.95 
because the front leg is the purchase of a futures contract).
---------------------------------------------------------------------------

    Except in the case where the counterparty to a leg of a Price 
Differential Spread enters into the trade as part of its own Price 
Differential Spread and elects to record the trade using the Spread 
Settle Price, the counterparty sees the trade as an ordinary stand-
alone futures transaction, and OCC will record the trade on behalf of 
the counterparty using the Spread Engine Price. Therefore, continuing 
the example, in a case where the Price Differential Spread Executor 
chooses to use the Spread Settle Prices for clearing a Price 
Differential Spread, the trades as recorded on OCC's books and records 
for the Price Differential Spread Executor will use a different set of 
prices (i.e., $117.90 and $118.85) from those recorded for counterparty 
A and counterparty B (i.e., $118.00 and $118.95). However, the 
aggregate amount of the variation payments that the Price Differential 
Spread Executor will pay to or collect from OCC will be the same 
(except for very small discrepancies due to rounding differences as 
described below) regardless of which set of prices is used to calculate 
variation payments because the price differential between the two legs 
of the Price Differential Spread is the same (i.e., $0.95). 
Accordingly, and subject to the treatment of rounding differences as 
described in the following paragraphs, OCC's clearing system will be in 
balance because the variation payments due to or from the Price 
Differential Spread Executor on the futures contracts executed as part 
of the Price Differential Spread will equal the amount due to or from 
the counterparties to those transactions on an aggregate basis even if 
not on a contract-by-contract basis.
    When the Price Differential Spread Executor records the trades 
using the Spread Settle Prices, rounding the Spread Settle Prices to 
the nearest applicable minimum price increment when the initial 
variation payments on the trades are calculated may result in the Price 
Differential Spread Executor paying slightly more or receiving slightly 
less than it would have paid or received if it had elected to record 
the trades using the Spread Engine Prices. In either case the amount 
will be no more than one cent per contract. The amount by which the 
Price Differential Spread Executor receives slightly less or pays 
slightly more than it would have otherwise paid or received with 
respect to the trades will fund the amount by which other Price 
Differential Spread Executors are entitled to receive more or pay less 
as a result of OCC's rounding procedures.
    While all such discrepancies in variation payments due to OCC's 
rounding procedures should net to zero when averaged over time, they 
may not net to precisely zero on any business day. Any net excess 
received by OCC on

[[Page 42754]]

any business day will be contributed to a ``Rounding Fund'' and will be 
carried forward to fund any net amount that OCC may be required to pay 
on subsequent days. In order to ensure that there is always a 
sufficient positive balance in the Rounding Fund to fund any such net 
amount that may be owed by OCC, a cushion is needed. Accordingly, ELX 
has agreed in an amendment to the Clearing Agreement between OCC and 
ELX to provide OCC an initial amount of $5,000 as a contribution to the 
Rounding Fund and to contribute additional amounts as reasonably 
required by OCC to provide a larger cushion should growth in product 
volume indicate such additional amounts are required. The Rounding Fund 
will be held by OCC in one or more bank accounts used by OCC to make 
daily cash settlements with Clearing Members so that it will be 
automatically available to fund variation payments as needed and to 
eliminate the expense and operational risk of unnecessary funds 
transfers. OCC will maintain a record of the amount held in the 
Rounding Fund on OCC's own books and records. If at any time ELX ceases 
to clear transactions through OCC or ceases to permit Price 
Differential Spread transactions, OCC will pay any amount left in the 
Rounding Fund to ELX.
    OCC proposes to make the following amendments to its By-Laws and 
Rules in order to accommodate clearance of Price Differential Spreads. 
OCC proposes to add a new Rule 1301A to (1) Define Price Differential 
Spreads,\7\ (2) require the listing exchange to include the Spread 
Engine Price and the Spread Settle Price and to identify (separately 
with respect to each counterparty to the trade, if applicable) which of 
the two prices is to be initially recorded as the contract price and 
the Price Differential Spread ID in each of the matched trade reports 
that the listing exchange sends to OCC with respect to Price 
Differential Spreads, (3) permit a Clearing Member to choose post trade 
the contract prices to be used for clearing its Price Differential 
Spread trades, and (4) highlight the rounding situation described 
above. OCC would also make a minor conforming amendment to Rule 1301.
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    \7\ OCC also proposes to add the term ``Price Differential 
Spread'' to Article I of its By-Laws as a cross reference to Rule 
1301A where the term is actually defined.
---------------------------------------------------------------------------

    In addition, OCC and ELX would enter into Amendment 1 to the 
Agreement for Clearing and Settlement Services dated December 5, 2008, 
between OCC and ELX to accommodate Price Differential Spreads. A copy 
of Amendment 1 is attached hereto as Exhibit 5.
    OCC states that the proposed changes to OCC's By-Laws and Rules are 
consistent with the purposes and requirements of Section 17A of the Act 
\8\ because they effect a change in an existing service of OCC that 
does not adversely affect the safeguarding of securities or funds in 
OCC's custody or control or for which OCC is responsible or 
significantly affect the respective rights or obligations of OCC or 
persons using its securities clearing services. The proposed rule 
change is not inconsistent with any rules of OCC including any rules 
proposed to be amended.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    OCC has not solicited or received written comments relating to the 
proposed rule change. OCC will notify the Commission of any written 
comments it receives.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(4) \10\ because it 
effects a change in an existing service of a registered clearing agency 
that does not adversely affect the safeguarding of securities or funds 
in the custody or control of the clearing agency or for which it is 
responsible and does not significantly affect the respective rights or 
obligations of the clearing agency or persons using the service. At any 
time within 60 days of the filing of the proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \9\ Supra note 2.
    \10\ Supra note 3.
---------------------------------------------------------------------------

IV. 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 (https://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-OCC-2011-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-OCC-2011-06. 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 (https://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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filings also will be available for 
inspection and copying at OCC's principal office and OCC's Web site 
(https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_11_06.pdf). 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 No. SR-OCC-
2011-06 and should be submitted on or before August 9, 2011.


[[Page 42755]]


    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-18118 Filed 7-18-11; 8:45 am]
BILLING CODE 8011-01-P

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