[Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2723]


[[Page Unknown]]

[Federal Register: February 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33543; File Nos. SR-OCC-92-05; SR-NSCC-91-07; SR-SCCP-
92-01; and SR-MCC-92-02]

 

Self-Regulatory Organization; The Options Clearing Corporation, 
et al.; Order Approving Proposed Rule Changes Relating to Revised 
Options Exercise Settlement Agreements

January 28, 1994.
    On January 27, 1992, October 21, 1991, February 27, 1992, and March 
5, 1992, The Options Clearing Corporation (``OCC''), the National 
Securities Clearing Corporation (``NSCC''), the Stock Clearing 
Corporation of Philadelphia (``SCCP'') and the Midwest Clearing 
Corporation (``MCC''), respectively, filed proposed rule changes1 
with the Securities and Exchange Commission (``Commission'') under 
section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').2 The self-regulatory organizations filed several 
amendments to the original filings.3 The proposed rule changes and 
amendments implement revised options exercise settlement agreements 
among OCC, NSCC, SCCP, and MCC (hereinafter referred to as the 
``correspondent clearing corporations'' or ``CCCs''). The Commission 
published notice of these proposed rule changes in the Federal Register 
on October 14, 1993.\4\ No comments have been received. For the reasons 
discussed below, the Commission is approving the proposed rule changes.
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    \1\File Nos. SR-OCC-92-05, SR-NSCC-91-07, SR-SCCP-92-01, and SR-
MCC-92-02.
    \2\15 U.S.C. 78s(b)(1).
    \3\OCC filed Amendment No. 1 to File No. SR-OCC-92-05 on 
February 27, 1992, and Amendment No. 2 on June 4, 1993. SCCP filed 
Amendment No. 1 to File No. SR-SCCP-92-01 on May 26, 1992, and 
Amendment No. 2 on July 1, 1993. MCC filed Amendment No. 1 to File 
No. SR-MCC-92-02 on January 7, 1993, and Amendment No. 2 on July 6, 
1993. NSCC filed Amendment No. 1 to File No. SR-NSCC-91-07 on May 
19, 1993.
    \4\The Commission first published notice in Securities Exchange 
Act Release Nos. 30488 (March 17, 1992), 57 FR 10201 [File No. SR-
OCC-92-05]; 30489 (March 17, 1992), 57 FR 10197 [File No. SR-NSCC-
91-07]; 30490 (March 17, 1992), 57 FR 10205 [File No. SR-SCCP-92-
01]; and 30491 (March 17, 1992) 57 FR 10197 [File No. SR-MCC-92-02].
     The Commission republished notice of the amended proposed rule 
changes in Securities Exchange Act Release No. 33011 (October 4, 
1993), 58 FR 53231.
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I. Description

    The proposed rule changes will permit the correspondent clearing 
corporations to put into effect amended and restated agreements 
providing for the settlement of exercises and assignments of equity 
options. In addition, OCC's proposed rule change makes related changes 
to OCC's By-Laws, Rules, and certain form agreements used by OCC's 
clearing members.
    In the original filings, OCC, NSCC, SCCP, and MCC proposed to make 
effective Amended and Restated Options Exercise Settlement Agreements 
(hereinafter collectively referred to as the ``First Restated 
Agreements''). OCC, NSCC, SCCP, and MCC have amended the First Restated 
Agreements (hereinafter collectively referred to as the ``Second 
Restated Agreements'') and will make the three Second Restated 
Agreements, which are the subjects of this approval order, effective in 
place of the three First Restated Agreements.5 The Second Restated 
Agreements replace the options exercise settlement agreements that were 
previously in effect between OCC and each CCC (hereinafter collectively 
referred to as the ``Original Agreements''). The MCC and SCCP Second 
Restated Agreements are substantially identical in form. The NSCC 
Second Restated Agreement is substantially in the same form with 
variations reflecting that NSCC will provide OCC with a daily report 
identifying all securities which are eligible for settlement through 
NSCC's continuous net settlement (``CNS'') system.
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    \5\Each Second Restated Agreement provides that it will become 
effective on the later of the effective date set forth in the Second 
Restated Agreement or the date of approval by the Commission of both 
parties' proposed rule changes that include the Second Restated 
Agreement as an Exhibit. The date of the Commission approval will be 
the effective date for all three Second Restated Agreements. Each 
Second Restated Agreement provides that it shall become effective in 
lieu of the respective First Restated Agreement.
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A. The Original Agreements and the Changes Made by the Second Restated 
Agreements

(1) Operation and Continuing Use of Broker-to-Broker Settlement 
Procedures
    Prior to implementing the Original Agreements, exercises of equity 
options were settled broker-to-broker. In broker-to-broker settlement, 
upon receipt of an equity option exercise notice, OCC would issue a 
delivery advice to the delivering clearing member (i.e., the assigned 
clearing member in the case of a call or the exercising clearing member 
in the case of a put) and to the receiving clearing member (i.e., the 
exercising clearing member in the case of a call or the assigned 
clearing member in the case of a put). The delivery advice would 
instruct the delivering clearing member to make delivery of the 
security underlying the exercised option directly to the receiving 
clearing member and would specify the address at which delivery was to 
be made and the exercise settlement amount to be paid. OCC continues to 
have rules governing broker-to-broker settlement.6 However, 
broker-to-broker settlement has been largely replaced by settlement 
through the facilities of the CCCs. The Second Restated Agreements 
provide that OCC will use broker-to-broker settlement only for 
exercises and assignments of equity options overlying securities which 
are not eligible for settlement in NSCC's continuous net settlement 
system (``CNS Securities'').7
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    \6\OCC Rules 901-912.
    \7\CNS Securities are defined only in the terms of NSCC's CNS 
System and not in terms of the securities that are eligible for each 
individual CCC's continuous net settlement system. The definition is 
new in the Second Restated Agreements as is the exclusion of non-CNS 
Securities. Both of these changes are made necessary by changes to 
OCC's margin system, which changes were designed to improve the 
margin system's ability to evaluate and neutralize OCC's risk during 
the five business day period between the exercise and settlement of 
an equity option. Because all securities underlying equity options 
issued by OCC are ordinarily CNS Securities, all exercise 
settlements will continue to be settled through the CCCs. However, 
in unusual circumstances in which an underlying security ceases to 
be a CNS Security or in which the owners of an underlying security 
become entitled to an additional security as a result of a rights 
offering or other extraordinary transaction and that additional 
security is not a CNS Security, exercise settlement may be effected 
entirely or partly through OCC's broker-to-broker settlement system.
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(2) Operation of the Original Options Exercise Settlement Agreements
    After OCC entered into the Original Agreements with the CCCs, OCC 
began to settle the great majority of equity option exercises through 
the facilities of the CCCs.\8\ Each clearing member was required to 
designate a CCC as its designated clearing corporation (``DCC'') for 
purposes of effecting settlements of exercises of equity options. 
Rather than delivering an underlying security broker-to-broker, in the 
revised system a delivering clearing member delivers the security to 
and receives payment of the exercise settlement amount from its DCC. A 
receiving clearing member makes payment to and receives the security 
from its DCC. If the delivering clearing member and the receiving 
clearing member have designated the same CCC as their DCCs, all 
deliveries and receipts of securities and all payments and receipts of 
settlement monies will take place at that DCC in accordance with its 
settlement procedures. If the delivering clearing member and receiving 
clearing member have designated different CCCs as their respective 
DCCs, the DCC for the delivering clearing member delivers the security 
to and receives payment from the DCC for the receiving clearing member 
in accordance with the interface arrangements between the two DCCs.
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    \8\OCC first executed Options Exercise Settlement Agreements 
with each of Stock Clearing Corporation (NSCC 's predecessor), SCCP, 
and MCC in 1976.
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    The Original Agreements provide for a five-day settlement period 
for settlement of exercises of equity options. The date of the exercise 
and the settlement period are analogous to the trade date (``T'') and 
settlement period for ordinary, regular-way stock trades. OCC reports 
the exercises and assignments of clearing members to their respective 
DCCs during the night of T. The DCCs effect settlement on the fifth 
business day after T (``T+5'').\9\
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    \9\Consistent with the recently approved Commission Rule 15c6-1 
under the Act that, effective June 1, 1995, will shorten from five 
business days to three business days the standard settlement time 
frame for most broker-dealer trades, the settlement period for 
settlement of exercises of equity options will be shortened to three 
business days. If the parties to the Second Restated Agreement 
determine that the agreement needs to be amended to accommodate a 
three business day settlement cycle of equity option exercises, the 
CCCs and OCC will file the necessary proposed rule changes with the 
Commission. Telephone conversation between James C. Yong, Deputy 
General Counsel, OCC, and Jerry W. Carpenter, Branch Chief, and 
Peter R. Geraghty, Attorney, Division of Market Regulation 
(``Division''), Commission (December 29, 1993). For a detailed 
description and discussion of Rule 15c6-1, refer to Securities and 
Exchange Commission Release Nos. 33-7022; 34-33023; IC-19768; 
(October 13, 1993), 58 FR 52891 [File No. S7-5-93] (order adopting 
Rule 15c6-1).
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B. Changes Made by the Second Restated Agreements

    The Second Restated Agreements alter and supplement the provisions 
of the Original Agreements in several ways. The most important 
modifications are set forth below.
(1) Timing of the Effectiveness of the Guarantees of the Correspondent 
Clearing Corporations
    Section 4 of each Original Agreement provides that if the CCC does 
not notify OCC prior to 12 Noon Central Time (1 p.m. Eastern Time) on 
T+4 that the CCC has ceased to act for an OCC clearing member which had 
designated the CCC as its DCC, the CCC is unconditionally obligated as 
of that time to complete the settlement of the exercise. These 
provisions were in accordance with the provisions of the rules of the 
CCCs as in effect in 1976. However, each CCC has subsequently amended 
its rules to provide that the CCC will be unconditionally obligated to 
complete settlement of any ``locked-in'' trade\10\ in any security 
eligible for settlement through the CCC's continuous net settlement 
system. The CCC's guarantees commence at midnight, or in the case of 
MCC at 11:59 p.m., of the day the trade is reported to the CCC's 
participants, which is usually T+1.
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    \10\Locked-in trades are trades executed through automated order 
routing and trade execution systems. Each of the Second Restated 
Agreements provides that exercises and assignments of options 
reported by OCC to the CCC will be deemed to be locked-in trades.
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    Section 4(a) of each Second Restated Agreement provides that the 
CCC will become unconditionally obligated to effect settlement or to 
close out each exercise and assignment of equity options overlying CNS 
Securities commencing at the time specified by the CCC 's rules 
applicable to locked-in trades in securities eligible for settlement 
through the CCC's continuous net settlement system. This revised 
provision has the effect of causing options exercises and assignments 
reported by OCC to the CCCs during the night of T to become guaranteed 
as of the time at which the CCCs generally become obligated to effect 
settlement (i.e., usually midnight at the end of T+1.\11\ OCC Rule 913 
is amended to state expressly that OCC's direct guarantee to the 
clearing member acting on behalf of the holder of the option terminates 
at the time that the clearing member's DCC becomes unconditionally 
obligated to effect settlement of the transaction.\12\
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    \11\The trade guarantee rules of the CCCs described in the text 
have been approved by the Commission on a temporary basis. 
Securities Exchange Act Release No. 32547 (June 29, 1993), 58 FR 
26491 [File Nos. SR-NSCC-93-04, SR-SCCP-93-02, and SR-MCC-93-02] 
(order granting approval until June 30, 1994). If the Commission 
should in the future decline to approve these rules, OCC and the 
CCCs will need to review the question of the point in time at which 
the CCCs guarantee options exercise settlements, and OCC will need 
to review its procedures for settling stock option exercises and, in 
particular, make adjustments to its margin system.
    \12\Section 4(a) of each First Restated Agreement permitted the 
CCC to eliminate an exercise transaction from its system in 
accordance with its rules even after its guarantee had attached to 
the transaction. Although this could have occurred only in the 
extremely unlikely event that a security were to cease to be 
eligible for settlement through the continuous net settlement system 
of the CCC during the time remaining until actual settlement of the 
transaction, OCC has concluded that it cannot efficiently develop a 
margin system that reflects and neutralizes OCC's risk exposure if a 
CCC's guarantee can be revoked after attaching to an exercise 
transaction. Accordingly, each Second Restated Agreement provides 
that the CCC will not eliminate any exercise transaction of options 
overlying CNS Securities from its system after its guarantee 
attaches.
    Section 4(b) of each First Restated Agreement provided that in 
the event of a default by an entity for which it is the DCC, the CCC 
voluntarily could determine to complete settlement of transactions 
with respect to which it had not yet become obligated at the time of 
the default. OCC has concluded that it cannot efficiently develop a 
margin system that reflects and neutralizes OCC's risk exposure if 
the CCCs have the right to make this voluntary determination. 
Accordingly, each Second Restated Agreement expressly provides that 
the CCC will not effect settlement of transactions which have been 
reported to it but to which it has not yet become obligated at the 
time of the default.
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(2) Guarantee by OCC to Each Correspondent Clearing Corporation
    Each Second Restated Agreement provides that OCC will compensate 
the CCC for losses incurred by it in closing out the exercises and 
assignments of a defaulting participating member.\13\ The amount of the 
compensation will be the smallest of the ``net options loss,'' the 
``net overall loss,'' or the ``maximum guarantee amount.'' The net 
options loss is essentially the actual net loss incurred by the CCC in 
closing out exercises and assignments of options to which the CCC is 
unconditionally obligated at the time of the default. The net overall 
loss is essentially the actual net loss incurred by the CCC in closing 
out all transactions of the defaulting participating member to which 
the CCC is unconditionally obligated at the time of the default. The 
maximum guarantee amount is essentially the sum of the mark-to-market 
amounts,\14\ positive and negative, for all options exercises and 
assignments to which the CCC is unconditionally obligated at the time 
of the default.\15\
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    \13\The term participating member is defined in the Second 
Restated Agreement as an entity that is an OCC clearing member and 
also is a participant in a CCC or is an entity that is a party to 
any of the three alternative arrangements for effecting settlement 
through a CCC (i.e., the appointing, Canadian, or nominating 
clearing arrangements). The alternative arrangements are discussed 
later in this order.
    \14\The term mark-to-market amount is defined to mean the 
difference between the exercise price of an option and the closing 
price of the underlying stock on the trading day immediately 
preceding the then most recently completed regular morning 
settlement of the participating member with OCC.
    For example, if a participating member defaults prior to the 
opening of business on T+4 and if the participating member has not 
made regular morning settlement with OCC on T+4 but had made regular 
morning settlement with OCC on T+3, the mark-to-market amount for 
the stock underlying the option will be determined as of the close 
of trading on T+2.
    \15\The effect of the maximum guarantee amount is to cap OCC's 
exposure at an amount that should be covered by the margin deposits 
collected by OCC and that should at least be equal to the net of the 
in-the-money amounts for all exercises and assignments being settled 
through a CCC as of the close of trading on the day or days on which 
the exercises were effected.
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    OCC's guarantee in each Second Restated Agreement does not cover 
the exposure of the CCC to losses from exercise and assignment 
settlements that can result if a participating member transfers 
settlements from its account at the CCC to the account of any other 
member of the CCC, including another participating member or another 
member that is an affiliate of the participating member, and the 
transferee member defaults on its obligations to the CCC with respect 
to those settlements. This occurs for several reasons. First, OCC will 
not be a party to the transfer and accordingly will not have the 
ability to review the impact of the transfer on the financial condition 
of the transfree member. Second, the three prongs of the computation of 
OCC's guarantee obligation are all premised on the assumption that the 
negative values arising from short positions of a participating member 
may be offset against the positive values arising from the long 
positions of the participating member. This assumption may not hold 
true if, for example, a participating member transfers its short 
positions but not its offsetting long positions to the account of 
another member and that member fails to make settlement.
(3) Permissible Arrangements for Effecting Settlement through a 
Correspondent Clearing Corporation
    Each Original Agreement contemplated that settlements of exercises 
and assignments would be effected by entities that are OCC clearing 
members and also are participants in a CCC. Each Second Restated 
Agreement retains the basic settlement concept contemplated in the 
Original Agreement and also contains expanded provisions addressing the 
alternative settlement arrangement, which are described later in this 
order.
    (i) Revised agreements for appointing clearing members and 
appointed clearing members. Each Second Restated Agreement contains 
provisions addressing the alternative settlement arrangement that is 
currently described in OCC's Rules in which an OCC clearing member 
appoints another OCC clearing member to effect settlement on its behalf 
at the appointed clearing member's DCC. In connection with implementing 
the Second Restated Agreements, OCC is revising the form of agreement 
that OCC requires from each OCC clearing member that appoints another 
OCC clearing member that is also a participant in a CCC to act for it 
for purposes of settling exercises and assignments of equity options. 
The most important purpose of the revisions is to cause the appointing 
clearing member to acknowledge that its obligations to OCC with respect 
to settlements of exercises and assignments are not satisfied until its 
appointed clearing member has satisfied its obligations to the DCC 
arising from the exercises and assignments and, accordingly, that the 
uses that OCC may make of the appointing clearing member's margin 
deposits and other assets include satisfying any obligation to the DCC 
incurred by OCC as a result of the DCC's settlement of the appointing 
clearing member's exercises and assignments.
    (ii) New agreement for Canadian clearing members that settle 
through CDS. The Original Agreement between OCC and NSCC was amended in 
1987 to include Canadian clearing members.\16\ In connection with 
implementing the Second Restated Agreements, OCC will require each 
Canadian clearing member that settles through the Canadian Depository 
for Securities (``CDS'') to execute a new agreement. The primary 
purpose of the new agreement is to cause each such Canadian clearing 
member to acknowledge expressly that the obligations of the Canadian 
clearing member to OCC with respect to settlement of exercises and 
assignments are not satisfied until CDS has satisfied its obligations 
to the DCC of the Canadian clearing member arising from the exercises 
and assignments and, accordingly, that the uses that OCC may make of 
the Canadian clearing member's margin deposits and other assets include 
satisfying any obligation to the DCC incurred by OCC as a result of the 
DCC's settlement of the Canadian clearing member's exercises and 
assignments through CDS. The agreement also causes the Canadian 
clearing member to acknowledge that it will be deemed not to have 
designated a DCC for purposes of OCC's rules if CDS at any time should 
cease to be a participant in good standing of a CCC. The new agreement 
is designed to make the Canadian clearing member alternative settlement 
arrangement and related agreement as parallel as possible in form and 
in content to the appointing clearing member and the nominating 
clearing member alternative settlement arrangements and their related 
agreements.\17\
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    \16\Canadian clearing members are OCC clearing members that are 
organized in Canada and that settle exercises and assignments of 
equity options through the facilities of the Canadian Depository for 
Securities (``CDS'').
    \17\Currently, NSCC is the only CCC of which CDS is a 
participant. Accordingly, Canadian clearing members that wish to 
settle through CDS will be required to select NSCC as their DCC. 
However, provisions relating to Canadian clearing members that 
settle through CDS also are included in the MCC and the SCCP Second 
Restated Agreements in order to preserve the similarity of the three 
Second Restated Agreements as far as possible and in order to 
accommodate the possibility that MCC or SCCP may enter into a 
relationship with CDS at some time in the future.
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    (iii) New agreement for nominating clearing members and nominated 
correspondents. Each Second Restated Agreement contains provisions 
addressing a new alternative settlement arrangement under which an OCC 
clearing member nominates an entity that is not an OCC clearing member 
but that is a participant in a CCC to effect settlement on its behalf. 
The need to accommodate the nominating clearing member alternative 
settlement arrangement came to OCC's attention as a result of a review 
of the records of OCC and NSCC relating to settlements of options 
exercises and assignments. In the course of that review, it was 
determined that NSCC's procedures will permit an NSCC participant that 
is not an OCC clearing member but that is affiliated with two OCC 
clearing members, neither of which is an NSCC participant, to effect 
settlement of options exercises and assignments on behalf of the two 
OCC clearing members. After considering such an arrangement, OCC has 
determined that it does not create any unusual risk for OCC or for the 
system for settling options exercises and assignments. OCC also has 
determined that such an arrangement will not involve any additional 
risk to OCC or to the system even if the entities involved are not 
affiliated. Accordingly, OCC has concluded that such arrangements 
should be expressly described in and permitted by its By-Laws and 
Rules.
    The new agreement to be used for this settlement alternative 
requires the nominating clearing member (i.e., an OCC clearing member) 
to not only appoint its nominated correspondent (i.e., a participant in 
a CCC that is not an OCC clearing member) but also to designate the CCC 
through which its settlements are to be made.\18\ The nominating 
clearing member does not have to be a participant of the CCC which it 
designates as its DCC but the nominated correspondent must be a 
participant in good standing of the CCC designated as the DCC. The new 
agreement also requires that the DCC of the nominating clearing member 
acknowledge the appointment of the nominated correspondent. This 
additional acknowledgement is appropriate because OCC will report 
exercises and assignments of each nominating clearing member to the DCC 
using the OCC clearing member number of the nominating clearing 
member.\19\ Therefore, OCC needs to be assured by the DCC that the DCC 
is aware of the appointment of the nominated correspondent and is 
prepared to recognize that settlements reported to it under the OCC 
clearing member number of the nominating clearing member are to be 
processed for the account of the nominated correspondent. In addition, 
the nominating clearing member is deemed to be the delivering or 
receiving clearing member, as the case may be, for purposes of OCC Rule 
913, and accordingly, it is the recipient of delivery advices made 
available by OCC.\20\
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    \18\In contrast, an appointing clearing member is not required 
to designate a DCC because settlement is effected through the DCC of 
the appointed clearing member.
    \19\In contrast, OCC reports exercises and assignments of each 
appointing clearing member to the DCC of the appointed clearing 
member using the OCC clearing member number of the appointed 
clearing member.
    \20\In contrast, OCC Rule 913(f) provides that the appointed 
clearing member is deemed to be the delivering or receiving clearing 
member, as the case may be, and accordingly, the appointed clearing 
member is the recipient of delivery advices made available by OCC.
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    In the nominated correspondent settlement arrangement, OCC will 
collect margin throughout the settlement period from the nominating 
clearing member. In the event that a nominated correspondent were to 
default on its obligations to the DCC, OCC will use the margin deposits 
and other assets of the nominating clearing member to satisfy any 
resulting obligation to the DCC incurred by OCC in accordance with the 
applicable Second Restated Agreement.
(4) OCC By-Laws and Rule Amendments
    In connection with implementing the Second Restated Agreements, OCC 
is making various changes, many of which are technical in nature, to 
its By-Laws and Rules.\21\ NSCC, MCC, and SCCP have determined that no 
changes to their By-Laws and Rules are required to implement the Second 
Restated Agreements.
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    \21\For a detailed description of the proposed rule changes to 
OCC's By-Laws and Rules, refer to Securities Exchange Act Release 
No. 33011, supra note 4.
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II. Discussion

    Settlement of equity option assignments and exercises through the 
facilities of the CCCs expose the CCCs to additional elements of risk. 
If a participating member that was assigned an option exercise defaults 
and the CCC's guarantee has attached, the CCC likely will have to 
liquidate the failed participating member's position at a price that is 
less favorable than the current market price for the underlying 
security.\22\ In addition, the earlier guarantee of settlement of 
exercises and assignments of equity options by the CCCs (i.e., from T+4 
to T+1) may pose increased risk to the CCCs.
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    \22\Assignments and exercises of equity options are valued at 
the option strike price and not at the market price of the 
underlying security. For example, if a participating member was 
assigned an equity call option with a strike price of fifty dollars 
and subsequent to the attachment of the CCC's guarantee the 
participating member failed, the CCC would be obligated to deliver 
securities whose current market price probably would be more than 
fifty dollars per share. Conversely, if the failed participating 
member was assigned on an equity put option, the CCC would be 
obligated, after its guarantee attached, to purchase the shares at 
the strike price, which must likely would be above the current 
market price.
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    To limit the CCC's exposure to such risk, the Second Restated 
Agreements provide that OCC will compensate the CCCs for losses 
incurred by them in closing out the exercises and assignments of a 
defaulting participating member.\23\ OCC has taken steps to ensure that 
it is protected from loss and to ensure that it will have adequate 
resources in the event it must compensate a CCC for losses. Among other 
measures, OCC will continue to collect margin throughout the settlement 
period. OCC is making amendments to its By-Laws and Rules so that it 
has the authority to use the margin of a defaulting participating 
member to compensate a CCC and the authority to hold a clearing 
member's margin deposits for an extra day if OCC receives notice from 
the clearing member's DCC that the clearing member or its appointed 
clearing member, its nominated correspondent, or CDS, in the case of a 
Canadian clearing member, had not performed an obligation to the 
DCC.\24\ OCC's Rules regarding margin requirements also are being 
amended to ensure that OCC does not give any margin credit which arises 
from positions which will be controlled by a CCC and which OCC might 
not be able to recover in the event that it suspends a clearing 
member.\25\
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    \23\Because OCC has agreed to compensate the CCCs for losses 
incurred in closing out the exercises and assignments of a 
defaulting participating member, NSCC will no longer factor the 
exercise and assignment positions into the market risk component of 
its clearing fund calculation. Telephone conversation between Karen 
Saperstein, Associate General Counsel, NSCC, and Jerry W. Carpenter, 
Branch Chief, and Peter R. Geraghty, Attorney, Division, Commission 
(December 20, 1993).
    \24\OCC Rules, Chapter VI, Rule 601(e)(2).
    \25\OCC Rule 601(c)(2).
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    OCC's By-Laws and Rules also are being amended to provide that OCC 
may apply the clearing fund deposit of a failed clearing member to 
satisfy any obligation incurred by OCC to a CCC as a result of OCC's 
guarantee.\26\ In addition, OCC rules make it clear that a clearing 
member has a continuing obligation to reimburse OCC for any guarantee 
payments made to a CCC and that OCC may satisfy this obligation out of 
the clearing member's assets that are subject to OCC's lien.\27\ OCC 
also has the authority to use the funds of a suspended clearing member 
that are subject to OCC's control to satisfy the suspended clearing 
member's obligation to OCC as a result of a guarantee payment to a 
CCC.\28\
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    \26\OCC By-Laws, Art. VIII, Secs. 1(a) and 5(a).
    \27\OCC Rule 913(j).
    \28\OCC Rule 1107.
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    Sections 17A(b)(3) (A) and (F)\29\ under the Act require that each 
registered clearing agency be organized and its rules 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 the proposed rule changes and 
the steps being taken by OCC and the CCCs to implement them, as 
described above, are consistent with these sections and will better 
enable OCC and the CCCs to fulfill their safeguarding obligations under 
the Act.
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    \29\15 U.S.C. 78q-1(b)(3) (A) and (F).
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    In Section 17A(a)(2)(A) of the Act, Congress directed the 
Commission to use its authority under the Act to facilitate the 
establishment of a national system for the prompt and accurate 
clearance and settlement of securities transactions and to facilitate 
the establishment of linked or coordinated facilities for the clearance 
and settlement of transactions in securities and securities 
options.\30\ The Commission believes that the proposed rule changes 
implementing the Second Restated Agreements are consistent with these 
directives. The proposed rule changes and the Second Restated 
Agreements provide for the efficient settlement of equity options 
exercises through the facilities of the equity clearing corporations, 
without increasing the risks to those clearing corporations or OCC. 
Coordination of this settlement activity will enable clearing members 
to avoid the duplicative margining of equity options exercises that 
occurs today. In addition, the rule changes and the Second Restated 
Agreements provide for several alternative settlement arrangements 
(i.e., the appointing, Canadian, and nominating clearing arrangements) 
for effecting settlement through the CCCs for firms that are not joint 
members of OCC and either NSCC, MCC, or SCCP. These alternative 
settlement arrangements will allow more firms to take advantage of the 
uniform and efficient procedures provided for by the settlement of 
options through the automated clearance and settlement facilities of 
the CCCs instead of through broker-to-broker settlement procedures. 
Participants also will continue to receive the benefit of a guarantee 
of settlement on T+1 which will reduce the risk of a contraparty 
default and will provide early assurance of settlement.
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    \30\15 U.S.C. 78q-1(a)(2)(A) (i) and (ii).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the Act and in particular 
with Section 17A thereunder.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule changes (File Nos. SR-OCC-92-05; SR-NSCC-91-07; 
SR-SCCP-92-01; and SR-MCC-92-02) be, and hereby are, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\31\
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    \31\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2723 Filed 2-4-94; 8:45 am]
BILLING CODE 8010-01-M