[Federal Register Volume 59, Number 72 (Thursday, April 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8931]


[[Page Unknown]]

[Federal Register: April 14, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33673; File No. SR-OCC-91-03]

 

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Modifying the Clearing Fund 
Assessment Formula

April 7, 1994.
    On February 12, 1991, The Options Clearing Corporation (``OCC'') 
filed a proposed rule change (File No. SR-OCC-91-03) with the 
Securities and Exchange Commission (``Commission'') pursuant to section 
19(b) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposal was published in the Federal Register on May 16, 1991, to 
solicit comments from interested persons.\2\ No comments were received. 
On March 9, 1994, OCC filed an amendment to the proposed rule 
change.\3\ As discussed below, this order approves the proposal.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78s(b) (1988).
    \2\Securities Exchange Act Release No. 29167 (May 7, 1991), 56 
FR 22744 (File No. SR-OCC-91-03).
    \3\Letter from Jean M. Cawley, OCC, to Jerry W. Carpenter, Esq. 
Chief, Branch of Clearing Agency Regulation, Division of Market 
Regulation, Commission (March 8, 1993). The amendment modified 
Article VIII, section 6 of OCC's By-Laws to clarify that in the 
event a clearing member seeks to withdraw from membership at the 
time of an additional assessment to the clearing funds and such 
clearing member's computed contribution is less than its minimum 
required contribution, the clearing member will be obligated to 
contribute 100% of the amount equal to its minimum contribution less 
its computed contribution.
---------------------------------------------------------------------------

I. Description

    The purpose of this rule change is to revise the formula by which 
OCC assesses its clearing funds for losses incurred as a result of a 
default by a clearing member and for losses resulting from the failure 
of any bank or securities or commodities clearing organization.
    OCC maintains a stock clearing fund to which OCC's stock clearing 
members are required to contribute and a non-equity securities clearing 
fund to which non-equity security clearing members are required to 
contribute. Among other things, the purpose of the clearing funds is to 
make good any losses sustained by OCC as a result of the failure of a 
clearing member to meet its obligations to OCC or the failure of a 
clearing bank or another clearing organization to settle with OCC. 
Currently in the event of a clearing member default, once the 
contributions of the defaulting clearing member are exhausted, OCC will 
charge on a pro rata basis the clearing fund contributions of non-
defaulting clearing members for any remaining losses. Similarly, in the 
event of a clearing bank or clearing organization default, the 
resulting loss is to be charged against all clearing members' 
contributions to the clearing funds on a pro rata basis.
    Unless a clearing member has been recently admitted, a clearing 
member's contribution to the clearing funds is determined pursuant to 
the formula set forth in OCC Rule 1001. A clearing member's 
contribution to the clearing funds is related to the clearing member's 
use of the options markets provided, however, that each clearing member 
must contribute at least the required minimum. Pursuant to Rule 1001, 
each stock clearing member or non-equity securities clearing member 
must contribute to the stock clearing fund or the non-equity securities 
clearing fund, respectively, the greater of: (i) Such clearing member's 
proportionate share (``computed contribution'') of five percent of its 
average daily aggregate margin requirement in respect of equity or non-
equity securities option contracts outstanding during the previous 
calendar month or (ii) the required minimum contribution amount of 
$75,000. Because this contribution formula is based on a clearing 
member's open interests and margin requirements, it provides a 
reasonable approximation of a clearing member's participation in the 
options markets and use of OCC's services. Therefore, it is highly 
probable that a clearing member who deposits the required minimum to 
the clearing funds is less active in the options markets in ways that 
give rise to potential OCC financial exposure than a clearing member 
whose clearing fund contribution is its computed contribution.
    Under the current assessment formula, non-defaulting clearing 
members are charged on a pro rata basis against their required 
contributions, whether computed or the minimum. OCC believes that it is 
more equitable to base its assessment formula on a clearing member's 
participation in the options markets and use of OCC's services rather 
than on a minimum contribution requirement. Therefore, OCC is proposing 
that charges to clearing fund contributions be made on a proportionate 
basis against non-defaulting clearing members' computed contributions.
    Accordingly, OCC is amending section 5 of Article VIII of its By-
Laws to provide that any losses remaining after use of a defaulting 
clearing member's assets or as the result of a failure of a clearing 
bank or another clearing organization will be charged on a 
proportionate basis against non-defaulting clearing members' computed 
contributions. Section 5 is further amended to add three 
Interpretations and Policies. The Interpretations and Policies set 
forth the manner by which a clearing member's proportionate share of a 
remaining loss will be determined. As a result of these rule changes, 
OCC believes that the assessment formula is based upon a clearing 
member's use of the options markets and use of OCC's services and is 
more equitable to those clearing members which use the options markets 
with less frequency.
    Conforming changes are made to sections 5(a), 5(b), 5(c), 5(d), 
5(e), and 5(h), 6, 7, and 8 of Article VIII of OCC's By-Laws and to 
Rule 1106(e). A technical amendment to Section 5(h) also is made to 
correctly identify paragraph (b), in the place of paragraph (d), as a 
paragraph pertaining to certain applications of clearing fund 
contributions. A technical amendment also is made to Section 1 of 
Article VIII to identify correctly Chapter XI in place of Chapter VI as 
the Chapter of OCC's Rules where OCC's protective transaction 
provisions may be found.

II. Discussion

    The Commission believes that the proposal is consistent with the 
purposes and requirements of section 17A of the Act.\4\ Section 
17A(b)(3)(D) of the Act requires that the rules of a clearing agency 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among participants.\5\ The proposed rule change provides 
a more equitable formula by which OCC may assess the clearing fund 
contributions of clearing members. Under the previous formula, clearing 
members depositing the minimum $75,000 clearing fund requirement were 
subject to proportionately greater assessments than clearing members 
whose clearing fund requirements were based on their computed 
contributions because the assessments were based upon a pro rata charge 
of required clearing fund contributions. By basing clearing fund 
assessments on a proportionate basis against the computed contributions 
of all clearing members, even those who have deposited the minimum 
requirement, the assessments will be linked more closely to the open 
interests and market activities of clearing members.
---------------------------------------------------------------------------

    \4\15 U.S.C. 78q-1 (1988).
    \5\15 U.S.C. 78q-1(b)(3)(D) (1988).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) requires that the rules of a clearing agency 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\6\ The proposed amendments will not affect the total size 
of the clearing funds. It is possible that as a result of the new 
assessment formula more than one round of charges to the clearing fund 
contributions of clearing members could be required to assess all of a 
clearing member's minimum contribution. However, OCC has provided in 
Article VIII, section 6 of its Bylaws that should a clearing member 
seek to withdraw from OCC membership, any portion of that clearing 
member's clearing funds that are unavailable for the first charge will 
be available to OCC in a second assessment.\7\
---------------------------------------------------------------------------

    \6\15 U.S.C. 78q-1(b)(3)(F) (1988).
    \7\Supra note 3.
---------------------------------------------------------------------------

III. Conclusion

    For the reasons stated above, the Commission finds that OCC's 
proposal is consistent with section 17A of the Act.\8\
---------------------------------------------------------------------------

    \8\15 U.S.C. 78q-1 (1988).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-OCC-91-03) be, and 
hereby is, approved.

    \9\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8931 Filed 4-13-94; 8:45 am]
BILLING CODE 8010-01-M