[Federal Register Volume 60, Number 171 (Tuesday, September 5, 1995)]
[Notices]
[Pages 46138-46139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21935]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36162; File No. SR-OCC-95-02]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Making the Stock Loan/Hedge 
Program Available to Market-Maker and Specialist Accounts Established 
and Maintained by Clearing Members

August 29, 1995.
    On January 13, 1995, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-95-02) pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposal was published in the Federal Register on April 11, 
1995.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 35567 (April 5, 1995), 60 
FR 18433.
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I. Description of the Proposal

    The primary purpose of the proposed rule change is to make OCC's 
Stock Loan/Hedge Program\3\ available to accounts established and 
maintained with OCC by clearing members for market-makers and 
specialists.\4\ Pursuant to OCC's By-Laws and Rules regarding its Stock 
Loan/Hedge Program, clearing members are permitted to carry stock loan 
and borrow positions in market-maker accounts.\5\ However, at the time 
OCC proposed its Stock Loan/Hedge Program, OCC was concerned that its 
market-maker agreements\6\ did not adequately accommodate stock loans. 
Accordingly, in the original Stock/Loan Hedge filing OCC appended an 
Interpretation to Article XXI, section 5 of its By-Laws stating that 
OCC would not permit stock loan positions and stock borrow positions to 
be maintained in a market-maker's account unless the market-maker had 
entered into an account agreement authorizing stock loan positions and 
stock borrow positions to be maintained in the account. In addition, 
OCC stated in that filing that it intended to submit revised versions 
of the various forms of market-maker agreements to the Commission in a 
separate proposed rule change in the near future.

    \3\For a description of OCC's Stock Loan/Hedge Program, refer to 
Securities Exchange Act Release No. 32638 (July 15, 1993), 58 FR 
39264 (File No. SR-OCC-92-34) (order granting permanent approval of 
the Stock Loan/Hedge Program).
    \4\Market-makers and specialists are collectively referred to in 
this order as ``market-makers,'' and accounts established and 
maintained with OCC by clearing members for market-makers, including 
separate market-maker's or specialist's accounts, combined market-
makers' or specialists' accounts, registered trader's accounts, and 
stock market-maker's or stock specialist's accounts (as described in 
Article VI, Section 3 of OCC's By-Laws) are collectively referred to 
in this order as ``market-maker accounts.''
    \5\For examples of permitted stock loan and borrow positions, 
refer to OCC By-Laws Article XXI, section 5 stating that a stock 
loan position may not be maintained in a market-maker's account 
unless the loaned stock to which the stock loan position relates is 
held for the account of the market-maker; OCC Rule 601(c) setting 
out margin requirements for market-maker accounts in which stock 
loan and borrow positions are carried; and OCC Rules 2209 and 2210 
describing the treatment of stock loan and borrow positions of a 
suspended clearing member, including stock loan and borrow positions 
carried in a market-maker's account.
    \6\The term ``market-maker agreements'' is used in this order to 
refer collectively to the three forms of agreement for market-maker 
accounts (i.e., separate market-maker's accounts, combined market-
makers' accounts, and joint accounts).
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    OCC has reviewed its current market-maker agreement forms and has 
concluded that the current forms do adequately accommodate the Stock 
Loan/Hedge Program. Section 1 of each market-maker agreement causes the 
market-maker and the clearing member to each agree that OCC has a lien 
``on all long positions, securities, margin and other funds and assets 
in the Account.'' OCC believes that stock loan and borrow positions are 
``securities, margin and other funds and assets'' and accordingly has 
concluded that this language adequately establishes its rights with 
respect to stock loan and borrow positions carried in market-maker 
accounts.
    In addition, OCC has concluded that section 3 of its market-maker 
agreements causes market-makers signing the agreement to authorize the 
clearing member to lend assets (i.e., stock) in the account and to 
authorize OCC to rely on the terms on which the assets are loaned.\7\ 
Therefore, OCC now believes that the Interpretation to Article XXI, 
section 5 of its By-Laws is unnecessary and proposes to delete the 
Interpretation.

    \7\A stock loan is not the result of an ``exchange transaction'' 
for purposes of OCC's rules because it does not arise from a 
transaction on an exchange. Therefore, OCC was concerned that the 
language of section 1 of the market-maker agreements did not 
adequately accommodate stock loans because the language is limited 
to exchange transactions of market-makers for whom an account is 
established. However, a stock borrow or loan position is established 
by a lending clearing member or borrowing clearing member and not by 
a market-maker. As defined in Article I, section 1(S)(8), the term 
``stock borrow position'' means the position of a borrowing clearing 
member with respect to a stock loan. In addition, in Article I, 
section 1(S)(11), the term ``stock loan position'' means the 
position of a lending clearing member with respect to a stock loan. 
A borrowing clearing member does not need any authorization from 
market-makers because the position is entirely the responsibility of 
the clearing member. Similarly, a stock loan position is entirely 
the responsibility of the lending clearing member. However, because 
a stock loan position in a market-maker account may arise only from 
a clearing member's lending of stock held for a market-maker for 
whom the account is carried (pursuant to Article XXI, section 5(d) 
of OCC's By-Laws), a lending clearing member does not need authority 
from a market-maker to permit the clearing member to lend the 
market-maker's stock, and OCC needs authority from the market-maker 
to rely upon the terms of the loan. As described in the text, OCC 
believes the current form of the market-maker agreements cause 
market-makers to provide this authority to both the clearing member 
and OCC.
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II. Discussion

    Section 17A(a)(1)(B) of the Act\8\ sets forth Congress' finding 
that inefficient procedures for clearance and settlement impose 
unnecessary costs on investors and persons facilitating transactions by 
and acting on behalf of investors. Under Section 17A(a)(2),\9\ Congress 
directs the Commission to use its authority to carry out the objectives 
set forth in section 17A(a)(1). As discussed below, the Commission 
believes that OCC's proposed rule change is consistent with the 
objectives established by Congress under the Act because it should 
remove inefficient procedures from the clearance and settlement system.

    \8\15 U.S.C. 78q-1(a)(1)(B) (1988).
    \9\15 U.S.C. 78q-1(a)(2) (1988).
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    Stock loan positions for which the loaned stock is held for the 
account of 

[[Page 46139]]
a customer other than a market-maker must be carried in the clearing 
member's customers' account. Stock loan positions for which the loaned 
stock is held for the account of a market-maker may be carried in the 
lending clearing member's customers' account or market-maker's account. 
Currently, stock loan and borrow positions may not be maintained in a 
market-maker's account unless the market-maker has entered into a 
market-maker's account agreement that specifically authorizes stock 
loan and borrow positions to be maintained in the account. 
Additionally, in the case of a combined market-makers' account, stock 
loan and borrow positions may not be maintained therein unless each 
market-maker that is a participant in the account has entered into an 
account agreement that specifically authorizes stock loan and borrow 
positions to be maintained in such an account. Because OCC has 
determined that its market-maker's account agreement does accommodate 
stock loans, OCC is proposing to amend its By-Laws and Rules to allow 
stock loan and borrow positions to be maintained in market-maker 
accounts without the execution of an additional agreement.
    OCC continues to employ its monitoring and risk reduction 
procedures which are subject to Commission review and approval. Under 
the Stock Loan/Hedge Program, OCC has a lien and right of set off 
against stock loan and borrow positions, and the clearing members' 
margin requirements will reflect the increase or decrease in risk to 
OCC associated with stock loan and borrow positions. Open stock loan 
positions of clearing members will continue to be taken into account in 
calculating their stock clearing fund obligations. OCC's stock clearing 
fund is available to cover losses suffered by OCC as a result of the 
failure of a clearing member to perform any of its obligation to OCC 
with respect to stock loan and borrow positions.
    OCC requires each participating clearing member to instruct OCC as 
to which accounts the stock loan and borrow positions are to be 
carried.\10\ Clearing members may maintain stock loan positions in a 
customer's account, a market-maker's account, or a firm account. An 
instruction from a clearing member to OCC designating a customer's 
account or a market-maker's account as the account in which a stock 
loan position is to be carried will constitute a representation (1) 
that the loaned securities to which the stock loan position relates are 
carried for the account of a customer and that the hypothecation of 
such loaned stock to OCC does not contravene any provision of 
Commission Rules 8c-1 and 15c2-1\11\ and (2) that the lending of the 
securities is consistent with Commission Rule 15c3-3.\12\

    \10\Clearing members may submit standing instructions stating 
the account or accounts in which all of the clearing member's stock 
loan or borrow positions are to be carried.
    \11\Rules 8c-1 and 15c2-1 (17 CFR 240.8c-1 and 240.15c2-1) 
prohibit the hypothecation and commingling of customer securities 
without first obtaining the written consent of each customer whose 
securities are to be hypothecated or commingled.
    \12\Because Rule 15c3-3 (17 CFR 240.15c3-3) requires that a 
broker-dealer maintain possession or control of all customer fully-
paid and excess margin securities, such securities can not be the 
subject of a stock loan. However, customer securities that the 
broker-dealer clearing member is permitted to lend may be the 
subject of a stock loan conducted through the Stock Loan/Hedge 
Program.
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    Because OCC has assured itself that its market-maker agreements are 
adequate to accommodate the entry of market-makers into the Stock Loan/
Hedge Program, the Commission believes that the removal of OCC's 
interpretation to its By-Laws that requires a market-maker to execute a 
separate agreement in order to participate in the Stock Loan/Hedge 
Program will expedite the process of a market-maker's entry into the 
program. Thus, the Commission believes that the rule change is 
consistent with Congress' objective under section 17A(a) (1) (B) of the 
Act\13\ because it removes inefficient procedures for clearance and 
settlement thereby eliminating unnecessary costs on investors and 
persons facilitating transactions by and acting on behalf of investors. 
Additionally, the Commission believes OCC's proposal is consistent with 
section 17A(a) (2) (A) of the Act\14\ because the Stock Loan/Hedge 
Program extends the availability of intermarket clearing facilities by 
further linking and coordinating the clearance and settlement of 
securities and securities options.

    \13\15 U.S.C. 78q-1(a) (1) (B) (1988).
    \14\15 U.S.C. 78q-1(a) (2) (B) (1988).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of section 17A(b) (3) (F) 
of the Act and the rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b) (2) of the Act, 
that the proposed rule change (File No. SR-OCC-95-02) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\17 CFR 200.30-3(a) (12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21935 Filed 9-1-95; 8:45 am]
BILLING CODE 8010-01-M