[Federal Register Volume 61, Number 30 (Tuesday, February 13, 1996)]
[Notices]
[Pages 5594-5596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3131]



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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36819; File No. SR-OCC-95-12]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Amending the Agreements Governing 
Non-Proprietary Cross-Margining Accounts of Market Professionals in 
Cross-Margining Programs

February 7, 1996.
    On August 15, 1995, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-95-12) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
September 12, 1995, and on October 11, 1995, OCC filed amendments to 
the proposed rule change to include, in addition to proposed changes to 
the agreements governing non-proprietary cross-margining (``XM'') 
accounts in the XM program among OCC, The Intermarket Clearing 
Corporation (``ICC''), and the Chicago Mercantile Exchange (``CME''), 
proposed changes to the agreements governing non-proprietary XM 
accounts in the XM program between OCC and ICC and in the XM program 
between OCC and the Kansas City Board of Trade Clearing Corporation 
(``KCC''), respectively.\2\ On January 11, 1996, OCC filed an amendment 
to the proposed rule change to correct minor typographical errors in 
two of the agreements that are the subject of the proposed rule 
change.\3\ Notice of the proposal was published in the Federal Register 
on December 11, 1995.\4\ No comment letters were received. For the 
reasons discussed below, the Commission is granting approval of the 
proposed rule change.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Letters from Jean M. Cawley, OCC, to Jerry W. Carpenter, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission (September 11, 1995, and October 10, 1995).
    \3\ Letter from Jean M. Cawley, OCC, to Jerry W. Carpenter, 
Assistant Director, Division, Commission (January 8, 1996).
    \4\ Securities Exchange Act Release No. 36551, (December 4, 
1995), 60 FR 63558.
---------------------------------------------------------------------------

I. Description of the Proposal

    OCC is amending the agreements governing non-proprietary XM 
accounts of market professionals in the OCC/ICC/CME XM program, in the 
OCC/ICC XM program, and in the OCC/KCC XM program in order to make the 
agreements correspond with the revised distributional scheme adopted by 
the Commodity Futures Trading Commission (``CFTC'') in the new appendix 
to the CFTC's bankruptcy rules.\5\ The proposed rule change also 
conforms the terms of the agreements governing the proprietary and non-
proprietary XM accounts in the OCC/KCC XM program with the terms of the 
agreements used in the OCC/ICC/CME XM program and in the OCC/ICC XM 
program.

    \5\ The CFTC's distributional requirements are set forth in 
Appendix B to Part 190 of the CFTC's General Regulations. 17 CFR 
190. The CFTC's distributional framework was adopted in April 1994. 
59 FR 17468 (April 13, 1994).
---------------------------------------------------------------------------

    The Commission and the CFTC approved non-proprietary cross-
margining in November 1991.\6\ As part 

[[Page 5595]]
of the CFTC's approval, it required each futures commission merchant 
(``FCM'') participating in cross-margining to agree that all funds and 
property in a non-proprietary XM account would be treated as customer 
property subject to the segregation requirements of the Commodity 
Exchange Act \7\ and to agree to segregate such funds and property from 
that of non-XM customers. The CFTC also required each market 
professional to subordinate its XM related claims to customer claims 
based on non-XM positions.

    \6\ Securities Exchange Act Release Nos. 29991 (November 26, 
1991), 56 FR 61458 (order approving OCC/CME non-proprietary XM 
program); 56 FR 61404 (CFTC 1991) (order approving OCC/CME non-
proprietary XM program); 30041 (December 5, 1991) 56 FR 64824 [File 
Nos. SR-OCC-90-04 and SR-ICC-90-03] (order approving OCC/ICC non-
proprietary, market professional cross-margin program); and 56 FR 
61406 (CFTC 1991) (order approving OCC/ICC non-proprietary cross-
margin program. In August 1993, the Commission approved expansion of 
the OCC/KCC XM program established in February of 1992 to include 
non-proprietary positions. Securities Exchange Act Release No. 32708 
(August 2, 1993), 58 FR 42586 [File No. SR-OCC-93-13] (order 
approving OCC/KCC non-proprietary XM program).
    \7\ 7 U.S.C. Sec. 6d(2) (1988) and 17 CFR 1.20 (1991).
---------------------------------------------------------------------------

    Pursuant to that subordination requirement, if a clearing member 
became insolvent, all non-XM customers of the FCM would be paid their 
pro rate share of the combined segregated funds pool, including funds 
of XM market professionals, before the XM market professionals received 
any portion of their claims. The subordination was intended to insulate 
non-XM customers from losses arising from XM accounts and to ensure 
that the XM accounts of market professionals would not be treated as 
accounts of securities customers subject to liquidation under the 
Securities Investor Protection Act of 1970 (``SIAP'') \8\ or the stock 
broker liquidation provisions of the Bankruptcy Code.\9\ As a result, 
the accounts would be liquidated as accounts of commodity customers 
under the commodity broker liquidation provisions of the Bankruptcy 
Code \10\ and the CFTC's bankruptcy rules,\11\ and both the 
Commission's order and the CFTC's order approving non-proprietary XM 
provide for such result.

    \8\ 15 U.S.C. Secs. 78aaa-78lll (1988).
    \9\ 11 U.S.C. Secs. 741-752 (1988).
    \10\ 11 U.S.C. Secs. 761-766 (1988).
    \11\ 17 CFR 190.1-190.10.
---------------------------------------------------------------------------

    The revised distribution rules adopted by the CFTC continue the 
concept of subordination for the purpose of ensuring that the market 
professionals' securities included in a XM account will be subject to 
commodity broker liquidation rules but modify the method for property 
distribution in the event of the liquidation of the firm(s) carrying 
the non-proprietary XM account.\12\ Under the revised distributional 
scheme, FCMs will continue to make separate calculations for non-XM 
customers and XM market professionals, and funds deposited pursuant to 
those calculations will continue to be separately maintained. However, 
in the event of the failure of the firm(s) carrying the non-proprietary 
XM accounts, the respective shortfalls, if any, of the pools of funds 
would be determined as a percentage of the segregation requirement for 
each pool.

    \12\ Supra note 5.
---------------------------------------------------------------------------

    In the event of (i) No shortfall in either pool, (ii) an equal 
percentage of shortfall in both pools, (iii) a shortfall in the non-XM 
pool only, or (iv) a greater percentage of shortfall in the non-XM pool 
than in the XM pool, then the two pools of segregated funds would be 
combined and non-XM customers and XM market professionals would share 
pro rata in the combined pool. In the event of (i) A shortfall in the 
XM pool only or (ii) a greater percentage shortfall in the XM pool than 
in the non-XM pool, then the two pools of segregated funds would not be 
combined. Instead, XM market professionals would share pro rata in the 
pool of XM segregated funds while non-XM customers would share pro rata 
in the pool of non-XM segregated funds.
    In order to implement the CFTC's new distributional requirements, 
the clearing organizations operating non-proprietary XM programs must 
submit amended agreements to the respective regulatory authorities 
deleting the subordination requirement and substituting a reference to 
the CFTC's distribution rules. Accordingly, OCC is making those and 
other conforming changes \13\ to the agreements governing non-
proprietary XM accounts for the XM program among OCC, CME, and ICC, the 
XM program between OCC and ICC, and the XM program between OCC and KCC.

    \13\ The conforming changes include provisions that ensure that 
non-broker-dealer XM market professional will not be treated as 
``customers'' for purposes of Rule 15c3-3 under the Act pursuant to 
the conditions set forth in the Commission's no-action letter from 
Michael Macchiaroli, Associate Director, Division of Market 
Regulation, Commission, to Jean Cawley, OCC (July 31, 1995).
---------------------------------------------------------------------------

    In addition, pursuant to the amendment filed on October 11, 1995, 
OCC is revising the agreements governing the proprietary XM accounts in 
the OCC/KCC XM program to conform the terms of those agreements to the 
terms of the agreements used in the OCC/ICC/CME and OCC/ICC XM 
programs. These revisions primarily consist of the use of uniform 
definitions under the agreements.

II. Discussion

    Section 17A(b)(3)(F) \14\ of the Act requires that the rules of a 
clearing agency be designed to facilitate the prompt and accurate 
clearance and settlement of securities transactions, 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, and to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions. The Commission 
believes OCC's proposed rule change amending the agreements governing 
the OCC/ICC/CME XM program, the OCC/ICC XM program, and the OCC/KCC XM 
program to correspond with the revised bankruptcy distribution scheme 
adopted by the CFTC is consistent with the requirements of Section 
17A(b)(3)(F).

    \14\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
---------------------------------------------------------------------------

    The Commission previously has noted the widespread belief that XM 
systems can provide (i) A more accurate measure of intermarket risk 
exposure for clearing organizations, (ii) added liquidity and depth to 
markets by reducing cash flow levels for clearing members and by 
reducing potential for financial gridlock, particularly during volatile 
markets when clearing organizations may demand additional clearing 
margin from their members, (iii) more efficient use of broker-dealer 
capital due to a more accurate measure of market risk, (iv) reduced 
clearing costs by the integration of clearing functions and the 
centralization of asset management, and (v) safer broker-dealer 
liquidation mechanisms by simplifying and clarifying the unwinding of 
each side of an intermarket hedge.\15\ The Commission believes that by 
conforming the terms of OCC's agreements governing the OCC/ICC/CME XM 
program, the OCC/ICC XM program, and the OCC/KCC XM program with the 
CFTC's new distributional framework, the proposal should help 
facilitate the continued benefits derived from the operation of OCC's 
XM programs. The agreements also should provide that any claim asserted 
by an XM market professional arising out of or based upon an XM non-
proprietary account will be subordinated to the claims of all other 
customers, as defined in Subchapter III of Chapter 7 of the Bankruptcy 
Code \16\ or SIPA,\17\ to the extent that such a claims would otherwise 
be a claim against customer property. The Commission believes the 
foregoing amendments to the agreements should ensure that XM accounts 
of market professionals will continue to be treated as non-customer 
accounts for purposes 

[[Page 5596]]
of Rule 15c3-3 under the Act.\18\ The amendments to the agreements 
facilitating the treatment of XM accounts in this manner foster 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions by helping to assure that the 
liquidation of a FCM can be done in accordance with the CFTC's 
distribution framework, thus helping to assure the safeguarding of 
securities and funds which are in the custody or control of OCC or for 
which it is responsible.

    \15\ Securities Exchange Act Release No. 30041 (December 5, 
1991), 56 FR 64824 [File Nos. SR-OCC-90-04 and SR-ICC-90-03] (order 
approving OCC/ICC non-proprietary, market professional cross-
margining program).
    \16\ 11 U.S.C. Secs. 741-752.
    \17\ 15 U.S.C. Secs. 78aaa-78lll.
    \18\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-95-12) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\19\

    \19\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3131 Filed 2-12-96; 8:45 am]
BILLING CODE 8010-01-M