[Federal Register Volume 61, Number 39 (Tuesday, February 27, 1996)]
[Notices]
[Pages 7293-7295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4311]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36860; File No. SR-OCC-96-02]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Accelerated Approval of a Proposed Rule Change to 
Modify the Stock Loan/Hedge Program to Accommodate Same-Day Funds 
Settlement

February 20, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 16, 1996, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-OCC-96-02) as described in Items I and II below, which items have 
been prepared primarily by OCC. The Commission is publishing this 
notice and order to solicit comments from interested persons and to 
grant accelerated approval of the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The purpose of the proposed rule change is to modify OCC's rules 
relating to its Stock Loan/Hedge Program (``Hedge Program'') \2\ to 
reflect the conversion of the equity securities processing operations 
of The Depository Trust Company (``DTC'') to a same-day funds 
settlement (``SDFS'') system.

    \2\ 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).
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II. Self-Regulatory Organization's Statement of the 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 that 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.\3\

    \3\ The Commission has modified the text of the summaries 
submitted by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to make technical 
modifications to OCC's rules governing its Hedge Program to accommodate 
the conversion by DTC of its equity securities processing operations to 
an SDFS system. DTC is scheduled to convert to an SDFS system on 
February 22, 1996.
    Stock loans under the Hedge Program are effected by a book-entry 
transfer on the books of a correspondent depository (i.e., a securities 
depository at which OCC has an account and which provides services to 
OCC in connection with the Hedge Program). The Midwest Securities Trust 
Company (``MSTC'') had acted as the only correspondent depository since 
the Hedge Program was established. However, MSTC has withdrawn from the 
securities depository business,\4\ and OCC has made arrangements for 
DTC to act as a correspondent depository for the Hedge Program.

    \4\ Securities Exchange Act Release No. 36684 (January 5, 1996), 
61 FR 1195 (January 17, 1996) [File Nos. SR-CHX-95-27, SR-DTC-95-22, 
SR-MCC-95-04, SR-MSTC-95-10, and SR-NSCC-95-15] (order approving 
arrangements relating to a decision by the Chicago Stock Exchange, 
Inc. to withdraw from the clearance and settlement, securities 
depository, and branch receives business).
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    Under OCC's rules governing the Hedge Program, after two 
participating clearing members have agreed to the terms of a stock 
loan, the lending clearing member transfers the stock that is the 
subject of the loan by book-entry into OCC's account at a correspondent 
depository. The lending clearing member's transfer instructions 
identify the borrowing clearing member and specify the amount of cash 
to be received as collateral by the lending clearing member. Once the 
stock is delivered into OCC's account, OCC instructs the correspondent 
depository to redeliver the stock to the account of the borrowing 
clearing member against payment of the required collateral. The cash 
payments also are effected through 

[[Page 7294]]
the facilities of the correspondent depository.
    It is essential to OCC's operation of the Hedge Program that OCC 
must never have a position against a lending clearing member without an 
offsetting position against a borrowing clearing member unless one of 
the two clearing members defaults in its obligations with respect to a 
stock loan. In order to assure that OCC never has a position against a 
lending or a borrowing clearing member without an offsetting position 
against another clearing member, OCC rule 2201, concerning the 
initiation of stock loans, currently specifies that a transfer of stock 
from a lending clearing member to OCC will not constitute a final entry 
on the books of a correspondent depository until the related transfer 
from OCC to the borrowing clearing member constitutes a final entry on 
the books of the correspondent depository. Similarly, OCC rule 2208, 
concerning the unwinding or settlement of stock loans, currently 
specifies that a transfer of stock from a borrowing clearing member to 
OCC will not constitute a final entry on the books of the correspondent 
depository until the related transfer from OCC to the lending clearing 
member constitutes a final entry on the books of the correspondent 
depository. These rules were drafted to operate in conjunction with 
MSTC's next-day funds settlement (``NDFS'') system as set forth in 
MSTC's rules.
    DTC's SDFS system rules are premised on the concept that any 
securities transfers in DTC's system will become final at the time that 
the funds relating to the securities transfer are transferred. 
Accordingly, as a technical matter, DTC's SDFS system rules do not 
accommodate the concept currently contained in OCC rules 2201 and 2208 
that provide one transfer will become final only when another related 
transfer becomes final. Therefore, the proposed rule change modifies 
OCC rules 2201(c) and 2208(a). As amended, rule 2201 regarding the 
initiation of stock loans provides that OCC may initiate an additional 
transfer to return stock to a lending clearing member if for any reason 
it appears to OCC that the related transfer from OCC to the borrowing 
clearing member will not become final on the books of the correspondent 
depository on the same day as the transfer from the lending clearing 
member to OCC. Correspondingly, amended rule 2208 regarding settlement 
of stock loans (i.e., the return of a stock loan) now provides that OCC 
may initiate an additional transfer to return loaned stock to a 
borrowing clearing member if for any reason it appears to OCC that the 
related transfer from OCC to the lending clearing member will not 
become final on the books of the correspondent depository on the same 
day as the transfer from the borrowing clearing member to OCC. The two 
rules as modified are compatible with DTC's SDFS system while still 
preserving OCC's ability to assure that in the ordinary course at the 
end of each day it will have an offsetting borrow position for each 
loan position and an offsetting loan position for each borrow position.
    OCC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder because the proposal will conform OCC's rules to DTC's rules 
thereby improving the linkage and coordination between two clearing 
agencies.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

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

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change, and none have been received.

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

    Section 17A(b)(3)(F) of the Act \5\ requires that the rules of a 
clearing agency be designed to promote 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 that OCC's proposed procedures relating to its Hedge Program 
are consistent with OCC's obligations under Section 17A(b)(3)(F) for 
the reasons discussed below.

    \5\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
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    The Commission believes that the proposed rule change is consistent 
with OCC's obligations under Section 17A(b)(3)(F) to promote the prompt 
and accurate clearance and settlement of securities transactions 
because the proposal modifies OCC's Hedge Program to enable it to 
operate in a SDFS environment at DTC thus allowing the continued use of 
book-entry movements of stock loans. The Commission also believes OCC's 
proposed procedures should help to assure the safeguarding of 
securities and funds which are in the custody or control of OCC or for 
which OCC is responsible because OCC's amended rules will provide OCC 
with the authority to make an additional stock loan transfer if it 
appears the related transfer will not become final on the books of the 
correspondent depository on the same day. These rules should help to 
assure that absent a clearing member default OCC will never have a 
position against a borrowing or lending clearing member without an 
offsetting position against another clearing member.
    Additionally, the Commission believes the proposed rule change 
should foster cooperation and coordination between OCC and DTC because 
the modification of OCC's Hedge Program procedures conform OCC's rules 
to DTC's rules regarding the finality of securities transactions and 
facilitates OCC's use of DTC as a Correspondent depository in its Hedge 
Program.
    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing. The Commission finds good cause for so 
approving the proposed rule change because accelerated approval of the 
proposed modifications will allow OCC to continue to utilize DTC as a 
correspondent depository in its Hedge Program following the conversion 
to SDFS on February 22, 1996. Therefore, OCC participants will be able 
to continue to utilize the Hedge Program without any disruption.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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. Sec. 552, will be 

[[Page 7295]]
available for inspection and copying in the Commission's Public 
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal office of OCC. All submissions should refer to the file 
number SR-OCC-96-02 and should be submitted by March 19, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-96-02) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\

    \6\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4311 Filed 2-26-96; 8:45 am]
BILLING CODE 8010-01-M