[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Notices]
[Pages 12124-12126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7068]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36983; File No. SR-OCC-96-01]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning Choice of Law 
Provisions in Connection With Amendments to Articles 8 and 9 of the 
Uniform Commercial Code

March 18, 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 as 
described in Items I, II, and III below, which Items have been prepared 
primarily by OCC. The Commission is publishing this notice to solicit 
comments from interested persons.

    \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 proposed rule change will change the choice of law provisions 
and other provisions in OCC's by-laws and rules in connection with 
Illinois' adoption of the 1994 amendments to Articles 8 and 9 of the 
Uniform Commercial Code (``UCC'').

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 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.\2\

    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In 1994, The American Law Institute and the National Conference of 
Commissioners on Uniform State Laws promulgated amendments to Articles 
8 and 9 of the UCC (``1994 amendments''). To a significant degree, the 
1994 amendments were adopted in response to the views of the Commission 
and others that the shortcomings in the provisions of the 1977 version 
of Articles 8 and 9 of the UCC contributed to the liquidity problems 
associated with the October 1987 stock market decline. The 1994 
amendments were intended to reduce legal uncertainty and to facilitate 
the transfer of ownership of and creation of security interests in 
securities as well as other financial assets and investment property, 
including futures and futures options, through a set of rules designed 
to apply to the modern securities and futures holding systems.
    OCC participated in certain aspects of the drafting process and 
believes that revised Articles 8 and 9 provide a framework of rules 
more appropriate to the special characteristics of OCC-cleared 
securities and for the holding of securities deposited with OCC for 
margin and for clearing fund purposes. OCC also believes the creation 
and

[[Page 12125]]
perfection of security interests arising in connection with cross-
margining will be facilitated.\3\ Accordingly, OCC believes that the 
1994 amendments should govern its operations to the fullest extent 
possible even though the amendments have not been adopted in all 
jurisdictions.

    \3\ Currently, there is a two to three week delay before OCC 
members that also are members of the Chicago Mercantile Exchange 
(``CME'') or the Kansas City Board of Trade (``KCBOT'') (``joint 
members'') are eligible to participate in the cross-margining 
arrangements OCC has with CME and KCBOT (``cross-margining 
participants''). Prior to participation in these cross-margining 
arrangements, OCC requires that security interests be created and 
perfected in securities held by the joint member prior to such 
member's eligibility as a cross-margining participant. Under the 
1977 version of the UCC, one option to perfect a security interest 
in securities requires the filing of the appropriate financing 
statements. Filing of the appropriate financing statements and 
confirmation thereof typically can take from two to three weeks. 
However, under the 1994 amendments, OCC believes that financing 
statements no longer will be necessary for perfection purposes. As a 
result, joint members can become cross-margining participants in a 
matter of days instead of weeks. Telephone Conversation between 
Michael G. Vitek, Staff Counsel, OCC, and Mark Steffensen, Attorney, 
Division of Market Regulation, Commission (February 12, 1996).
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    Without this rule change, OCC will not receive the benefits of the 
application of the 1994 amendments despite its adoption in Illinois 
because OCC's by-laws and rules contain choice of law provisions that 
select Delaware as the governing law. Although the 1994 amendments have 
been adopted in Illinois, they have not been adopted in many other 
jurisdictions, including Delaware, the state of OCC's incorporation. 
OCC originally adopted the Delaware choice of law provisions to 
reinforce the provisions of the 1977 version of the UCC under which OCC 
options were deemed uncertificated securities. Under the conflict of 
laws rules in the 1977 version of the UCC, the law of the jurisdiction 
of incorporation of the issuer of uncertificated securities governs the 
perfection of security interests therein.
    Under the 1994 amendments, OCC will function as a ``securities 
intermediary'' rather than an issuer of uncertificated securities. 
Under the new choice of law provisions in the 1994 amendments, the 
applicable law will be the law of the securities intermediary's 
jurisdiction, which may be selected by agreement between OCC and its 
clearing members. In absence of a contrary agreement, OCC believes that 
Illinois law will apply because under the choice of law rules found in 
the 1994 amendments, Illinois would be deemed the securities 
intermediary's jurisdiction. As discussed above, OCC's present choice 
of law rules were adopted solely to reinforce the choice of law 
provisions of the 1977 version of the UCC. However, in light of the 
1994 amendments, OCC believes that Delaware law no longer has any 
special relevance. Accordingly, the present rule change will replace 
those provisions with Illinois choice of law provisions and makes 
certain other changes intended to create conformity with or a nexus 
between the terminology of OCC's by-laws and rules and the terminology 
of the 1994 amendments.
    Notwithstanding the adoption of the Illinois choice of law 
provisions as set forth in this proposed rule change, there still will 
be situations in which the 1977 version of the UCC will be applicable. 
This could occur whenever UCC issues arise in a jurisdiction that has 
not adopted the 1994 amendments and a tribunal in that jurisdiction 
applies its own choice of law rules. Because the choice of law 
provisions in the 1977 version of the UCC are mandatory and cannot be 
altered by agreement, OCC's choice of law rules would not likely be 
enforceable and therefore Delaware law would be controlling.
    Because this possibility exists, OCC is proposing to retain the 
provisions in its by-laws and rules that were deemed necessary or 
desirable to manage the application of Delaware law to options 
transactions. OCC's by-laws and rules presently contain interpretations 
to alert clearing members and others to the fact that Delaware law will 
not always govern notwithstanding the choice of law provisions. These 
interpretations will be adapted to reflect the proposed choice of law 
change from Delaware law to Illinois law. The effect of this change 
will be to alert members and others that now Illinois law, instead of 
Delaware law, may not always govern notwithstanding the choice of law 
provisions contained in OCC's by-laws.
    To accommodate Illinois' adoption of the 1994 amendments, OCC 
proposes to make the following specific changes in its by-laws and 
rules. Article I, Section 1 of OCC's by-laws will be amended to add 
definitions of the terms ``lien'' and ``pledge'' to make it clear that 
these terms refer to a security interest within the meaning of the 1994 
amendments. Even though the likelihood of misinterpretation on this 
point may be remote, OCC believes that the addition of these 
definitions seems prudent because lien and pledge no longer appear in 
the provisions of UCC Articles 8 and 9 under the 1994 amendments that 
are applicable to OCC. Section 1-201(37) of the UCC defines ``security 
interest'' broadly but without reference to such common law concepts as 
lien and pledge, which are subsumed within the amended definition of 
security interest.
    Article 1, Section 1 will be amended further to modify OCC's 
definition of ``rules.'' In effect, Section 8-111 of the 1994 
amendments provides that a rule adopted by a clearing corporation 
supersedes contrary provisions of the UCC. In order to take full 
advantage of this provision, OCC has proposed that the definition of 
rules be amended to make it clear that for purposes of Articles 8 and 9 
the term ``rules of a clearing agency'' as applied to OCC will mean 
anything deemed to be a rule of a clearing agency under the Act.
    Article VI, Section 9(c) of OCC's by-laws will be amended to 
replace the basic choice of law provision applicable to option holders 
and writers with respect to cleared securities. Subparagraph 1 of 
Section 9(c) will contain statements indicating how revised Articles 8 
and 9 will apply to OCC and its clearing members with regard to 
ownership of and security interests in cleared securities. These 
statements are not intended to alter the substantive operation of 
Articles 8 and 9 but are intended merely to provide a guide to proper 
interpretation of Articles 8 and 9. However, UCC Section 8-111 does 
permit OCC to supersede provisions of the UCC with its own rules. 
Accordingly, Section 9(c)(1) as proposed sets forth that all cleared 
securities will be deemed financial assets without the need to consider 
whether a particular cleared security is a similar obligation to an 
option as would be required under the regular definition of financial 
asset set forth in Section 8-102 of the 1994 amendments. Subparagraph 2 
of Section 9(c), which essentially is the prior OCC choice of law 
provision, will remain in place to cover situations where the 1977 
version of the UCC is applicable.
    OCC Rule 610(g) involves the use of depository receipts and 
electronic confirmations in connection with specific or bulk deposits 
made to OCC in lieu margin payments. As proposed in the current filing 
(File No. SR-OCC-96-01), OCC does not intend to amend Rule 610(g), if 
the Commission approves SR-OCC-95-17 prior to the current filing.\4\ 
However, if the current rule filing is approved prior to SR-OCC-95-17, 
OCC has proposed in the current filing certain amendments to Rule 
610(g), and OCC will be required to amend SR-OCC-95-17 to reflect the

[[Page 12126]]
changes made to this rule by the current rule filing.\5\

    \4\ On November 2, 1995, OCC filed a proposed rule change (File 
No. SR-OCC-95-17) to amend OCC Rule 610(g).
    \5\ SR-OCC-95-17 will amend Rule 610(g) to eliminate the 
requirement that in certain circumstances a depository has to 
acknowledge that securities transfers or pledges were effected 
through book-entry. This requirement arose because in order to 
effect a securities pledge and the corresponding perfection of a 
security interest therein or to deposit securities in favor of OCC, 
the 1977 version of Article 8 required that the pledgor or depositor 
``transfer'' the security to OCC. In order to effect this transfer, 
Section 8-313 of the 1977 version of the UCC required an 
acknowledgement by the depository if the securities were delivered 
by book-entry. Under the 1994 amendments, a transfer pursuant to 
Section 8-313 is no longer required to effect a securities deposit 
or pledge. In fact, the entire concept of a transfer requirement in 
connection with a securities pledge or deposit previously embodied 
in Section 8-313 of the 1977 version of the UCC has been removed 
from the 1994 amendments. Under Sections 9-115 and 8-106 of the 1994 
amendments, a securities deposit or pledge in favor of OCC with the 
corresponding perfection of a security interest therein is effected 
once the transferee or pledge obtains control over the securities. 
Therefore, depository acknowledgement no longer is required in 
connection with securities deposits or pledges in favor of OCC 
involving book-entry delivery of securities.
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    Finally, OCC Rule 614(m) concerning OCC's obligations to pledges 
under OCC's pledge program will be revised to make clear that certain 
provisions of this rule which relate to the 1977 version of Articles 8 
and 9 will apply only if the 1977 version of the UCC is otherwise 
applicable.
    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act \6\ because it will 
promote the protection of investors by enhancing OCC's ability to 
safeguard the securities and funds in its possession or subject to its 
control.

    \6\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will 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 by 
OCC with respect to the proposed rule change and none were received.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which OCC consents, the Commission will:
    (a) By order approve such proposed rule change or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submissions, 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, NW., Washington, 
DC 20549. Copies of such filings will also be available for inspection 
and copying at the principal office of OCC. All submissions should 
refer to the file number SR-OCC-96-01 and should be submitted by April 
15, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7068 Filed 3-22-96; 8:45 am]
BILLING CODE 8010-01-M