[Federal Register Volume 61, Number 173 (Thursday, September 5, 1996)]
[Notices]
[Pages 46889-46891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22628]


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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37618; File No. SR-OCC-96-07]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing and Other Granting Accelerated Approval on a Temporary 
Basis of a Proposed Rule Change Relating to Revisions to the Standards 
for Letters of Credit Deposited as Margin

August 29, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 21, 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 and other to solicit 
comments on the proposed rule change from interested persons and to 
grant accelerated approval of the proposed rule change on a temporary 
basis through June 30, 1997.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) (1988).
---------------------------------------------------------------------------

I. Self Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change extends the Commission's previous 
temporary approval of the OCC's modifications that relate to OCC's 
standards for letters of credit deposited with OCC as margin. In 
general, OCC requires that letters of credit deposited by clearing 
members as margin with OCC be irrevocable and unless otherwise 
permitted by OCC expire on a quarterly basis. In addition, OCC may draw 
upon a letter of credit regardless of whether the clearing member has 
been suspended or has defaulted on any obligation to OCC if OCC 
determines that such action is advisable to protect OCC, other clearing 
members, or the general public.\2\
---------------------------------------------------------------------------

    \2\ For a complete description of these modifications to the 
standards for letters of credit, refer to Securities Exchange Act 
Release No. 29641, (August 30, 1991), 56 FR 46027 [File No. SR-OCC-
91-13] (order temporarily approving proposed rule change through 
February 28, 1992).

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

[[Page 46890]]

II. Self-Regulatory Organization's State of the Purpose, 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.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
---------------------------------------------------------------------------

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In previous filings OCC has proposed and the Commission has 
approved on a temporary basis the modification of the rules governing 
letters of credit deposited with OCC as a form of margin.\4\ Like the 
previous filings, this filing proposes several modifications to OCC 
Rule 604, Forms of Margin. First, in order to conform to the Uniform 
Commercial Code and to avoid any ambiguity as to the latest time for 
honoring demands upon letters of credit, letters of credit must state 
expressly that payment must be made prior to the close of business on 
the third banking day following demand. Second, letters of credit must 
be irrevocable. Third, letters of credit must expire on a quarterly 
basis. Fourth, OCC included language in its rules to make explicit its 
authority to draw upon letters of credit at any time, whether or not 
the clearing member that deposited the letter of credit has been 
suspended or is in default, if OCC determines that such draws are 
advisable to protect OCC, other clearing members, or the general 
public.\5\
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release Nos. 29641 (August 30, 
1991), 56 FR 46027 [File No. SR-OCC-91-13] (order temporarily 
approving proposed rule change through February 28, 1992); 30424 
(February 28, 1992), 57 FR 8160 [File No. SR-OCC-92-06] (order 
temporarily approving proposed rule change through May 31, 1992); 
30763 (June 1, 1992); 57 FR 242884 [File No. SR-OCC-92-11] (order 
temporarily approving proposed rule change through August 31, 1992); 
31126 (September 1, 1992), 57 FR 40925 [File No. SR-OCC-92-19] 
(order temporarily approving proposed rule change through December 
31, 1992); 31614 (December 17, 1992), 57 FR 61142 [File No. SR-OCC-
92-37] (order temporarily approving proposed rule change through 
June 30, 1993); 32532 (June 28, 1993) [File No. SR-OCC-93-14] (order 
temporarily approving proposed rule change through June 30, 1994), 
34206 (June 13, 1994) [File No. SR-OCC-94-06] (order temporarily 
approving proposed rule change through June 30, 1995); and 36138 
(August 23, 1995), 60 FR 44926 [File No. SR-OCC-95-9] (order 
temporarily approving proposed rule change through June 28, 1996).
    \5\ Supra note 2.
---------------------------------------------------------------------------

    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act because the proposed 
rule change promotes the protection of investors by enhancing OCC's 
ability to safeguard the securities and funds in its custody or control 
or for which it is responsible.

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 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) \6\ of the Act requires the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in its custody or control or for which it is responsible. The 
Commission believes the proposed rule change is consistent with OCC's 
obligations under Section 17A(b)(3)(F) because the modified standards 
for letters of credit will enable OCC to draw upon a letter of credit 
at any time that OCC determines that such a draw is advisable to 
protect OCC, the clearing members, or the general public. This ability 
increases the liquidity of its margin deposits by enabling OCC to 
substitute cash collateral for a clearing member's letter of credit and 
consequently will permit OCC to rely more safely upon such letters of 
credit. In addition, by eliminating the issuer's right to revoke the 
letter of credit, an issuer will no longer be able to revoke a letter 
of credit at a time when the clearing member is experiencing financial 
difficulty and most needs credit facilities. Finally, requiring that 
the letters of credit expire quarterly rather than annually will result 
in the issuers conducting more frequent credit reviews of the clearing 
members for whom the letters of credit are issued. More frequently 
credit reviews will facilitate the discovery of any adverse 
developments in a more timely manner.
---------------------------------------------------------------------------

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

    Although OCC has asked for permanent approval of the proposed rule 
change, the Commission believes that by approving the proposed rule 
change on a temporary basis through June 30, 1997, OCC, the Commission 
and other interested parties will be able to assess further, prior to 
permanent Commission approval, any effects the revised standards have 
on letter of credit issuance and on margin deposited at OCC.\5\
---------------------------------------------------------------------------

    \5\ The Commission and OCC continue to discuss concentration 
limits on letters of credit deposited as margin. The Commission 
believes that clearing agencies that accept letters of credit as 
margin deposits or clearing fund contributions should limit their 
exposure by imposing concentration limits on the use of letters of 
credit. Generally, clearing agencies impose limitations on the 
percentage of an individual member's required deposit or 
contribution that may be satisfied with letters of credit, 
limitations on the percentage of the total required deposits or 
contributions that may be satisfied with letters of credit by any 
one issuer, or some combination of both. OCC has no concentration 
limits on the use of letters of credit issued by U.S. institutions.
---------------------------------------------------------------------------

    OCC has requested that the Commission find good cause for approving 
the proposed rule change on an accelerated basis prior to the thirtieth 
day after the date of publication of notice of the filing. The 
Commission finds good cause for so approving the proposed rule change 
because accelerated approval will allow the changes that have been 
implemented pursuant to the previous temporary approval order to remain 
in place during the further assessment of any effects the revised 
standards have on the issuance of letters of credit and on margin 
deposited at OCC pending permanent approval.

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 available for inspection and copying in 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for

[[Page 46891]]

inspection and copying at the principal office of OCC. All submissions 
should refer to the File No. SR-OCC-96-07 and should be submitted by 
September 26, 1996.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, particularly 
with 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-96-07) be, and hereby 
is, approved on a temporary basis through June 30, 1997.

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

    \6\ 17 CFR 200.30-3(a)(12) (1996).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22628 Filed 9-4-96; 8:45 am]
BILLING CODE 8010-01-M