[Federal Register Volume 61, Number 199 (Friday, October 11, 1996)]
[Notices]
[Pages 53475-53477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26169]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37792; File No. SR-OCC-96-11]
Self-Regulatory Organization; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Relating to Membership
Standards
October 7, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 30, 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 on the proposed rule change from interested persons.
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\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 amend OCC's by-laws and rules
regarding OCC's initial membership standards and the ongoing duties of
clearing members.
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\
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\2\ These statements have been modified by the Commission.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The principal purpose of the proposed rule change is to amend
certain initial membership standards and certain ongoing duties of
clearing members. OCC has a three tiered system of safeguards against a
clearing member failure or default, and this system is reviewed each
year. The initial membership standards and ongoing duties comprise the
system's first tier of safeguards. The other two tiers are margin
requirements and clearing fund deposits. OCC's membership standards are
designed to assure OCC of an applicant's initial creditworthiness,
operational capability and experience, and competence to clear option
transactions.
OCC is proposing to make several enhancements to its initial
membership standards and ongoing duties of clearing members. The
proposed changes and the purposes thereof are described below.
1. Article V, Section 1 of the By-Laws
A number of changes are being proposed to the Interpretations and
Policies (``Interpretations'') under Article V, Section 1 of OCC's by-
laws. Interpretation 2 will be amended to add clause d, which will
provide that the Membership/Margin Committee (``Committee'') of the
Board of Directors (``Board'') will not recommend approval of an
application for clearing membership unless the applicant's Designated
Examining Authority (``DEA'') has stated that it has no objections to
the application for clearing membership. If requested in writing by the
applicant, the Committee will be permitted to waive the requirement in
exceptional cases and where good cause is shown. Under OCC's current
membership review procedures, an applicant's DEA is contacted for
information regarding the applicant and is requested to provide advice
or any objections with respect to the applicant's ability to self-clear
option transactions. OCC believes that input from an applicant's DEA
provides critical information regarding the firm's compliance with all
applicable requirements with respect to the maintenance of books and
records as well as the firm's ability operationally and financially to
self-clear. The proposed addition of clause d to Interpretation 2 will
codify OCC's existing procedures.
Interpretation 3 will be amended to require that if an applicant
elects to use an associated person to satisfy the applicable
requirements of clauses a through c thereof the designated associate
person must be a full time employee of the applicant.\3\ The purpose of
the requirements contained in clauses a through c is to ensure that an
applicant has at least one person with sufficient competence and
experience to supervise the preparation of financial reports and the
back office operations of the applicant. Interpretation 3 also will be
amended to require that the key operations employees required to have
attended applicable OCC operations readiness review sessions and
successfully completed any applicable OCC operational and financial
examinations for operations employees be full time employees and attend
all such review sessions. OCC believes that the preparation of
financial reports and the proper operation of back office
responsibilities are such critical functions that it is appropriate
that there be full time supervision of these functions.
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\3\ Clauses a through c require that an applicant that is a
registered broker-dealer must be registered as a ``Limited
Principal--Financial Operations'' with the National Association of
Securities Dealers; an applicant that is applying for clearing
membership as an exempt Canadian clearing member must be registered
as a principal/director/officer and as a designated registered
options principal with the Investment Dealers Association of Canada;
and an applicant that is a non-U.S. securities firm must have
completed any applicable OCC financial and operational examination
for employees who are responsible for supervising the preparation of
applicant's financial reports.
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Interpretation 4 will be amended to eliminate the ability of an
applicant for clearing membership to enter into a facilities management
arrangement with a non-clearing member. There are no current
limitations on who might act as a non-clearing member facilities
manager, and OCC is limited in its ability to obtain financial and
other information relating to the creditworthiness and operational
capability of such a non-clearing member facilities manager. As a
result, OCC believes it is prudent to permit only OCC clearing members
to act as facilities managers for applicants because OCC has existing
systems in place to monitor their creditworthiness and operational
capabilities. Although OCC currently has two clearing members that use
the same non-clearing member facilities manager, OCC believes that each
of these clearing members will be able to enter into a facilities
management arrangement with a clearing member.
Interpretation 5 will be added to authorize the Committee to
recommend
[[Page 53476]]
to the Board that additional financial requirements be imposed on an
applicant for clearing membership (e.g., an increase in net capital or
a requirement to make and maintain initial margin deposits) or that
restrictions be imposed on the applicant's clearance of option
transactions if the Committee has determined that the applicant's
financial or operational condition in relation to the business that the
applicant has proposed to transact through OCC makes such action
necessary or advisable for the protection of OCC, clearing members, or
the general public. The Board will be required to review independently
such a recommendation to determine whether it should be imposed on an
applicant. Any requirements or restrictions so imposed would remain in
force for the period determined by the Board but in any event no longer
than the end of the first three calendar months commencing after the
applicant's admission to clearing membership.
OCC believes that it is important for the Committee to have the
means to address situations where an applicant might otherwise
technically meet OCC's membership standards but might present special
risks to OCC and its clearing membership because of the type and volume
of business the applicant proposes to transact relative to its
financial or operational capability. This authority is similar to the
authority found in OCC Rule 305, under which the Chairman or President
may impose certain restrictions on the activities of a clearing member
if such officer believes that the financial or operational condition of
a clearing member warrants such action for the protection of OCC, other
clearing members, and the general public. The three month time
limitation would ensure that the requirements or restrictions imposed
under this initial authority would not have an unlimited duration and,
therefore, would not be unduly burdensome on an applicant. However, the
restriction would permit OCC to gain experience with the ability of the
applicant to meet the responsibilities of clearing membership before
having to consider acting under Rule 305.
2. Article V, Section 3 of the By-Laws
Section 3 of Article V will be amended to add Interpretation 1.
Such interpretation will require an applicant, which is approved for
clearing membership subject to the satisfaction of specified
conditions, to meet those specified conditions within six months from
the date on which its application is approved unless the Board
prescribes a shorter time period at the time of approval. If an
applicant failed to meet the specified conditions within the applicable
time period, the approval of the application will be deemed withdrawn,
and the application will be deemed to have lapsed unless the period to
satisfy those conditions is extended by OCC. Any applicant seeking such
an extension will be required to make a written request specifying any
material changes that have occurred in its ability to transact business
with OCC. The Chairman or the President will be vested with the
authority to approve or disapprove the extension request. No deadline
could be extended beyond one year from the date the application
originally was approved.
This interpretation is intended to ensure that an approved
applicant meets in a timely fashion all conditions associated with its
application for clearing membership and to protect OCC against material
but unknown changes in such applicant's financial and operational
condition. In addition, it will ensure that an applicant remains
current with respect to the operational requirements for transacting
business with OCC.
3. Chapter II of the Rules
Rule 201 will be amended (i) to delete the requirement that each
clearing member maintain an office in the vicinity of the office of OCC
designated by the clearing member pursuant to Rule 204 and (ii) to
ensure that every clearing member provides OCC with prompt written
notice of the relocation of either its principal office or the office
maintained by the clearing member to comply with the requirements of
Rule 201(a) or of a material change in a non-U.S. clearing member's
arrangements under Rule 201(b) with OCC as an alternative to an office
under Rule 201(a).
Rule 214(a) will be amended to require that only associated persons
who are full time employees of a clearing member may satisfy the
applicable requirements of that rule.\4\ The interpretations thereunder
will be amended (i) to shorten the time period to three months within
which a clearing member must replace an associated person through whom
a clearing member has been meeting the requirements of the rule and
(ii) to require notice of any separation between the clearing member
and such associated person.
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\4\ Rule 214(a) contains provisions similar to Interpretation 3
of Article V, Section 1 of the by-laws.
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Rule 215 will be added to require each clearing member to provide
OCC with prompt prior written notice of material changes to its
operations including: (i) Its involvement in any merger, combination,
or consolidation; (ii) the acquisition of another entity; (iii) the
sale of a significant portion of its assets; (iv) a change in its form
of business organization or the name under which it does business; and
(v) a change in the direct or indirect beneficial ownership of 10% or
more of the equity of the clearing member. Clearing members will be
required to provide OCC with such documents as OCC might require with
respect to such events as well as a list of persons or entities that
are the beneficial owners directly or indirectly of 10% or more of the
equity of the clearing member.
The purpose of these proposed changes is to modify OCC's rules
regarding location of clearing member offices. OCC no longer believes
that it is necessary for clearing members to maintain an office in the
actual vicinity of an office of OCC because electronic and other
capabilities exist that reduce the importance of physical proximity in
ensuring that a clearing member is able to transact promptly all
necessary business with OCC. The other changes are designed to ensure
(i) that OCC is advised of material changes to a clearing member's
business so that applicable agreements, documentation, and collateral
can be amended in a timelys and efficient manner; (ii) that OCC is
advised of changes that might affect the financial or operational
capability of clearing members; and (iii) that the clearing member's
full capabilities are promptly restored in the case of key employee
departures. Rule 214 will be amended for the reasons described above in
relation to Interpretation 3 of Section 1, Article V of the by-laws.
* * * * *
The proposed rule change is consistent with Section 17A of the Act
\5\ it that it augments OCC's initial and ongoing membership standards
which are designed to ensure a participant's creditworthiness,
operational capability and experience, and competency in clearing
options transactions.
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\5\ 15 U.S.C. 78q-1 (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Any membership standard has the potential to exclude certain
persons from clearing membership and thereby technically to reduce the
number of competing clearing members. However,
[[Page 53477]]
OCC believes that the proposed changes in membership standards and
procedures appropriately balances such potential effects against the
important need to ensure that new OCC clearing members do not expose
OCC, its members, the national clearing system, or the investing public
to undue risk.
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
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 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 provisions of 5
U.S.C. 552, will be 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 No. SR-OCC-96-11 and should be submitted by November
1, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-26169 Filed 10-10-96; 8:45 am]
BILLING CODE 8010-01-M