[Federal Register Volume 62, Number 18 (Tuesday, January 28, 1997)]
[Notices]
[Pages 4089-4091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2012]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38188; File No. SR-OCC-96-18]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Revise Rules To Include 
Limited Cross-Guarantee Agreements

January 21, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 9, 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 on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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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 revise OCC's by-laws 
and rules to authorize OCC to execute ``limited cross-guarantee 
agreements'' with other clearing agencies.

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\ 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

    The purpose of the proposed rule change is to revise OCC's by-laws 
and rules to authorize OCC to execute ``limited cross-guarantee 
agreements'' with other clearing agencies. A limited cross-guarantee 
agreement is an agreement between two or more clearing agencies that 
provides that if the parties to the agreement must liquidate the assets 
of an entity that is a member of two or more of the agencies (``common 
member'') and at least one of the clearing agencies liquidates the 
assets of

[[Page 4090]]

the common member in its control to a loss and at least one liquidates 
the assets of the common member to a gain, each clearing agency 
liquidating to a gain will make the excess assets of the common member 
in its control available to each clearing agency liquidating to a loss 
up to the amount of the loss. If all of the parties to a limited cross-
guarantee agreement liquidate the assets of a common member in their 
respective control to a gain or if all liquidate to a loss, the 
agreement provides that no assets will be made available by any party 
to the agreement to any other party. The cross-guaranties established 
in a limited cross-guarantee agreement are limited in the sense that 
each party to the agreement guarantees funds to the other parties only 
if it liquidates the assets of a common member in its control to a net 
gain and only up to the amount of the net again.
    The effect of a limited cross-guarantee agreement is to enable each 
party to the agreement to have recourse to the assets of a defaulting 
common member in the control of the other parties to the agreement. 
Therefore, a limited cross-guarantee agreement should reduce the risk 
of each of the clearing agencies which is a party to the agreement 
because a defaulting common member may have positions spread across 
markets in such a manner that its net asset position at one clearing 
agency is positive even though its net asset position at another 
clearing agency is negative.
    OCC is currently pursuing discussions of the terms of a limited 
cross-guarantee agreement with other clearing agencies. OCC anticipates 
that it will be filing with the Commission one or more limited cross-
guarantee agreements to which it has become a party following the 
conclusion of those discussions.
    The Commission has generally stated its support of the use of 
limited cross-guarantee agreements as a means of reducing the exposure 
of clearing agencies to loss as a result of the default of common 
members.\3\ OCC proposes to add definitions of ``common member,'' 
``cross-guarantee party,'' and ``limited cross-guarantee agreement'' to 
Article I of its by-laws.
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    \3\ Securities Exchange Act Release No. 37616 (August 28, 1996), 
61 FR 46887 [File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-ISCC-
96-04] (order approving proposed rule changes seeking authority to 
enter into limited cross-guaranty agreements filed by MBS Clearing 
Corporation, Government Securities Clearing Corporation and 
International Securities Clearing Corporation).
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    OCC proposes to add new paragraph (i) to Section 5 of Article VIII 
of its by-laws to provide explicitly that OCC may use the clearing fund 
contributions of a clearing member to satisfy its limited cross-
guarantee obligations to other clearing agencies with respect to that 
clearing member. New paragraph (i) provides that the amount charged 
against a clearing member's contributions to the stock clearing fund 
and non-equity securities clearing fund will be in proportion to the 
clearing member's contributions to the stock clearing fund and the non-
equity securities clearing fund as fixed at the time of the suspension 
of the clearing member. New paragraph (i) does not provide OCC with any 
authority to use the clearing fund contributions of other clearing 
members (i.e., other than the defaulting clearing member) to satisfy 
any limited cross-guarantee obligation that OCC has to another clearing 
agency because OCC will not have any obligation pursuant to a limited 
cross-guarantee agreement which could require recourse to the clearing 
fund contributions of other clearing members.
    OCC also proposes to add new paragraph (j) to Section 5 of Article 
VIII of its by-laws to establish a rule for allocating funds received 
by OCC pursuant to a limited cross-guarantee agreement where OCC has 
charged, or will charge, the stock clearing fund and the non-equity 
securities clearing fund. The new paragraph provides that the funds 
will be credited to the stock clearing fund and the non-equity 
securities clearing fund in proportion to the computed contributions of 
the suspended clearing member to the two clearing funds as fixed at the 
time of the suspension of the clearing member. If one of the two 
clearing funds is made whole then the remainder of the funds will be 
credited entirely to the other clearing fund.
    OCC proposes to add three new interpretations to Article VIII, 
Section 5 of its by-laws. New interpretation .03 states explicitly that 
if OCC has a deficiency after the application of all available funds of 
a suspended clearing member and if OCC cannot determine whether or in 
what amount it will be entitled to receive funds from a cross-guarantee 
party or when it will receive such funds, with respect to the clearing 
member, OCC may, in its discretion, make a charge against other 
clearing members; contributions to the stock clearing fund and/or the 
non-equity securities clearing fund. New interpretation .04 states 
explicitly that if OCC determines that it is likely to receive funds 
from a cross-guarantee party with respect to the clearing member, OCC 
may in anticipation of receipt of the funds from the cross-guarantee 
party, forego making a charge, or make a reduced charge against other 
clearing members' contributions to the stock clearing fund and/or the 
non-equity securities clearing fund. If OCC does not receive the 
anticipated funds or receives funds in a smaller amount than 
anticipated, OCC may make a charge or an additional charge against 
other clearing members' contributions to the stock clearing fund and/or 
the non-equity securities clearing fund. New interpretation .05 states 
explicitly that if OCC were ever to be required to refunds funds which 
it had received from a cross-guarantee party back to the cross-
guarantee party, OCC could make a charge or an additional charge 
against other clearing members' contributions to the stock clearing 
fund and/or the non-equity securities clearing fund to make itself 
whole. The charge would be based on the other clearing members' 
computed contributions as fixed at the time of the refund and not at 
the time of the suspension of the clearing member.
    OCC also proposes to add a new paragraph (d) to its Rule 1104 to 
state explicitly that OCC may use any positive balance remaining in a 
clearing member's liquidating settlement account to satisfy any 
obligation with respect to that clearing member which OCC may have to 
any other clearing agency pursuant to a limited cross-guarantee 
agreement. OCC believes the new paragraph is needed to assure that 
OCC's use of the assets of a clearing member in this manner is 
authorized by OCC's rules because Rule 1104(a) states that funds of a 
suspended clearing member subject to OCC's control shall be placed in 
the clearing member's liquidating settlement account and used ``for the 
purposes hereinafter specified.''
    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 assures the safeguarding of securities 
and funds in its custody or control or for which OCC is responsible.

B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will have any 
material impact 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, an none have been 
received.

[[Page 4091]]

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 the provisions 
of 5 U.S.C. 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 also will be available 
for inspection and copying at the principal office of OCC. All 
submissions should refer to File No. SR-OCC-96-18 and should be 
submitted by February 18, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2012 Filed 1-27-97; 8:45 am]
BILLING CODE 8010-01-M