[Federal Register Volume 62, Number 56 (Monday, March 24, 1997)]
[Notices]
[Pages 13931-13932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7341]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38410; File No. SR-OCC-96-18]


Self-Regulatory Organizations: The Option Clearing Corporation 
Order Granting Approval of a Proposed Rule Change To Revise Rules To 
Include Limited Cross-Guarantee Agreement

March 17, 1997.
    On December 9, 1996, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-96-18) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ Notice of 
the proposal was published in the Federal Register on January 28, 
1997.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 38188 (January 21, 
1997), 62 FR 4089.
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I. Description

    The rule change revises 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 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 part 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 gain.
    The effect of a limited cross-guarantee agreement is to enable each 
part 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 such an 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 discussion 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 mean of reducing the exposure 
of clearing agencies to loss as a result of the default of common 
members.\3\
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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).
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    As part of its rules revision to provide for limited cross-
guarantee agreements, OCC will add definitions of ``common member,'' 
``cross guarantee party,'' and ``limited cross-guarantee agreement'' to 
Article I of its by-laws. OCC will 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 will 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 will 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

[[Page 13932]]

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 refund 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 will add 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. 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.''

II. Discussion

    Seciton 17A(b)(3)(F) of the Act \4\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds 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 the rule change is consistent 
with OCC's obligation to assure the safeguarding of securities and 
funds in the custody or control of the clearing agency or for which it 
is responsible because cross-guarantee agreements among clearing 
agencies are a method of reducing clearing agencies' risk of loss due 
to a common member's default. Furthermore, the Commission has 
encouraged the use of cross-guarantee agreements and other similar 
arrangements among clearing agencies.\5\ Consequently, cross-guarantee 
agreements should assist clearing agencies in assuring the safeguarding 
of securities and funds in their custody or control.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
    \5\ Securities Exchange Act Release Nos. 36431 (October 27, 
1995), 60 FR 55749 [File No. SR-GSCC-95-03] and 36597 (December 15, 
1995), 60 FR 66570 [File No. SR-MBSCC-95-05] (orders approving 
proposed rule changes authorizing the release of clearing data 
relating to participants).
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    The Commission also believes the rule change is consistent with 
OCC's obligation to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions. The 
Commission believes that by entering into such cross-guarantee 
agreements, clearing agencies can mitigate the systemic risks posed to 
an individual clearing corporation and to the national clearance and 
settlement system arising from the default of a common member.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A 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-96-18) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-7341 Filed 3-21-97; 8:45 am]
BILLING CODE 8010-01-M