[Federal Register Volume 62, Number 101 (Tuesday, May 27, 1997)]
[Notices]
[Pages 28751-28752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13805]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38659; File No. SR-OCC-96-15]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Revisions to the 
Standards for Letters of Credit Deposited as Margin

May 20, 1997.
    On November 4, 1996, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-96-15) 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 February 21, 
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. 38284 (February 13, 
1997), 62 FR 8070.
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I. Description

    The proposed rule change makes permanent the Commission's previous 
temporary approvals \3\ of OCC's modifications to its Rule 604, which 
sets forth the standards for letters of credit deposited with OCC as a 
form of margin. First, 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 Rule 604 to make explicit OCC's 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.
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    \3\ 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 24284 [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), 58 FR 36232 [File No. SR-OCC-
93-14] (order temporarily approving proposed rule change through 
June 30, 1994); 34206 (June 13, 1994), 59 FR 31661 [File No. SR-OCC-
94-06] (order temporarily approving proposed rule change through 
June 30, 1995); 36138 (August 23, 1995), 60 FR 44926 [File No. SR-
OCC-95-9] (order temporarily approving proposed rule change through 
June 28, 1996); and 37618 (August 29, 1996), 61 FR 46889 [File No. 
SR-OCC-96-07] (order temporarily approving proposed rule change 
through June 30, 1997).
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II. Discussion

    Section 17A(b)(3)(F) of the Act \4\ requires the rules of a 
clearing agency to be designated 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 obligation under the Act because the modified 
standards for letters of credit will enable OCC to draw upon a letter 
of credit when the OCC determines that a draw is advisable to protect 
OCC, the clearing members, or the general public. This ability will 
allow OCC as needed to increase the liquidity of its margin deposits by 
enabling OCC to substitute cash collateral for a clearing member's 
letter of credit. The rule change also will increase the reliability of 
the letters of credit because an issuer will no longer be able to 
revoke a letter of credit when the clearing member is experiencing 
financial difficulty and poses the greatest credit risk.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, 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 frequent credit reviews should facilitate the 
discovery of any adverse developments in a more timely manner. By 
increasing the liquidity and reliability of the letters of credit and 
the frequency of reviews of its members, OCC has increased its ability 
to assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.
    Finally, when the Commission granted temporary approval to OCC's 
revisions to the standards for letters of

[[Page 28752]]

credit deposited as margin, the Commission stated that the temporary 
approval period would allow the Commission and other interested parties 
an opportunity to assess the effects these revised standards would have 
on letter of credit issuance and margin deposits at OCC.\5\ The 
Commission initially granted temporary approval for the rule change on 
August 30, 1991. For that year, letters of credit deposited as margin 
constituted approximately $1.9 billion of OCC's total margin deposit of 
approximately $19.5 billion (9.7 percent of the total margin 
deposit).\6\ As of December 31, 1996, the amount of letters of credit 
deposited as margin increased to approximately $2.5 billion of OCC's 
total margin deposits of approximately $18.3 billion (13.7 percent of 
the total margin deposits).\7\ Therefore, it appears that the rule 
change has neither hindered the use of the letters of credit nor 
increased their use beyond a reasonable level.
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    \5\ Supra note 3.
    \6\ Conversation between Michael G. Vitek, OCC, and Jeffrey S. 
Mooney, Attorney, Commission, (May 15, 1997).
    \7\ OCC 1996 Annual Report, pg 22.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of 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-96-15) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13805 Filed 5-23-97; 8:45 am]
BILLING CODE 8010-01-M