[Federal Register Volume 62, Number 159 (Monday, August 18, 1997)]
[Notices]
[Pages 44025-44027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21751]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38923; File No. SR-OCC-97-09]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Seeking To Amend the 
Valuation Rate Applied to Equity Securities and Corporate Debt 
Deposited as Margin Collateral

August 11, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 21, 1997, The Options 
Clearing Corporation (``OCC'') filed with the

[[Page 44026]]

Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-OCC-97-09) 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.
---------------------------------------------------------------------------

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

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 increase from 60 
percent to 70 percent the valuation rate OCC applies to equity 
securities and corporate debt deposited as margin collateral.

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\
---------------------------------------------------------------------------

    \2\ 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

    The purpose of the proposed rule change is to amend the valuation 
rate OCC applies to equity securities and corporate debt deposited with 
OCC as margin collateral. Under the proposed rule change, the rate will 
be increased from 60 percent to 70 percent.
Background
    In 1975, OCC proposed instituting a program to accept deposits of 
common stock as margin collateral (``valued securities program'') under 
its Rule 604(d) and sought to value these deposits at 70 percent of 
their current market value.\3\ According to OCC, the valued securities 
program would reduce OCC's reliance on letters of credit as a form of 
margin collateral and would reduce the amount of money OCC's clearing 
members paid to banks for letters of credit. Because margin securities 
are the major source of collateral for letters of credit, the valued 
securities program would eliminate the need for OCC's clearing members 
to deposit margin securities at a bank in order to obtain a letter of 
credit for the benefit of OCC. Instead, clearing members could pledge 
margin stock directly to OCC as a form of margin collateral. OCC 
believed that the 70 percent valuation rate would provide a sufficient 
cushion against exposure to market and liquidity risk in the event OCC 
would need to liquidate deposited securities in connection with a 
clearing member's default.
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 11820 (November 12, 
1975), 40 FR 53637 [File No. SR-OCC-75-05] (notice of proposed rule 
change). The Commission did not approve this proposed rule change. 
OCC withdrew File No. SR-OCC-75-05 and submitted File No. SR-OCC-82-
11 in its place. Securities Exchange Act Release No. 18994 (August 
20, 1982), 47 FR 37731 [File No. SR-OCC-82-11] (order approving File 
No. SR-OCC-82-11 and withdrawing File No. SR-OCC-75-05).
---------------------------------------------------------------------------

    The novelty of the valued securities program resulted in extensive 
regulatory review by the staffs of the Commission and the Federal 
Reserve Board. This review led to several changes to the valued 
securities program, including a change in the valuation rate to be 
applied to stock deposited as margin collateral. As the program was 
approved, the rate was set at no more than the maximum loan value 
specified in Regulation U (i.e., 50 percent of current market 
value).\4\
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 18994 (August 20, 1982), 
47 FR 37731 [File No. SR-OCC-82-11] (order approving File No. SR-
OCC-82-11 and withdrawing File No. SR-OCC-75-05).
---------------------------------------------------------------------------

    OCC began accepting deposits of stock as margin collateral in 1985 
and has gained substantial experience in operating the program as 
initially approved and as later enhanced. Enhancements to the program 
include: (i) Expanding the types of common stock eligible for deposit; 
\5\ (ii) permitting the acceptance of deposits of qualified preferred 
stock, corporate debt, and units of beneficial interests in unit 
investment trusts; \6\ and (iii) increasing the valuation rate to 60 
percent.\7\ However, even with these enhancements, OCC states that its 
clearing members continued to request that a valuation rate of 70 
percent be applied to securities deposits into the valued securities 
program.
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 20558 (January 13, 
1984), 49 FR 2183 [File No. SR-OCC-83-17] (order granting 
accelerated approval of proposed rule change).
    \6\ Securities Exchange Act Release Nos. 29576 (August 16, 
1991), 56 FR 41873 [File No. SR-OCC-88-03] (order approving proposed 
rule change involving the value securities program); 38105 (December 
31, 1996), 62 FR 1014 [File No. SR-OCC-96-13] (order approving 
proposed rule change relating to unit investment trusts as margin).
    \7\ Securities Exchange Act Release No. 33893 (April 14, 1994), 
59 FR 18427 [File No. SR-OCC-92-13] (notice of amendment to filing 
and order granting accelerated approval to proposed rule change). As 
originally filed, SR-OCC-92-13 proposed a 70% valuation rate. OCC 
submitted this proposed rule change upon receipt of advice from the 
staff of the Federal Reserve Board that it would not object to a 70% 
valuation rate. OCC and the Commission's staff later concurred on 
60% as the valuation rate, and accordingly, OCC amended its filing.
---------------------------------------------------------------------------

Seventy Percent Valuation Rate
    OCC believes that a 70 percent valuation rate is prudent and will 
protect OCC in case of a clearing member's default. OCC also asserts 
that the proposed valuation rate is consistent with the securities 
haircuts prescribed in the Commission's uniform net capital rule.\8\ 
Under the net capital rule, haircuts are intended to account for market 
and liquidity risks associated with securities positions in the event 
of a broker-dealer liquidation.\9\ For broker-dealers using the risk-
based haircut methodology approved in February 1997,\10\ the maximum 
haircut to be taken for equity or equity options positions is 15 
percent. For broker-dealers using the alternative method, the maximum 
haircut for long proprietary securities positions is 15 percent.\11\ 
For broker-dealers using the basic method, the maximum haircut 
applicable to non-convertible debt securities, convertible debt 
securities, preferred stock, and common stock (all of which are forms 
of valued securities) is 30 percent.\12\
---------------------------------------------------------------------------

    \8\ 17 CFR 240.15c3-1.
    \9\ Generally, haircuts are percentage deductions broker-dealers 
apply to their securities positions to determine the value of the 
securities for net capital purposes.
    \10\ Securities Exchange Act Release No. 38248 (February 12, 
1997), 62 FR 6480 [File No. S7-07-94] (effective September 1, 1997) 
and Letter from Brandon Becker, Division of Market Regulation, 
Commission, to Mary L. Bender, First Vice President, Chicago Board 
Options Exchange, and Timothy Hinkas, Vice President, OCC (March 15, 
1994).
    \11\ 17 CFR 240.15c3-1(c)(2)(v)(J).
    \12\ 17 CFR 240.15c3-1(c)(2)(v) (F), (G), (H), and (J).
---------------------------------------------------------------------------

    A 70 percent valuation rate for securities deposited in OCC's 
valued securities program means that a 30 percent haircut will be 
applied to those positions. Accordingly, the haircut proposed by OCC is 
two times the maximum deduction required for proprietary and market-
maker trading accounts under the risk-based haircut methodology; two 
times the maximum deduction required for long proprietary positions 
under the alternative method; and equal to the maximum deduction 
required under the basic method. In light of the purposes served by 
securities haircuts and in comparison to the haircut percentages 
prescribed in the Commission's uniform net capital rule, OCC believes 
that a 30 percent haircut will adequately cover any

[[Page 44027]]

market or liquidity risk that it could encounter in liquidating a 
clearing member's valued securities deposits.
    Moreover, in addition to the valuation rate applied to deposits of 
valued securities, OCC Rule 604(d)(1) specifies other criteria 
governing OCC's acceptance of deposits. According to OCC, these 
criteria have been designed to ensure: (i) That a ready and liquid 
public market exists for deposited securities; (ii) that a diversified 
portfolio of securities is deposited with respect to each account 
carried by a clearing member at OCC; (iii) that OCC can prescribe a 
lower valuation for individual issues; and (iv) that deposits are 
marked-to-the-market on each business day. Furthermore, as market 
conditions or other circumstances warrant, OCC has the authority to 
issue intraday margin calls.\13\ Accordingly, OCC believes that it can 
prudently apply a 70 percent valuation rate to deposits of valued 
securities. OCC also believes that a 70 percent valuation rate will 
result in a further diversification of the overall portfolio of margin 
collateral deposited with OCC and, as such, will lessen the risk of 
overexposure to any one form of margin collateral.
---------------------------------------------------------------------------

    \13\ OCC Rule 609.
---------------------------------------------------------------------------

    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \14\ and the rules and 
regulations thereunder because it reduces costs to persons facilitating 
transactions by and acting on behalf of public investors without 
adversely affecting OCC's ability to safeguard funds and securities in 
its custody or control or for which it is responsible.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

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

    OCC does not believe that the proposed rule change would 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

    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. Sec. 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 number SR-OCC-97-09 and should be 
submitted by September 8, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-21751 Filed 8-15-97; 8:45 am]
BILLING CODE 8010-01-M