[Federal Register Volume 62, Number 176 (Thursday, September 11, 1997)]
[Notices]
[Pages 47863-47865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24134]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39022; File Nos. SR-OCC-97-17 and SR-NSCC-97-12]


Self-Regulatory Organizations; The Options Clearing Corporation 
and National Securities Clearing Corporation; Notice of Filing and 
Order Granting Accelerated Approval of Proposed Rule Changes Relating 
to a Limited Cross-Guaranty Agreement

September 4, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 2, 1997, The 
Options Clearing Corporation (``OCC'') and on September 3, 1997, the 
National Securities Clearing Corporation (``NSCC'') filed with the 
Securities and Exchange commission (``Commission'') the proposed rule 
changes as described in Items I and II below, which items have been 
prepared primarily by OCC and NSCC. The Commission is publishing this 
notice and order to solicit comments from interested persons and to 
grant accelerated approval of the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The purpose of the proposed rule changes is to obtain Commission 
approval of the form of limited cross-guaranty agreement into which OCC 
and NSCC propose to enter.

II. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, OCC and NSCC included 
statements concerning the purpose of and basis for the proposed rule 
changes and discussed any comments they received on the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. OCC and NSCC have 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 
submitted by OCC and NSCC.
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A. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The purpose of the proposed rule changes is to obtain Commission 
approval of the form of limited cross-guaranty agreement into which OCC 
and NSCC propose to enter. OCC amended its by-laws and rules in File 
No. SR-OCC-96-18 \3\ to accommodate limited cross-guaranty agreements 
and accordingly is not proposing to amend the language of its by-laws 
and rules

[[Page 47864]]

further at this time. NSCC amended its rules in File No. Sr-NSCC-93-07 
\4\ to accommodate limited cross-guaranty agreements and is not 
proposing to amend the language of its rules further at this time.
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    \3\ Securities Exchange Act Release No. 38410 (March 17, 1997), 
62 FR 13931 (order approving proposed rule change). In general, the 
proposed rule change added a provision to OCC Rule 1104 to permit 
OCC to pay any amount owed by OCC to another cross-guaranty party 
pursuant to a limited cross-guaranty agreement; added a provision to 
Article VIII, Section 5 of OCC's by-laws to authorize OCC to have 
recourse to a suspended clearing member's clearing fund contribution 
for the amount of any payment which it is required to make pursuant 
to a limited cross-guaranty agreement; and added additional 
provisions to Article VIII, Section 5 of OCC's by-laws to address 
the treatment in various circumstances of amounts which OCC might 
receive under a limited cross-guaranty agreement.
    \4\ Securities Exchange Act Release No. 33548 (January 31, 
1994), 59 FR 5638 (order approving proposed rule change). The 
proposed rule change incorporated the limited guaranty provisions 
into NSCC's rules and approved NSCC's limited cross-guaranty 
agreement with The Depository Trust Company.
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    Essentially, a limited cross-guaranty agreement is an agreement 
between two or more securities clearing corporations and/or commodities 
clearing organizations (collectively, ``clearing agencies'' and each, a 
``clearing agency'') that provides a guarantee that can be invoked in 
the event that the parties to the agreement must liquidate the assets 
of an entity that is a member of two or more of the clearing agencies 
(``common member''). Pursuant to such guarantee, if at least one 
clearing agency's liquidation of the assets of the common member in its 
control results in a loss and at least one clearing agency's 
liquidation of the assets of the common member results in 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 
liquidations results in a gain or if all of the liquidations results in 
a loss, the agreement provides that no assets will be made available by 
any party to the agreement to any other party.
    The effect of a limited cross-guaranty 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-guaranty agreement should reduce the risk of 
each of the clearing agencies which is a party to the agreement because 
a defaulting common member may well have the positions which were 
spread across markets in such a manner as to cause its net asset 
position at one clearing agency to be positive even though its net 
asset position at another clearing agency is negative.
    NSCC and OCC believe that the form of limited cross-guaranty 
agreement which they propose to sign is substantially similar to the 
limited cross-guaranty agreement previously entered into by NSCC with 
the International Securities Clearing Corporation (``ISCC''), the 
Government Securities Clearing Corporation (``GSCC''), and the MBS 
Clearing Corporation (``MBSCC'') except as described below.\5\ Like 
NSCC's agreements with MBSCC, GSCC, and ISCC, the agreement provides 
that demand for payment must be made within six months of the 
suspension of the common member.
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    \5\ See Securities Exchange Act Release No. 37616 (August 28, 
1996), 61 FR 46887 (order approving proposed rule changes seeking 
authority to enter into limited cross-guaranty agreements filed by 
MBSCC, GSCC, and ISCC).
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    The NSCC-OCC agreement differs from NSCC's agreements with MBSCC, 
GSCC, and ISCC principally in three ways. The agreement contains 
statements to make explicit that the net resources which either 
clearing agency might have to pay over to the other are to be 
calculated taking into account the obligations to each to the other 
pursuant to the options exercise settlement agreement \6\ between them 
and the obligations which either might have pursuant to any cross-
margining agreement to which it is a party.\7\ The agreement also 
contains a statement to make explicit that the net resources which 
either clearing agency might have to pay over to the other are to be 
calculated taking into account any amount deemed by the clearing agency 
to be necessary to cover any deficiency in the bankruptcy estate of the 
common member with respect to customers of the common member or to 
constitute customer funds or securities which the clearing agency has 
an obligation to return to the common member or its bankruptcy trustee 
or other representative.\8\ The agreement also contains a section 
providing for the indemnification of the clearing agency paying funds 
under the agreement by the clearing agency receiving funds under the 
agreement.
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    \6\ See Securities Exchange Act Release No. 37731 (September 26, 
1996), 61 FR 51731 (order approving proposed rule change).
    \7\ OCC has several cross-margining agreements in place with 
various community clearing agencies.
    \8\ OCC believes this statement to be important to reflect its 
Rule 1104(d) which in turn reflects that its account structure 
provides for maintaining customer positions in separate customers' 
accounts and marketmaker positions in separate market-makers' 
accounts. (A market-maker that is not affiliated with its clearing 
firm is a ``customer'' of that firm for purposes of the 
hypothecation rules even though it is regulated as a broker-dealer.)
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    OCC and NSCC believe that the proposed rule changes are consistent 
with the requirements of Section 17A of the Act because they will 
establish an additional linkage of clearance and settlement facilities 
which reduces the risk exposure of the clearing agencies and their 
members to the liquidation of any defaulting common members and thus 
reduces systemic risk.

B. Self-Regulatory Organizations' Statements on Burden on Competition

    OCC and NSCC do not believe a burden will be placed on competition 
as a result of the proposed rule changes.

C. Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants, or Others

    No written comments relating to the proposed rule changes have been 
solicited or received. OCC and NSCC will notify the Commission of any 
written comments they receive.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    Section 17A(b)(3)(F) \9\ of the Act requires that the rules of a 
clearing agency be designed 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 and to foster cooperation and coordination 
with persons engaged in the clearance and settlement of securities 
transactions. The Commission believes that the proposals are consistent 
with the NSCC's and OCC's obligations to assure the safeguarding of 
securities and funds in the custody or control of the clearing agency 
or for which they are responsible because the agreement should reduce 
their risk of loss due to a common member's default.\10\ The agreement 
should also mitigate the systemic risks posed to the national clearance 
and settlement system as a result of a defaulting common member and 
thus should foster cooperation and coordination with persons engaged in 
the clearance and settlement of securities transactions.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ This order also approves future limited cross-guarantee 
agreements into which NSCC or OCC may enter with other clearing 
agencies provided that the form of such agreements are substantially 
similar to the form of agreement approved in this filing.
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    NSCC and OCC have requested that the Commission find good cause for 
approving the proposed rule changes prior to the thirtieth day after 
the date of publication of notice of the filing. The Commission finds 
good cause for approving the proposed rule changes prior to the 
thirtieth day after publication of notice because it will permit NSCC 
and OCC to put a risk reduction mechanism into place in a timely 
fashion.

V. Solicitation of Comments

    Interested person are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions

[[Page 47865]]

should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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, 
NW., Washington, DC 20549. Copies of the respective filing swill also 
be available for inspection and copying at the respective principal 
offices of OCC and NSCC. All submissions should refer to File Nos. SR-
OCC-97-17 and SR-NSCC-97-12 and should be submitted by October 2, 1997.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule changes (File Nos. SR-OCC-97-17 and SR-
NSCC-97-12) be and hereby are approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24134 Filed 9-10-97; 8:45 am]
BILLING CODE 8010-01-M