[Federal Register Volume 62, Number 236 (Tuesday, December 9, 1997)]
[Notices]
[Pages 64902-64903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32171]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39386; File No. SR-OCC-97-11]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Regarding the Stock Loan/Hedge 
System

December 2, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 11, 1997, The Options 
Clearing Corp. (``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 amend OCC's by-laws 
governing OCC's stock loan/hedge system (``HEDGE system'') to eliminate 
the requirements with respect to the accounts in which stock loan 
positions must be maintained.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Base 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 test 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 HEDGE system is a clearing system for stock loans between OCC 
clearing members.\3\ To date, OCC has approved only a few clearing 
members as stock lenders under the HEDGE system. OCC believes that the 
HEDGE system will have positive effects on OCC's risk profile and on 
the stock loan marketplace generally and would like to open the HEDGE 
system to a broader group of clearing members. However, OCC has 
determined that the HEDGE system's requirements with respect to the 
accounts in which stock loan positions must be maintained seriously 
limit clearing members' ability to use the HEDGE system.
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    \3\ For a complete description of the HEDGE system, refer to 
Securities Exchange Act Release No. 32638 (July 15, 1993), 58 FR 
39264 [File No. SR-OCC-92-34] (order approving proposed rule change 
establishing HEDGE system).
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    OCC's by-laws governing the HEDGE system \4\ currently treat stock 
loans as if they were pledges of loaned securities subject to the 
Commission's hypothecation rules.\5\ The hypothecation rules limit the 
circumstances under which a broker-dealer may pledge securities carried 
for the account of any customer \6\ and specifically prohibit broker-
dealers from pledging securities carried for the account of any 
customer under circumstances that will permit such securities to be 
commingled with securities carried for the account of any person other 
than a bona fide customer of such broker or dealer under a lien for a 
loan made to such broker or dealer.\7\ Accordingly, under the HEDGE 
system's account segregation rules, a clearing member that desires to 
lend stock must (1) first determine whether the stock is a customer or 
proprietary security; and (2) if the stock is a customer security, 
effect the loan through its OCC customers' account (or where permitted 
through its OCC market-maker's account).
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    \4\ OCC By-Laws, Article XXI, Section 5.
    \5\ 17 CFR 240.8c-1 and 240.15c2-1.
    \6\ For purposes of the hypothecation rules, the term 
``customer'' includes registered broker-dealers so long as they are 
not affiliated in specified ways with the broker-dealer effecting 
the pledge. 17 CAR 240.8c-1(b)(1), 240.15c2-1(b)(1). References to 
``customers'' and ``non-customers'' herein are based on the 
definition in the hypothecation rules.
    \7\ 17 CAR 240.15c2-1(a)(2). See also 17 CFR 240.8c-1(a)(2) 
(providing the same requirements as Rule 15c2-1(a)(2) except that 
its scope is limited to exchange members and brokers and dealers 
that transact business through exchange members.
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    According to OCC, stock loans historically have not been subject to 
the hypothecation rules and clearing members do not identify the stock 
in their ``loan boxes'' as to origin (i.e., as customer or 
proprietary). OCC also has advised the Commission that ordinary over-
the-counter stock loan transactions are not subject to the 
hypothecation rules. Therefore, according to OCC, clearing members that 
desire to loan stock through the HEDGE system find it difficult, if not 
impossible, to comply with the HEDGE system's account segregation 
requirements. OCC believes

[[Page 64903]]

that clearing members are unlikely to change their systems just to be 
able to use the HEDGE system. As a result, OCC does not expect to be 
able to achieve broad-based participation in the HEDGE system with its 
current account segregation requirements.
    OCC has determined that there is no legal reason for OCC's by-laws 
to treat stock loans under the HEDGE system as hypothecations. 
Therefore, OCC has concluded that it may eliminate the HEDGE system's 
account segregation requirements for stock loans without violating or 
causing clearing members to violate the Commission's hypothecation 
rules.
    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(A) of the Act \8\ and the rules and 
regulations thereunder because it promotes efficiencies in the 
clearance and settlement of securities transactions.
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    \8\ 15 U.S.C. 78q-1(b)(3)(A).
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(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, 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. 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-97-11 and should be 
submitted by December 30, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32171 Filed 12-8-97; 8:45 am]
BILLING CODE 8010-01-M