[Federal Register Volume 63, Number 52 (Wednesday, March 18, 1998)]
[Notices]
[Pages 13293-13294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6977]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39739; File No. SR-OCC-97-05]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to Early 
Warning Notices

March 10, 1998.
    On May 15, 1997, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-97-05) 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 August 25, 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. 38948 (August 19, 1997), 
62 FR 44998.
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I. Description

    The proposed rule change revises OCC's Rule 303 to expand the 
circumstances under which a clearing member is to provide OCC with 
early warning notices. Currently, Rule 303 requires a clearing member 
to provide OCC with an early warning notice if the clearing member 
experiences certain enumerated financial difficulties or if the 
clearing member has provided any notice required pursuant to Commission 
Rule 15c3-1(e)(1)(iv).\3\ Rule 303 is expanded to explicitly provide 
that a clearing member must immediately notify an officer of OCC of any 
notice that such clearing member gives, is required to give, or 
receives from any regulatory organization regarding any financial 
difficulty affecting the clearing member or of any failure by the 
clearing member to be in compliance with the financial responsibility 
rules or capital requirements of any regulatory organization. As 
proposed, Rule 303 requires the clearing member to promptly confirm 
such notice in writing. In addition, the language of paragraphs (b) and 
(c) of Rule 303 [previously paragraphs (a) and (b)] is revised to 
conform to the requirement in new paragraph 303(a) that an officer of 
OCC be immediately notified by telephone of any of the events described 
in those paragraphs.
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    \3\ 17 CFR 240.15c3-1(e)(1)(iv). Rule 15c3-1(e) requires broker-
dealers to provide written notice to the Commission in connection 
with the withdrawal of certain levels of equity capital.
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    The term ``regulatory organization'' is defined in proposed 
Interpretations and Policies .01 to mean (i) the Commission and any 
other federal or state regulatory agency having jurisdiction over the 
clearing member including the Commodity Futures Trading Commission 
(``CFTC'') in the case of a clearing member which is subject to the 
jurisdiction of the CFTC; (ii) any self-regulatory organization as 
defined in Section 3(a) of the Act \4\ of which the clearing member is 
a member or participant; (iii) any clearing

[[Page 13294]]

 organization as defined in Regulation Section 1.3(d) under the 
Commodity Exchange Act,\5\ board of trade, contract market, and 
registered futures association of which the clearing member is a member 
or participant; and (iv) in the case of a non-U.S. clearing member, any 
non-U.S. regulatory agency or instrumentality or independent 
organization or exchange having jurisdiction over the non-U.S.clearing 
member or of which the non-U.S. clearing member is a member or 
participant.
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    \4\ 15 U.S.C. 78c(a).
    \5\ 17 CFR 1.3(d).
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    These amendments will enhance the effectiveness of OCC's financial 
surveillance program by providing OCC with material information, some 
of which it currently does not receive, concerning a clearing member's 
financial condition. For example, many of OCC's clearing members are 
also registered as futures commission merchants (``FCMs'') under the 
Commodity Exchange Act and as such are subject to the financial 
reporting requirements of the CFTC and the early warning notice 
requirements of commodity self-regulatory organizations. Because of 
differences in the early warning notice criteria used by the commodity 
regulatory organizations and those used by the securities regulatory 
organizations, events triggering early warning notice requirements for 
an FCM (e.g., net capital below a specified percentage of segregated 
funds) would not necessarily create an early warning notice requirement 
for a registered broker-dealer. Consequently, under OCC's current 
rules, a situation could occur that would require a clearing member to 
give early warning notice to its commodity regulatory authority but 
would not require the clearing member to give notice to OCC. 
Accordingly, requiring a clearing member to provide OCC with early 
warning notices which it is required to provide to any other regulatory 
organization should assist OCC in assessing the ongoing 
creditworthiness of its clearing members.
    There is potential overlap between the requirements of new 
paragraph (a) and existing paragraph (c) [previously paragraph (b)] 
whereby a non-U.S. clearing member might be required to notify OCC of a 
notice from a non-U.S. regulatory agency pursuant to both 
paragraphs.\6\ However, the overlap should not impose an inappropriate 
burden on non-U.S. clearing members because the requirement to notify 
OCC of an event can be satisfied by the same notice to OCC even if the 
requirement arises under both paragraphs.
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    \6\ Paragraph (c) of Rule 303 currently provides that an exempt 
non-U.S. clearing member must notify OCC promptly of any violation 
on its part of the rules or regulations of its non-U.S. regulatory 
agency or any notice received from such agency that alleges a 
violation of such rules or regulations, informs the non-U.S. 
clearing member that it may violate such rules or regulations, or 
informs the non-U.S. clearing member that it has triggered any 
provision relating to early warning notices contained in such rules 
or regulations.
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II. Discussions

    Section 17A(b)(3)(F) of the Act \7\ 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. 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 it increases the effectiveness 
of OCC's financial surveillance program. Revisions to Rule 303 
concerning early warning notices enables OCC to receive material 
information concerning a clearing member's financial condition that it 
does not receive currently. The early warning notices should assist OCC 
in assessing the ongoing creditworthiness of its clearing members and 
thus should help OCC to safeguard securities and funds in OCC's custody 
or control.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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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-97-05) 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. 98-6977 Filed 3-17-98; 8:45 am]
BILLING CODE 8010-01-M