[Federal Register Volume 64, Number 69 (Monday, April 12, 1999)]
[Notices]
[Pages 17709-17711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9013]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41242; File No. SR-OCC-98-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Concerning Required Clearing Fund Contributions

April 1, 1999.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 13, 1998, The 
Options Clearing corporation (``OCCC'') filed with the Securities and 
Exchange Commission (``Commission'') and on March 22, 1999, amended the 
proposed rule change (File No. SR-OCC-98-04) as described in Items I 
and II below, which items have been prepared primarily by OCC. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to grant 
accelerated approval of the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).

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[[Page 17710]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Under the proposed rule change, OCC will revise clearing members' 
required clearing fund contributions so that each clearing member will 
not be required to contribute a proportionate share of an amount equal 
to 5 percent of the average daily aggregate margin requirement of all 
clearing members with a sliding scale calculation of up to 7 percent if 
the amount of the clearing fund falls below $1 billion.

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\
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    \2\ The Commission has modified the text 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

    As part of OCC's risk reduction system, the clearing fund is 
designed to provide a third line of defense in the event of a clearing 
member default to enhance OCC's capacity to perform its guarantee 
function. OCC's first two lines of defense are (1) the credit 
worthiness of each clearing member and (2) each clearing member's 
margin deposits. If a clearing member becomes insolvent and its margin 
deposits are inadequate or are not immediately available, the clearing 
fund provides OCC with a pool of highly liquid assets that are 
immediately available.
    The clearing fund mutualizes among all of OCC's clearing members 
the risk of default of an individual clearing member. OCC's total 
clearing fund is comprised of two fund pools, the equity clearing fund 
and the non-equity clearing fund. Currently, each clearing member's 
required contribution to the clearing fund is its proportionate share 
of an amount equal to 7 percent of the average daily aggregate margin 
requirement for equity options and for non-equity options.\3\ Each 
clearing member is subject to a minimum contribution of $75,000 for the 
equity clearing fund if it is approved to clear equity options and 
$75,000 for the non-equity clearing fund if it is approved to clear 
non-equity options. Should these pools of assets ever be depleted, each 
clearing member is obligated to provide a second contribution equal to 
its original contribution prior to being able to withdraw from OCC 
membership.
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    \3\ A clearing member's proportionate share is the percentage 
based on the clearing member's average daily open long and short 
positions during the month compared to the average daily open long 
and short positions held by all clearing members during the same 
month.
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    Under Article VIII of its by-laws, OCC may use the clearing fund to 
cover various contingencies which include compensation for losses 
suffered by OCC as a result of the failure of a clearing member or a 
bank to perform its obligations to OCC. OCC's clearing fund currently 
contains over $1 billion. OCC has studied the adequacy of its clearing 
fund and believes that the size of its clearing fund is excessive with 
respect to its potential exposure. Among other things, OCC's analysis 
of the clearing fund's adequacy included an assessment of the clearing 
fun's ability to cover OCC's exposure resulting from (1) the default of 
a clearing member during volatile market conditions and (2) a delay or 
failure of a letter of credit bank to meet its obligation to OCC in 
connection with the default of a clearing member.
    After careful and deliberate discussions, OCC and its Board of 
Directors have determined that a more prudent level of the clearing 
fund may be achieved by reducing the overall fund size calculation from 
the current 7 percent of average aggregate daily margin requirement to 
5 percent of average aggregate daily margin requirement. However, OCC 
will apply a sliding scale calculation if the 5 percent contributions 
level produces a clearing fund of less than $1 billion.
    Specifically, the proposed rule change will amend Interpretation 
.01 to OCC Rule 1001 to provide that each clearing member's 
contribution to the clearing fund will be not less than 5 percent and 
not greater than 7 percent of its average daily aggregate margin 
requirement.\4\ Interpretation .01 will also provide that if the 5 
percent contribution level produces a clearing fund of less than $1 
billion that contribution level will be increased until either (a) The 
clearing fund reaches $1 billion or (b) the contribution level reaches 
7 percent.
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    \4\ OCC Rule 1001, which is not being amended, states that each 
clearing member's contribution shall be the greater of (1) $75,000 
or (2) the clearing member's proportionate share of 5 percent, or 
such greater percentage as OCC's board may prescribe, of the average 
daily aggregate margin requirement.
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    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the rules and 
regulations thereunder because it reduces clearing members' required 
clearing fund contributions to a more efficient and prudent level while 
not adversely affecting OCC's ability to effectively manage its risks.
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    \5\ 15 U.S.C. 78q-1.
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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

    Section 17A(b)(3)(F) of the Act \6\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody and control of the clearing agency 
or for which it is responsible. The Commission believes that the 
proposed rule change is consistent with OCC's obligations under Section 
17A(b)(3)(F) because while it reduces the size of OCC's clearing fund 
by allowing OCC to lower its clearing members' required contributions, 
it still requires OCC to maintain a clearing fund which should be 
sufficient to cover OCC's exposure to a defaulting clearing member or 
to a defaulting bank that has issued a letter of credit to a defaulting 
clearing member.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the publication of notice of 
the filing. Approving prior to the thirtieth day after publication of 
notice will permit OCC to use the new clearing fund contribution 
requirements for its April calculation.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 17711]]

Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-0609. 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 Room, 450 Fifth Street, NW, Washington, DC 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-98-04 and should be submitted by May 3, 1999.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\7\ that the proposed rule change (File No. SR-OCC-98-04) be and 
hereby is approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    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. 99-9013 Filed 4-9-99; 8:45 am]
BILLING CODE 8010-01-M