[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82431-82432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33120]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43755; File No. SR-OCC-00-12]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to The Creation of a 
Program to Relieve Strains on Clearing Members' Liquidity in Connection 
With Settlements

December 20, 2000.
    Pursuant to 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ notice is hereby given that on November 27, 2000, The 
Options Clearing Corporation (``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 on the proposed rule change from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organizations Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change proposes a program to relieve strains on 
clearing members' liquidity in heavy expiration months by reducing 
inefficiencies in the exercise settlement process.\2\
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    \2\ A copy of the text of OCC's proposed rule change and the 
attached exhibits are available at the Commission's Public Reference 
Section or through OCC.
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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 these 
statements.\3\
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    \3\ 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

1. Background
    Under the Third Amended and Restated Options Exercise Settlement 
Agreement (the ``Accord'') dated February 16, 1995, between OCC and 
National Securities Clearing Corporation (``NSCC''), OCC and NSCC each 
guarantee that if the other sustains a loss on liquidity of a common 
member \4\ with pending settlement activity at NSCC resulting option 
exercises and assignments, it will make a payment to the other in an 
amount (which may be zero) determined by a formula set forth in the 
Accord.\5\
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    \4\ The Accord also covers situations where an OCC clearing 
member that is not a NSCC member settles option exercises and 
assignments through an NSCC member.
    \5\ For a description of the Accord's formula, refer to 
Securities Exchange Act Release No. 37731 (September 26, 1996), 61 
FR 51731.
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    Under the Accord, NSCC has until 6:00 a.m. Central Time on the day 
after an option exercise settlement date (E+4) to notify OCC that is 
has ceased to act or may cease to act for a common member. If NSCC 
fails to give such notice by that time, OCC is released from its 
guarantee obligation with respect to transactions for which E+3 was the 
settlement date. Because OCC is not released from its guarantee 
obligation until the morning of E+4, it must continue to hold margin on 
assignments settling on E+3 until E+4. This means that assets that a 
clearing member has deposited with OCC as margin for pending 
assignments cannot be used to settle or to finance settlement of those 
assignments. Instead, the clearing member must find other sources of 
financing and that can strain some clearing members' liquidity in 
months with heavy exercise and assignment activity.
2. The Proposed Rule Change
    In an effort to reduce the strains on liquidity resulting from the 
after-the-fact release of margin on pending assignments, OCC, in 
conjunction with NSCC and The Depository Trust Company (``DTC''), has 
worked out a program to allow OCC clearing member to withdraw equity 
securities \6\ deposited with OCC as margin and pledge them to DTC 
participant banks as collateral for loans. The proceeds of such loans 
would be disbursed by the bank directly to OCC and used to discharge 
settlement obligations of the clearing member at NSCC that were 
guaranteed by OCC. OCC's liability exposure to NSCC under the Accord 
would be correspondingly reduced as would OCC's need to continue to 
hold margin until E+4.
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    \6\ OCC plans to allow the use of Government securities as well 
once the necessary systems are developed. At December 31, 19999, 
OCC's margin deposits included over $36 billion in equities compared 
to $9 billion Governments.
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    The program would work as follows:
     On the morning of E+3, a clearing member would determine 
from OCC the amount of the loan that it could collateralize with 
securities held by OCC as a margin. That amount would be no less than 
the value assigned by OCC to such securities for margin purposes \7\ 
and would be no more than the lesser of (i) the margin requirement for 
the account from which the securities were to be withdrawn \8\ and (ii) 
the amount of OCC's guarantee exposure to NSCC (assuming that the 
clearing member's NSCC positions liquidated to a deficit).\9\
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    \7\ For example, if the clearing member had equity securities 
with a market value of $10 million on deposit in an account with OCC 
as margin (which OCC would value at $7 million for margin purposes), 
the amount of the bank loan collateralized by those securities would 
have to be no less than $7 million. If the loan amount were, for 
example, $6 million, OCC would be exchanging $7 million worth of 
margin for a reduction of only $6 million in its guarantee exposure 
to NSCC,
    \8\ If, in the preceding example, the margin requirement in the 
relevant account were only $6 million, the loan would be limited to 
that amount and OCC would only release equity securities with a 
market value of $8.57 million ($6 million in margin value). The 
remaining $1.43 million of securities would be excess margin, which 
the clearing member would be free to withdraw and pledge separately.
    \9\ If, in the preceding examples, OCC's guarantee exposure to 
NSCC were only $5 million, the loan would be limited to that amount 
and OCC would only release equity securities with a value of $7.14 
million ($5 million in margin value). If the loan amount were in 
excess of $5 million, OCC would be releasing margin worth more than 
$5 million for a reduction of only $5 million in its guarantee 
exposure.
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     The clearing member would then contact its bank and 
arrange for the loan. When the terms of the loan were agreed upon, the 
clearing member would use a new Participant Terminal System screen 
developed by DTC to confirm both to the bank and to OCC the amount of 
the loan and the quantity and description of the securities to be 
withdrawn from OCC and pledged to the bank as collateral. The bank and 
OCC would use that information to validate the loan request.
     When both the bank and OCC approved the loan, DTC would 
transfer the securities from a ``pledged to OCC'' field in the clearing 
member's DTC account to a special OCC account at DTC. From that 
account, the securities would be pledged to the bank against receipt of 
the loan proceeds. The proceeds would thus be paid directly to OCC 
without passing through the hands of the clearing member.
     Upon receipt in the special OCC account, the loan proceeds 
would automatically be paid over to NSCC for the benefit of the 
clearing member resulting in a corresponding reduction in OCC's 
guarantee exposure to NSCC under the Accord.

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     At the end of the day, DTC would automatically transfer 
the securities from a ``pledged to bank'' field in the special OCC 
account to a ``pledged to bank'' field in the clearing member's DTC 
account, leaving the clearing member in the same position as if it had 
been able to pledge the securities to the bank without OCC's 
intermediation.
    Upon allowing securities to be withdrawn and pledged under the 
program, OCC would reduce its margin requirement in the account from 
which the securities were withdrawn by an amount equal to the value 
assigned to the securities for margin purposes. The account would, 
however, be required to be fully margined the next morning.
    Initially, clearing members will be permitted to withdraw and 
pledge securities held by OCC as margin only on settlement dates for 
exercises of expiring equity options. OCC may at a future date decide 
to make it available on other exercise settlement dates as well.
3. Timing
    Historically, the heaviest volume of option expirations, and hence 
exercises, occurs in January. In January 2000, 26,099,346 option 
contracts expired, accounting for 41.9% of total open interest. Open 
interest as of November 21, 2000, included 26,378,070 contracts 
expiring in January 2001 (43.2% of total open interest). OCC believes 
that it is important to have the new program in place in time for the 
January 2001 expiration to help relieve potential strains on liquidity 
resulting from the large volume of exercise activity expected to occur 
at that time.
    The proposed rule change is consistent with the requirements of 
section 17A of the Act \10\ and the rules and regulations thereunder 
applicable to OCC because it would reduce inefficiencies in the 
exercise settlement process and relieve strains on clearing members' 
liquidity in heavy expiration months thereby promoting the safeguarding 
of securities and funds.
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    \10\ 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

    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 the self-regulatory organization 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, including whether the proposed rule 
change is consistent with the Act. 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 Section 450 Fifth Street, NW., 
Washington, DC 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-00-12 and should be submitted by 
January 18, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33120 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M