[Federal Register Volume 66, Number 83 (Monday, April 30, 2001)]
[Notices]
[Pages 21425-21427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10607]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44212; File No. SR-OCC-2001-05]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Clearing Security 
Futures

April 23, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 21, 2001, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') and on April 16, 2001, amended 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 Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change would amend OCC's By-Laws to provide that 
OCC may clear transactions in security futures effected on any national 
securities exchange or association registered under section 6(a) or 
15A(a) of the Act, as amended, or any ``designated contract market'' 
(as that term is used in the Commodity Exchange Act (``CEA'') that is 
registered as a national securities exchange under section 6(g) of the 
Act.

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.\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

    The Commodity Futures Modernization Act (``CFMA''), which became 
law on December 21, 2000, eliminated the preexisting ban on trading in 
future contracts on individual securities and narrow-based stock 
indices. Such ``security futures'' will be permitted to be traded on a 
principal to principal basis between ``eligible contract participants'' 
on August 21, 2001, and by other classes of customers on December 21, 
2001. The purpose of this proposed rule change is to identify the kinds 
of markets from which OCC will accept transactions in security futures 
for clearance.
    OCC anticipates that some or all of OCC's five participant 
exchanges will trade security futures, either on the participant 
exchange itself or on an affiliated futures exchange. OCC expects that 
it will therefore enter into the business of clearing security futures. 
However, the types of entities that can provide a marketplace for 
security futures include markets in addition to the options exchanges 
that are OCC's participant exchanges. These include other national 
securities exchanges and national securities associations as well as 
any ``board of trade'' that has been designated as a ``contract 
market'' under the CEA. An SEC-regulated market that wishes to trade 
security futures is required to obtain a limited-purpose registration 
as a marketplace under the CEA through a notice filing with the 
Commodity Futures Trading Commission (``CFTC''). A CFTC-regulated 
market trading security futures is required to obtain a limited-purpose 
registration with the Commission as a national securities exchange 
under a similar procedure. Each market will be regulated primarily by 
the agency (i.e., the Commission or the CFTC) with which it is 
fully registered.
    OCC believes that it is in a uniquely favorable position to clear 
security futures for any of these types of markets. OCC's role as the 
common clearinghouse for equity options offers opportunities for margin 
offsets and other efficiencies that would not be available if positions 
in security futures were carried with other clearinghouses. OCC's 
settlement interface with the National Securities Clearing Corporation 
gives OCC the ready ability to effect delivery of underlying stocks 
with respect to physically settled security futures. Because of OCC's 
experience and expertise in adjusting equity option contracts to 
compensate for various corporate actions, OCC is uniquely prepared to 
perform the same necessary function for security futures. Finally, OCC 
is legally able to clear security futures transactions originating on 
any type of market whereas a futures clearinghouse cannot clear 
security futures transactions originating on national securities 
exchanges that are registered with the Commission pursuant to section 
6(a) of the Act without registering as a securities clearing agency.
    Clearing members have conveyed to OCC their desire to consolidate 
clearance, settlement, and collateralization of similar or hedgeable 
products. This need grows in urgency with the sale of the collateral 
necessary to support the growing security derivatives markets.

[[Page 21426]]

    OCC believes that the interests of minimizing the scale and cost of 
collateral, maximizing the efficiency of clearance and settlement, 
reducing systemic risk, providing the best possible service to clearing 
members at the lowest possible price, and ultimately reducing costs to 
investors all argue that OCC's policy should be to clear stock futures 
transactions for any national securities exchange or association 
registered under section 6(a) or 15(A)(a) of the Act or any 
``designated contract market'' (as that term is used in the CEA) that 
is registered as a national securities exchange under section 6(g) of 
the Act.
    OCC will, of course, need to adopt additional rules governing 
security futures. Additionally, as described below, OCC proposed to 
cover security futures under separate clearing agreements between it 
and the markets desiring to clear security futures transactions through 
OCC rather than to incorporate security futures in the Restated 
Participant Exchange Agreement (``RPEA''). Because these products and 
the systems and other infrastructure needed to clear them are still 
being designed and developed, it is too early for OCC to be able to 
file a complete set of rules for clearing security futures. These 
rules, including a proposed form of clearing agreement for security 
futures, will be the subject of one or more future filings under Rule 
19b-4. However, it is important to resolve now the question of which 
markets OCC will clear for in order that both those markets and OCC can 
prepare for the start of security futures trading, which can begin in 
less than six months.
    Considerations of fairness dictate that markets other than 
participant exchanges and their affiliates be required to market some 
form of ``investment'' in OCC analogous to the redeemable equity 
investments required of participant exchange, However, such markets 
should not be offered OCC common stock. Increasing the number of OCC's 
common stockholders would dilute the interest of OCC's existing 
stockholders and unnecessarily complicate issues of corporate 
governance.
    Accordingly, the proposed amendment to Article I of OCC's By-Laws 
would define a separate category of market--a ``security futures 
market--''--from which OCC would accept transactions in security 
futures for clearance. The definition of ``security futures market'' 
would include certain entities, other than participant exchanges, that 
can be marketplaces for security futures under the provisions of the 
CFMA.\3\ A security futures market would not be defined as an 
``exchange,'' and OCC would be simply a provider of clearing services 
to such markets. For convenience, however, the terms ``exchange 
transaction,'' ``exchange rules,'' and ``exchange member'' would be 
redefined to include transactions on the rules and members of, as the 
case may be, a security futures market.
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    \3\ The term ``security futures market'' does not include an 
``alternative trading system'' or a ``derivatives transaction 
execution facility'' even though such markets may also trade 
security futures under provisions of the CEMA. Under section 6(h) of 
the Act, alternative trading systems would be permitted to trade 
only those security futures that are listed on a national securities 
exchange or national securities association and even then not until 
certain additional action is taken by such an exchange or 
association as provided in section 6(h)(5) of the Act. ``Derivatives 
transaction facility'' is a newly created regulatory category under 
the CEA. OCC believes that clearance of transactions for either of 
these types of entities could involve additional considerations not 
raised by its current proposal.
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    OCC anticipates that it would clear security futures transactions 
on security futures markets on the same terms and subject to the same 
clearing fees that will apply to security futures transactions 
originating on the exchanges. OCC proposes to create a new Article XII 
of its By-Laws that will be applicable to security futures. For the 
reasons stated, the present filing contains only the first section of 
Article XII, which establishes the conditions on which OCC will clear 
transactions in security futures for an exchange or a security futures 
market. Section 1 distinguishes between participant exchanges and 
security futures markets that are affiliated with an exchange, on the 
one hand, and non-affiliated security futures markets on the other 
hand.
    For the sake of fairness to its participant exchanges, which are 
required to purchase and hold shares of OCC stock and to provide 
additional capital to OCC to support the preparation for clearing 
transactions for new security futures markets, OCC proposes that non-
affiliated security futures markets be required to make a ``good 
faith'' deposit with OCC of $250,000. That deposit will be refunded to 
the security futures market in whole or in part if it ceases clearing 
security futures through OCC. OCC is considering a formula that would 
fix the amount of the refund at the lesser of the full amount of the 
original deposit or 50% of the amount of clearing fees received by OCC 
from clearing members as a result of transactions on that market 
(i.e., a kind of ``earn out'' provision).
    OCC would not be obligated to undertake security futures clearing 
for any non-affiliated security futures market if it determined that to 
do so would tax OCC's resources in a way that would jeopardize OCC's 
ability to fully perform its other responsibilities.
    The proposed By-Law provision would also require an exchange or 
security futures market that wishes OCC to clear its transactions in 
security futures to enter into a clearing agreement with OCC that would 
define the business relationship between OCC and such market with 
respect to security futures. OCC anticipates that there will be 
separate but uniform (except for provisions relating to the good faith 
deposit required of non-affiliated security futures market) clearing 
agreements with each exchange and security futures market that clears 
security futures through OCC. These agreements would cover some of the 
same matters covered in the RPEA but would omit inapplicable provisions 
relating to the registration statement on which OCC registers options, 
registration under state securities laws, and the options disclosure 
document. The clearing agreement would also contain appropriate 
indemnification of OCC and its officers and directors. The clearing 
agreement would terminate if the exchange or security futures market is 
no longer eligible to list security futures, no longer lists security 
futures despite being eligible to do so, or is in material breach of 
the clearing agreement.
    The proposed rule change is consistent with the purposes and 
requirements of section 17A of the Act\4\ and the rules and regulations 
thereunder applicable to OCC because it fosters cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions, removes impediments to and perfects the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions, and in general protects 
investors and the public interest.
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    \4\ 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

[[Page 21427]]

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-2001-05 and should be submitted by May 
21, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-10607 Filed 4-27-01; 8:45 am]
BILLING CODE 8010-01-M