[Federal Register Volume 66, Number 110 (Thursday, June 7, 2001)]
[Notices]
[Pages 30778-30780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14311]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44371; File No. SR-OCC-00-09]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to Specific Deposit and Escrow Deposit Programs

May 31, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), notice is hereby given that on, September 8, 2000, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change 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 parties 
and to grant accelerated approval.\1\
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    \1\ A copy of the text of OCC's proposed rule change and the 
attached exhibit are available at the Commission's Public Reference 
Section or through OCC.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change adds a provision to OCC's rules to 
describe specifically how OCC would handle a closing purchase 
transaction submitted to it in the name of a suspended clearing member 
that had been effected to close out or reduce a covered short position. 
The purposed rule also updates and clarifies OCC's rules that describe 
how OCC proceeds after suspending a clearing member.

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.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The principal purpose of the proposed rule change is to add a 
provision to OCC's rules to describe specifically how OCC would handle 
a closing purchase transaction submitted to it in the name of a 
suspended clearing member that had been effected to close out or reduce 
a covered short position. A secondary purpose of the proposed rule 
change is to update and clarify a few other rules that describe how OCC 
proceeds after suspending a clearing member. These changes are 
described under the heading ``Other Changes'' below.
    The rules governing both OCC's escrow deposit program and its 
specific deposit program permit OCC to have recourse to a deposit if an 
exercise is assigned to the short position that is covered by the 
deposit and if the clearing member does not perform on the 
assignment.\2\ Both programs are intended to provide OCC with 
protection against the risk associated with short positions. The escrow 
deposit program is intended also to provide the clearing member and the 
clearing member's correspondent broker, if there is one for a 
particular customer, with recourse if the clearing

[[Page 30779]]

member or broker performs on an assignment to the covered short 
position and the customer fails to make settlement with the clearing 
member or broker.
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    \2\ Under OCC's rules, an ``escrow deposit'' is a deposit made 
by a clearing member's customer with a bank that has been approved 
by OCC (referred to as an ``escrow bank''), and a ``specific 
deposit'' is a deposit made by a clearing member at The Depository 
Trust Company. When OCC accepts an escrow deposit or a specific 
deposit, it does so in lieu of requiring the clearing member to 
deposit margin with OCC, and OCC therefore looks to the deposit to 
make itself whole if the clearing member fails to perform on an 
assignment on the short position that is covered by the deposit.
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    OCC has identified an area in which the protection afforded to OCC 
by the two deposit programs should be strengthened. The weakness 
relates to closing purchase transactions.\3\ Although OCC's rules 
permit OCC to have recourse to a specific deposit or an escrow deposit 
if an exercise is assigned to the covered short position and the 
clearing member fails to perform on the assignment, the rules do not 
provide OCC with express recourse to the deposit if the clearing member 
closes out the covered short position by means of a closing purchase 
transaction and then fails to pay the premium for the closing purchase 
transaction. When OCC's deposit programs were originally established, 
OCC's rules permitted it to reject any transaction for which the 
purchaser failed to pay the premium. If a clearing member failed to pay 
the premium for a closing purchase transaction covered by a specific 
deposit or an escrow deposit, OCC could have rejected the closing 
purchase transaction and caused the short position to remain on OCC's 
books until it was assigned in which case OCC could have used the 
deposit to perform on the assignment or until it expired unassigned. 
Some years ago, however, OCC amended its rules so that it cannot reject 
trades for nonpayment of premiums.\4\ An unintended result of that 
amendment was to leave OCC without specific authority in its rules to 
have recourse to a specific deposit or escrow deposit if a clearing 
member closed out a covered short position and then defaulted on 
payment of the premium.
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    \3\ A ``closing purchase transaction'' is a transaction in which 
the purchaser's intention is to eliminate (``close out'') or reduce 
a short position in the series of options involved in the 
transaction.
    \4\ Securities Exchange Act Release No. 29853 (October 23, 
1991), 56 FR 55968 [File No. SR-OCC-90-05] (approving OCC's proposed 
rule change relating to the earlier guarantee of options 
transactions).
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    In order to remedy this concern, OCC is adding an Interpretations 
and Policies .01 to Rule 1105 to provide that if a clearing member 
fails to make premium settlement for an account on any day on which it 
is obligated to settle a closing purchase transaction in any series in 
the account, first, OCC will deem the closing transaction first to have 
closed out any uncovered short positions in the series and second, if 
the number of cleared securities involved in the transaction exceeds 
the number of uncovered short positions in the account, OCC will deem 
the transaction to be an opening purchase transaction to the extent of 
the excess even if there are covered short positions carried in the 
account. The effect of the interpretation would be to expressly allow 
OCC to maintain the covered short position on OCC's books until the 
position is assigned or expires unassigned.\5\
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    \5\ A parallel concern with closing purchase transactions exists 
for the escrow deposit program at the ``clearing/member broker'' 
level. (As stated in the text, the escrow deposit program is 
designed to provide protection for clearing members and their 
correspondent brokers as well as for OCC.) OCC's Rule 613(j) as 
currently in effect and the form of agreement currently used by OCC 
with banks that act as escrow depositories (``escrow agreement'') do 
not expressly permit the clearing member or correspondent broker to 
have recourse to an escrow deposit if the customer fails to pay the 
premium for a closing purchase transaction to the clearing member or 
broker. The cure for this ``clearing member/broker'' level weakness 
requires an amendment to the form of the escrow agreement as well as 
an amendment to OCC's rules. OCC is preparing a restated form of 
escrow agreement that will address this concern as well as will make 
a number of other changes in the form of escrow agreement. OCC 
intends to file that amended form, together with amendments to Rule 
613(j), in the near future.
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Other Changes
    1. Rule 1105. The proposed change in the first paragraph of Rule 
1105 is to make clear that Rule 1105 applies to any pending transaction 
of a suspended clearing member and not just those affected after the 
time at which the clearing member was suspended.
    2. Rule 1106. The changes in Rule 1106(a) are to make non-
substantive improvements in the language of the rule and to add a 
reference to any rule that replaces or supplements Rule 1107. This 
change conforms Rule 1106(a) to the change in the language following 
Rule 1807 that is described below.
    The changes in Rule 1106(b)(2): (1) Eliminate a reference to Rule 
1107(a)(2) (because virtually all equity options are settled through 
the facilities of a designated clearing corporation and therefore 
subject to Rule 1107(a)(1)); (2) replace a reference to Rule 1807 with 
a reference to ``a provision of the Rules that is specified in the 
Rules as replacing or supplementing Rule 1107 with respect to 
particular classes of options'' (because Rule 1107 is currently 
replaced or supplemented by Rule 1705 for yield-based treasury options 
and by Rule 2306 for cash-settled foreign currency options as well as 
by Rule 1807 for index options); and (3) add the word ``covered'' to 
clarify the intended meaning of the rule.
    3. Rule 1107 and Rule 1807. The changes in Rules 1107 and 1807 have 
closely related purposes. Rule 1107(a)(2) is amended to delete language 
currently in that rule that seems to address the closeout of assigned 
covered index option contracts. This language has no effect because 
Rule 1807 expressly replaces Rule 1107(a) with respect to index 
options. The explanatory sentence following Rule 1807 that currently 
states, ``Rule 1807 supplements Rule 1104 and replaces Rule 1107,'' 
will be amended to state, ``Rule 1807 supplements Rule 1104 and Rule 
1107(b) and replaces Rule 1107(a) and (c).'' This change is to reflect 
that Rule 1107(b) is intended to apply to the close-out of assigned 
covered index option contracts. (Rule 1107(b) authorizes OCC to 
allocate an assignment if OCC cannot determine promptly upon the 
suspension of a clearing member whether the clearing member allocated 
the assignment to a short position for which a specific deposit or an 
escrow deposit has been made. This concept is relevant for covered 
index option contracts.) New paragraph (b) to Rule 1807(b) incorporates 
sentences parallel to the final two sentences of Rule 1107(a)(2). These 
sentences are simpler than their Rule 1107(a)(2) counterparts because 
index options are cash-settled and the ``delivery'' concept is not 
relevant to index options.
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act and the rules and regulations thereunder 
applicable to OCC because it enhances OCC's ability to assure the 
safeguarding of securities and funds which are in its custody or 
control or for which it is responsible.

(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 requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is

[[Page 30780]]

responsible.\6\ For the reasons set forth below, the Commission 
believes that OCC's proposed rule change is consistent with OCC's 
obligations under the Act.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after publication 
of the notice of filing. The Commission finds good cause for so 
approving the proposed rule change because accelerated approval will 
permit OCC to immediately give OCC the benefit of protection against 
such failures to settle. Accordingly, the Commission finds that the 
rule change is consistent with OCC's obligations to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible because 
it should provide OCC with strengthened protection against the risk of 
a suspended member's failure to settle by providing OCC with express 
recourse to the suspended member's deposits.

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-00-09 and should be submitted by June 
28, 2001.

V. 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-00-09) be and hereby is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14311 Filed 6-6-01; 8:45 am]
BILLING CODE 8010-01-M