[Federal Register Volume 66, Number 165 (Friday, August 24, 2001)]
[Notices]
[Pages 44659-44661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21421]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44723; File No. SR-OCC-2001-03]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Rescind Concentration 
Restrictions on Letters of Credit Issued by Certain Non-U.S. 
Institutions

August 20, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 11, 2001, 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.\2\ 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).
    \2\ A copy of OCC's proposed rule change is 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 would rescind the concentration 
restrictions on letters of credit issued by certain non-U.S. 
institutions.

[[Page 44660]]

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

    The purpose of the proposed rule change is to rescind the 
concentration restrictions placed upon letters of credit issued by a 
non-U.S. institution where the issuing institution has qualified as a 
financial holding company under Regulation Y of the Board of Governors 
of the Federal Reserve System (``Fed'') or is an institution owned by 
or under the control of such a financial holding company.
    OCC began accepting letters of credit from non-U.S. institutions in 
January 1983 in response to concerns that U.S. institutions were 
increasing their fees to clearing members or were otherwise reducing 
their overall commitment to financing clearing members. A combination 
of factors led OCC to impose more stringent qualification standards on 
non-U.S. institutions than on U.S. institutions issuing letters of 
credit for the benefit of OCC.\4\ The qualification standards generally 
are found in Sections .01 through .08 of the Interpretations and 
Policies under OCC Rule 604.
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    \4\ Those factors included concerns about the diversity of 
regulatory structures, exposure to economic or political risk 
outside of the United States, and OCC's relative inexperience in 
dealing with non-U.S. institutions. Securities Exchange Act Release 
No. 19422 (January 12, 1983), 48 FR 2481 [File No. SR-OCC-82-8] 
(formalizing certain OCC criteria for approving domestic and foreign 
banks as issuers of letters of credit for margin purposes).
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    OCC has recently completed a reassessment of these standards to 
ensure that they remain appropriate and achieve their intended 
purposes. We have concluded that with the enactment of the Gramm-Leach-
Bliley financial Modernization Act of 1999 (``GLB'') \5\ and the Fed 
amendments to Regulation Y implementing GLB, the concentration 
restrictions found in Interpretations and Policies .02 should be 
rescinded for certain non-U.S. institutions.
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    \5\ Gramm-Leach-Bliley Financial Modernization Act of 1999, Pub. 
L. No. 106-102, 113 Stat. 1338 (1999).
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    GLB created a new type of holding company called a ``financial 
holding company'' and specified certain eligibility requirements for 
such institutions.\6\ To become a financial holding company, GLB 
requires a bank holding company to submit a declaration to the Fed that 
the company elects to be a financial holding company and a 
certification that all of the depository institutions controlled by the 
company are well capitalized and well managed. Under GLB, foreign banks 
are specifically permitted to qualify as financial holding companies. 
GLB also requires the Fed to apply comparable capital and management 
standards to such banks that are comparable to those applied to U.S. 
banks owned by a financial holding company, giving due regard to 
certain enumerated principles.
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    \6\ Qualified financial holding companies may engage in 
securities, insurance, and other activities that are financial in 
nature or incidental to a financial activity. 50 FR 14433.
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    The Fed has amended Regulation Y in order to implement provisions 
of the GLB Act governing the creation and conduct of financial holding 
companies.\7\ Section 225.90 sets forth requirements that a foreign 
bank must meet for purposes of qualifying as a financial holding 
company, including capitalization and management tests.\8\ The well-
capitalized test includes risk based capital assessments.\9\ The well-
managed test requires the foreign bank to receive satisfactory Fed 
regulatory ratings, to receive the consent of its home country 
supervisor to the expansion of its U.S. activities, and to meet 
management standards comparable to those required of a U.S. bank owned 
by a financial holding company.\10\ A foreign bank's election to be 
treated as a financial holding company is effective on the thirty-first 
day after the date that the election was received by the appropriate 
Federal Reserve Bank unless the applicant receives prior written notice 
that its election is effective or the applicant is notified that the 
election is ineffective.\11\
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    \7\ See 66 FR 399 (January 3, 2001) (Board of Governors of the 
Federal Reserve Board adopting a final rule to amend Regulation Y to 
implement the financial holding company provisions of the GLB).
    \8\ Section 225.93 sets forth provisions that are applicable 
should a foreign bank fail to meet the applicable capital and 
management standards and specifies the consequences of such failure. 
Consequences include being required to execute an agreement with the 
Fed providing for a schedule of actions to be taken by the foreign 
bank to become compliant and, if the foreign bank is unable to meet 
such schedule, being subjected to an order requiring the divestiture 
or termination of certain business in the United States. Section 12 
CFR 225.93 (2000).
    \9\ Section 12 CFR 225.90(b) (2000).
    \10\ Section 12 CFR 225.90(c) (2000).
    \11\ Section 12 CFR 225.92 (2000). The Fed publishes a list of 
effective financial holding company elections on its web site. As of 
January 2001, 13 out of 32 non-U.S. Institutions approved by OCC to 
issue letters of credit have qualified as financial holding 
companies.
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    OCC believes that the Fed's regulatory policies governing the 
qualification of foreign banks as financial holding companies provide 
sufficient safeguards as to the creditworthiness of such institutions 
and the collectibility of letters of credit issued by them to warrant 
rescinding the concentration restrictions currently imposed on such 
institutions. Letters of credit issued by non-U.S. institutions 
currently represent only 3.2% of total margin deposits,\12\ and OCC 
does not believe that rescinding the concentration requirements for 
qualified non-U.S. financial holding companies will materially increase 
its exposure to letters of credit issued by non-U.S. institutions 
specifically or letters of credit generally.
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    \12\ Letters of credit currently represent only 11.9% of total 
margin deposits.
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    The proposed rule change is consistent with section 17A of the Act 
because it would facilitate the prompt and accurate clearance and 
settlement of securities transactions and should allow OCC to safely 
keep funds and securities while allowing non-U.S. institutions that 
have qualified as financial holding companies to compete on an equal 
footing with U.S. institutions for purposes of issuing letters of 
credit on behalf of clearing members.

(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

[[Page 44661]]

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-2001-03 and should be submitted by 
September 14, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-21421 Filed 8-23-01; 8:45 am]
BILLING CODE 8010-01-M