[Federal Register Volume 66, Number 219 (Tuesday, November 13, 2001)]
[Notices]
[Pages 56876-56878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28274]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45021; File No. SR-OCC-2001-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Forms of Margin 
Collateral

November 5, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 9, 2001, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on August 24, 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

[[Page 56877]]

solicit comments on the proposed rule change from interested persons.
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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 expand the forms of high quality 
debt securities that OCC may accept as margin collateral to include 
non-callable fixed income debt securities issued by approved government 
sponsored enterprises.

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 parts of these statements.
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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 this rule change is to expand the types of debt 
securities that clearing members may deposit with OCC as margin 
collateral. The declining supply of U.S. Treasury bills, notes, and 
bonds has been the subject of increased scrutiny from the financial 
markets. In light of this decreasing supply, OCC proposes to accept 
non-callable, fixed income debt securities issued by approved 
government sponsored enterprises (``GSEs'') as another form of high 
quality, liquid debt securities that clearing members may deposit as 
margin. OCC's membership/margin committee has approved the debt 
securities issued by two GSEs, the Federal Home Loan Mortgage 
Corporation (Freddie Mac) and the Federal National Mortgage Association 
(Fannie Mae), as being eligible for deposit. Both companies are 
stockholder-owned, Congressionally chartered corporations with the 
public purpose of increasing the supply and availability of home 
mortgages.
    In 1998, Freddie Mac initiated its Reference Debt Program (``RDP'') 
in order to finance the mortgages it retains. Through the RDP program, 
which was expanded to include bills in 2000, Freddie Mac sells large 
issues of long and short-term non-callable debt (i.e., bills, notes, 
and bonds) to provide investors with high quality debt securities. The 
debt securities generally are distributed through a group of 
participating dealers that also support secondary trading in the 
securities. To ensure broad based dealer participation, Freddie Mac 
limits the allocation to any one dealer to 35 percent of the offered 
amount. The debt securities are offered according to a predetermined 
schedule and issued in sufficient quantities to provide investors with 
liquid secondary markets.\3\ The RDP debt securities issued by Freddie 
Mac are the general obligations of the company and are not secured by 
the full faith and credit of the U.S. Government. Not all RDP debt has 
been rated. However, all such debt that has been rated has received S&P 
and Moody's top ratings. Domestic clearing and settlement may be done 
through organizations participating in one or more U.S. clearing 
systems, principally the book entry system operated by the Board of 
Governors of the Federal Reserve System or the DTC system. As a result, 
OCC will be readily able to perfect its security interest in these 
securities.
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    \4\ At the end of 2000, the total outstanding notional value of 
non-callable RDP bonds and notes approached $100 billion while the 
outstanding notional value of the non-callable RDP bills approached 
$600 billion. Freddie Mac's web site, www.freddiemac.com, provides a 
detailed description of the RDP program.
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    Also in 1998, Fannie Mae launched the Benchmark Debt Program (BDP), 
its debt financing initiative. The BDP model is almost identical to the 
RDP model. Through the BDP, Fannie Mae sells large issues of non-
callable long and short-term debt securities \4\ that are the general 
obligations of the company and are not secured by the full faith and 
credit of the U.S. Government. Other than the total value of securities 
issued in the programs, the most notable difference between the RDP and 
BDP is that all BDP securities have been rated and have received 
Moody's and S&P's top credit ratings.
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    \5\ At the end of 2000, the total outstanding notional value of 
non-callable BDP bonds and notes approached $180 billion. The 
outstanding notional value of BDP bills approached $350 billion in 
notional value at the end of 2000. Fannie Mae's web site, 
www.fanniemae.com, provides a detailed description of its BDP 
program.
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    The debt securities issued by Freddie Mac and Fannie Mae are 
liquid, marketable, and of high credit quality, making them an 
appropriate form of collateral. These characteristics ensure that OCC 
will be readily able to liquidate the securities and realize their 
market value in order to cover any clearing member default. Securities 
haircuts have been prescribed to cover any market and liquidity 
risk.\5\ They are based upon OCC's analysis of the daily volatility of 
these issues since their launch. The haircuts in all cases cover the 
largest one-day decline in the securities and, therefore, are 
considered appropriate.
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    \5\ Technical changes are also being made to Rule 604(b)(1) in 
order to more accurately describe the maturity periods of Government 
securities for purposes of valuation as margin collateral.
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    OCC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations. In particular, 
OCC believes that the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act \6\ because it responds to the decreasing 
supply of U.S. Government securities by allowing clearing members to 
deposit other high quality, liquid debt securities with OCC as margin 
collateral in a manner that safeguards securities that are within OCC's 
custody and control.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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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 OCC consents, the Commission will:
    (a) By order approve the 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

[[Page 56878]]

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 will also be available for inspection and copying at the 
principal office of OCC. All submissions should refer to File No. SR-
OCC-2001-04 and should be submitted by December 4, 2001.

    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. 01-28274 Filed 11-9-01; 8:45 am]
BILLING CODE 8010-01-M