[Federal Register Volume 66, Number 220 (Wednesday, November 14, 2001)]
[Notices]
[Pages 57143-57144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28489]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-5037; File No. SR-OCC-2001-03]


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

November 6, 2001.
    On April 11, 2001, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-2001-03) pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'').\1\ Notice of the 
proposed rule change was published in the Federal Register on August 
24, 2001.\2\ No comment letters were received. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 44723, (August 20, 
2001), 66 FR 44659.
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I. Description

    The purpose of the proposed rule change is to rescind the 
concentration restrictions placed upon the use as margin of 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.\3\ The qualification standards generally 
are found in sections .01 through .08 of the Interpretations and 
Policies under OCC Rule 604.
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    \3\ 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 recently reassessed these standards to ensure that they remain 
appropriate and achieve their intended purposes. OCC concluded that 
with the enactment of the Gramm-Leach-Bliley Financial Modernization 
Act of 1999

[[Page 57144]]

(``GLB Act'') \4\ and the Fed amendments to Regulation Y implementing 
GLB Act, the concentration restrictions found in Interpretations and 
Policies .02 should be rescinded for certain non-U.S. institutions.
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    \4\ Gramm-Leach-Bliley Financial Modernization Act of 1999, Pub. 
L. No. 106-102, 113 Stat. 1338 (1999).
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    GLB Act created a new type of holding company called a ``financial 
holding company'' and specified certain eligibility requirements for 
such institutions.\5\ To become a financial holding company, GLB Act 
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 depositor institutions controlled by the 
company are well capitalized and well managed. Under GLB Act, foreign 
banks are specifically permitted to qualify as financial holding 
companies. GLB Act 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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    \5\ 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 amended Regulation Y in order to implement provisions of 
the GLB Act governing the creation and conduct of financial holding 
companies.\6\ 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.\7\ The well-
capitalized test includes risk based capital assessments.\8\ 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.\9\ 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.\10\
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    \6\ 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 Act).
    \7\ 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.
    \8\ Section 12 CFR 225.90(b).
    \9\ Section 12 CFR 225.90(c).
    \10\ Section 12 CFR 225.92. 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,\11\ 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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    \11\ Letters of credit currently represent only 11.9% of total 
margin deposits.
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II. Discussion

    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 clearing agency's custody or control or for 
which it is responsible. The rule change removes restrictions on the 
percentage of clearing member's margin of obligations that may be 
satisfied by letters of credit issued by non-U.S. institutions where 
the issuing institution has qualified as a financial holding company 
under Regulation Y or is an institution owned by or under the control 
of such a financial holding company. Removing the restrictions from 
such non-U.S. institutions gives clearing members a larger pool of 
financially sound institutions from which they may obtain letters of 
credit to use the satisfy their margin obligations while still 
providing OCC with comfort that the non-U.S. issuing financial 
institutions have sufficient capital and adequate management to issue 
letters of credit for OCC margin purposes. Therefore, the Commission 
finds that OCC's proposed rule change is consistent with section 17A of 
the Act and the rules and regulations thereunder.

III. 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-2001-03) be and hereby 
is approved.

    For the Commission, by the Division of Market Regulation 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28489 Filed 11-13-01; 8:45 am]
BILLING CODE 8010-01-M