[Federal Register Volume 67, Number 76 (Friday, April 19, 2002)]
[Notices]
[Pages 19467-19468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9631]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45745; File No. SR-OCC-2001-04]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Forms of Margin 
Collateral

April 12, 2002.
    On March 9, 2001, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') and on 
August 24, 2001, amended proposed rule change SR-OCC-2001-04 pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on November 13, 2001.\2\ On April 8, 2002, OCC filed a second 
amendment.\3\ No comment letters were received. For the reasons 
discussed below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 45021 (November 5, 
2001), 65 FR 56876.
    \3\ The amendment was technical in nature and did not affect the 
substance of the proposal as published for notice.
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I. Description

    The proposed rule change expands the types of debt securities that 
clearing members may deposit with OCC as margin collateral. In light of 
the declining supply of U.S. Treasury bills, notes, and bonds, the rule 
change allows OCC clearing members to deposit as margin debt securities 
issued by Congressionally chartered corporations (government sponsored 
enterprise or ``GSE'' debt securities).
    To be acceptable as margin collateral, the GSE debt securities must 
be approved by OCC's membership/margin committee. OCC's membership/
margin committee has approved certain non-callable 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 margin deposit.\4\ Both companies are stockholder-
owned, Congressionally chartered corporations with the public purpose 
of increasing the supply and availability of home mortgages.
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    \4\ OCC will advise the Commission staff of additional GSE debt 
securities that the membership/margin committee approves for deposit 
as margin collateral.
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    In 1998, Freddie Mac initiated its Reference Debt Program (``RDP'') 
in order to finance the mortgages it retains.\5\ Through the RDP 
program, 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.\6\ 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. 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. As a result, OCC will be readily able to perfect its 
security interest in these securities.
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    \5\ Freddie Mac's web site, www.freddiemac.com, provides a 
detailed description of the RDP program.
    \6\ 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.
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    Also in 1998, Fannie Mae launched the Benchmark Debt Program (BDP), 
which is its debt financing initiative.\7\ 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 that are the 
general obligations of the company and are not secured by the full 
faith and credit of the U.S. Government.\8\ 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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    \7\ Fannie Mae's web site, www.fanniemae.com, provides a 
detailed description of its BDP program.
    \8\ 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.
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    These debt securities issued by Freddie Mac and Fannie Mae are 
liquid, marketable, and of high credit quality which makes them an 
appropriate form of margin collateral. These characteristics help 
ensure that OCC will be readily able to liquidate the securities and to 
realize their market value in order to cover any clearing member 
default. Securities haircuts,

[[Page 19468]]

similar to those used for U.S. Government securities deposited as 
margin, have been prescribed to cover market and liquidity risk.\9\
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    \9\ OCC is also making technical changes 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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II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F).\10\ Section 17A(b)(3)(F) 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 responsible. The Commission believes that OCC's rule 
change meets this requirement because it allows OCC's clearing members 
to deposit high quality, liquid debt securities with OCC as margin 
collateral in a manner that should provide OCC with sufficient 
safeguards to protect the securities and funds that are within its 
custody or control or for which it is responsible.
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    \10\ U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A(b)(3)(F) 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-2001-04) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9631 Filed 4-18-02; 8:45 am]
BILLING CODE 8010-01-P