[Federal Register Volume 67, Number 147 (Wednesday, July 31, 2002)]
[Notices]
[Pages 49729-49731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19312]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46257; File No. SR-OCC-2002-02]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Providing 
Clearing Services to Options Exchanges That Are Not Stockholders

July 25, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(''Act''),\1\ notice is hereby given that on January 25, 2002, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') and on July 9, 2002, 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 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 amend OCC's by-laws and rules in 
order that OCC could provide clearing services to new options exchanges 
without having those exchanges become stockholders of OCC.

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 allow OCC to provide clearing 
services to new options exchanges without issuing new equity to such 
exchanges. Under OCC's existing by-laws, any new options market 
desiring to clear options transactions through OCC is required to 
purchase common stock in OCC and to execute the Stockholders Agreement 
to which the existing stockholder exchanges are parties. Management of 
OCC has concluded that the practice of issuing new equity to each 
market for which it provides clearing services is no longer either 
necessary or appropriate. Indeed, the practice has already been 
abandoned with respect to providing clearing services to markets 
trading only security futures or commodity futures.\3\ The present rule 
change would permit OCC to clear options transactions for additional 
exchanges on a similar basis. OCC believes that there is no more reason 
to permit or require new options exchanges to become OCC stockholders 
than to permit or require those other markets to do so.
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    \3\ Article XII of the by-laws permits OCC to clear ``security 
futures exchanges'' without issuing equity to such exchanges and 
permits OCC to provide clearing services for other futures products 
on the same basis (Securities Exchange Act Release Nos. 44434 (June 
15, 2001), 66 FR 33283 [File No. SR-OCC-2001-05] and 45946 (May 16, 
2002), 67 FR 36056 [File No. SR-OCC-2001-16]).
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    Exchange ownership of clearing organizations is not required under 
Section 17A of the Act or of any other provision of the federal 
securities laws. State law at one time made such ownership necessary. 
Article VIII of the Uniform Commercial Code (``UCC''), as in effect in 
Illinois prior to the 1973 amendment, defined a ``clearing 
corporation'' as ``a corporation all of the capital stock of which is 
held by or for a national securities exchange or association registered 
under a statute of the United States such as the Securities Exchange 
Act of 1934.'' \4\ The UCC as now in effect in all U.S. jurisdictions 
no longer defines ``clearing organization'' in terms of ownership, and 
therefore, the UCC is no longer a constraint in determining the 
ownership of OCC.
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    \4\ The 1973 amendment identified certain other entities that 
could be owners of a clearing corporation while retaining securities 
exchanges or associations among the permitted owners.
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    Not only is there no continuing need to have new markets seeking 
clearing services become stockholders, there are a number of reasons 
not to do so. First, increasing the number of Class A and Class B 
stockholders could adversely affect OCC's ability to pursue new 
business opportunities.\5\ Stock ownership gives the existing 
participant exchanges the right to a representative on OCC's board of 
directors and veto rights over certain significant transactions (e.g., 
a merger) or amendments to certain provisions of the constituent 
documents (e.g., Article VII of the by-laws regarding exchange 
qualifications). The participant exchanges have divergent and sometimes 
conflicting interests, and this will only become more prevalent as the 
number and types of options exchanges proliferates. Expanding the 
number of stockholders with veto rights increases the likelihood that a 
single stockholder might block action that is in the best interests of 
OCC and its other stockholders. Second, continuing to add

[[Page 49730]]

 Class A and B stockholders could soon result in substantial increases 
in the size of the OCC board. After the number of exchange directors 
reaches seven, each addition of an exchange director would require the 
addition of another member director in order to maintain the allocation 
between member directors and exchange directors called for under OCC's 
constituent documents. Ultimately, the OCC board could reach an 
unwieldy size. Finally, issuing additional Class A and Class B common 
stock for each new market would continually dilute the interests of the 
existing participant exchanges.
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    \5\ Holders of OCC Class A common stock have the right, by 
majority vote, to elect member directors of OCC. Holders of Class B 
common stock vote on the election of the management director and 
exchange directors of OCC. In addition, the votes of Class B common 
stock holders are required to amend OCC's certificate of 
incorporation, to adopt an agreement of merger or consolidation of 
OCC with or into any other corporation, to authorize or consent to 
the sale, lease, or exchange of all or substantially all of the 
property and assets of OCC, to authorize or consent to the 
dissolution of OCC, to receive dividends, to receive assets upon 
partial or final liquidation or dissolution of OCC.
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    OCC proposes instead to create a new category of ``non-equity 
exchange'' to which markets that desire options clearing services from 
OCC would be admitted. In lieu of purchasing common stock of OCC, new 
participant exchanges would be required to enter into a Noteholders 
Agreement and to purchase a promissory note from OCC in the principal 
amount of $1 million, which is the amount currently specified in 
Article VII, Section 2 of the by-laws as the maximum purchase price for 
additional equity currently required to be purchased by a new equity 
exchange. Instead of the equity interest received by such equity 
exchanges, non-equity exchanges would receive promissory notes bearing 
an interest rate return on their investments as described below.
    Non-equity exchanges will be subject to admission requirements 
identical to those imposed on the current participant exchanges that 
hold equity. Among other things, new participant exchanges must be 
registered under the Act and must be in compliance with the rules 
promulgated thereunder by the Commission and must furnish information 
to OCC concerning such things as the exchange's operations, management, 
rules, and membership.
    OCC will provide clearing services to non-equity exchanges on the 
same basis that it provides services to the equity exchanges. Non-
equity exchanges would become parties to the existing Restated 
Participant Exchange Agreement in the same way that new participant 
exchanges have done in the past. No modification to the agreement is 
necessary because it does not address matters relating to an exchange's 
role as stockholder, which are confined to the Stockholders Agreement.
    The rights of the existing participant exchanges as stockholders, 
including their rights to representation on OCC's board and their veto 
rights, have been preserved in Article VIIA relating to equity 
exchanges. Although non-equity exchanges will not have representation 
on OCC's board, their members that are clearing members of OCC would be 
``participants'' in OCC within the meaning of Section 17A(b)(3)(C) of 
the Act and would be entitled under that provision to ``fair 
representation . . . in the selection of [OCC's] directors and 
administration of its affairs.'' Fair representation would be assured 
because participants that are members of non-equity exchanges would 
participate in the selection of OCC's member directors on the same 
basis as members of the equity exchanges.\6\
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    \6\ OCC has represented to the Commission that OCC management 
will (1) provide non-equity exchanges with the opportunity to make 
presentations to the OCC board or the appropriate board committee 
upon request and (2) will promptly pass on to non-equity exchanges 
any information that management considers to be of competitive 
significance to such exchanges disclosed to exchange directors at or 
in connection with any meeting or action of the OCC board or any 
board committee. Letter from William H. Navin, Executive Vice 
President, General Counsel, and Secretary, OCC (July 8, 2002).
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    The Noteholders Agreement proposed in this rule filing contains 
restrictions on the transfer of promissory notes issued to non-equity 
exchanges and provides for the repurchase of the notes by OCC under 
certain circumstances parallel to the provisions applicable to the 
repurchase of Class A and Class B stock.\7\ These provisions are 
designed to ensure that the promissory notes remain in the hands of 
participant exchanges of OCC and to give withdrawing exchanges the 
right to ``put'' the notes back to OCC. The promissory notes will bear 
interest at a rate determined by reference to provisions of the 
Internal Revenue Code.\8\ The interest rate will be reset annually. 
Interest will be payable annually in arrears on the promissory note's 
anniversary date. If a promissory note is repurchased by OCC in less 
than six years from the date of the initial sale of the note, the 
purchase price of the note will be the principal amount plus any 
accrued and unpaid interest less a reduction based on the length of 
time since initial sale.\9\ After six years, there would be no 
reduction, and the promissory notes would be redeemable at their 
aggregate principal amount plus any accrued and unpaid interest. Under 
the terms of Section VIII of the Noteholders Agreement, OCC's 
obligations to a noteholder are subordinated to the claims of all other 
creditors of OCC except that the obligation to repurchase a note from 
any noteholder ranks pari passu with OCC's obligations to repurchase 
notes from any other noteholders and to repurchase Class A or Class B 
common stock from any stockholder. The provisions of the Noteholders 
Agreement are generally parallel to corresponding provisions of the 
Stockholders Agreement.
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    \7\ The Noteholders Agreement is attached as Exhibit I to OCC's 
filing.
    \8\ The interest rate for the promissory notes will be equal to 
the short-term applicable federal rate for purposes of Section 
1274(d) of the Internal Revenue Code of 1986.
    \9\ The amount of the reduction, which is set forth in the 
Noteholders Agreement, would be $300,000 if the note is purchased by 
OCC within two years of its original sell date, $240,000 if more 
than two years but less than three years, $180,000 if more than 
three years but less than four years, $120,000 if more than four 
years but less than five years, and $60,000 if more than five years 
but less than six years.
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    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act because it facilitates the 
establishment of a national system for the prompt and accurate 
clearance and settlement of transactions in securities and ensures fair 
representation of participants and stockholders of OCC.

(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 organization 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 Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW, Washington, DC 20549-0609. 
Copies of the submission, all subsequent

[[Page 49731]]

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 the File No. 
SR-OCC-2002-02 and should be submitted by August 21, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-19312 Filed 7-30-02; 8:45 am]
BILLING CODE 8010-01-P