[Federal Register Volume 67, Number 159 (Friday, August 16, 2002)]
[Notices]
[Pages 53634-53637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20855]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46335; File No. SR-OCC-2002-07]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating To Clearing 
Security Futures Transactions and Arrangements With Associated 
Clearinghouses

August 9, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 9, 2002, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission''), and on August 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 Rule 1303 to provide that 
OCC may agree with an associate clearinghouse to open one or more 
omnibus accounts to enable its clearing members to clear trades in 
futures, which include security futures, and futures options, through 
the facilities of OCC. In addition, the proposed rule change requests 
approval of OCC's agreements with OneChicago, LLC (``OCX'') and the 
Chicago Mercantile Exchange (``CME'') with respect to clearing security 
futures transactions.

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

    Under OCC's Rule 1303, OCC may open one or more omnibus accounts 
with an associate clearinghouse (``ACH'') for the purposes of enabling 
the ACH's clearing members that are not OCC clearing members to clear 
transactions in security futures through the ACH rather than directly 
through OCC. Affiliates of OCC clearing members are permitted to clear 
transactions in security futures through the ACH through January 1, 
2003. The principal purpose of the proposed rule change is to extend 
this same accommodation to OCC clearing members and to provide that the 
initial period during which either OCC clearing members or their 
affiliates may clear through an ACH will end one year from the date 
when general trading in security futures commences rather than on a 
specified date. OCC also seeks

[[Page 53635]]

Commission approval of the Agreement for Clearing and Settlement 
Services between OCC and OCX (``OCX Clearing Agreement'') and the ACH 
Agreement between OCC and CME.
1. Background
    OCC is preparing to clear security futures for a number of markets, 
including certain national securities exchanges that presently clear 
options through OCC and certain futures exchanges that are notice-
registered as national securities exchanges under Section 6(g) of the 
Act. In SR-OCC-2001-07, OCC filed detailed rules for the clearance of 
security futures, including Rule 1303, which provides that OCC may 
agree with an ACH to carry omnibus accounts for the ACH in which the 
ACH may clear security futures transactions for certain of its clearing 
members.\3\ In SR-OCC-2001-07, the Commission also approved the 
Agreement for Clearing and Settlement Services between OCC and Nasdaq 
Liffe Markets, LLC \4\ (``NqLX Clearing Agreement'').\5\
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    \3\ Securities Exchange Act Release No. 44727 (August 20, 2001), 
66 FR 45351 (order approving rules for clearance of security 
futures.) SR-OCC-2001-07 also amended Article I of OCC's By-Laws to 
include within the definition of ``associate clearinghouse'' a 
``derivatives clearing organization regulated as such under the 
Commodity Exchange Act.''
    \4\ Previously Nasdaq LIFFE, LLC.
    \5\ Securities Exchange Act Release No. 44727 (August 20, 2001), 
66 FR 45351.
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2. Amendments to Rule 1303
    Under current Rule 1303(a), an OCC clearing member that is also an 
ACH clearing member may not clear its security futures transactions 
through the ACH. Additionally, Rule 1303(b) currently provides that 
affiliates of OCC clearing members that are eligible to become OCC 
clearing members may not continue to clear security futures through an 
ACH past January 1, 2003.\6\
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    \6\ For purposes of Rule 1303, an entity shall be deemed to be 
an affiliated entity of a clearing member if the clearing member 
owns, directly or indirectly, at least 50% of the equity in such 
entity or if at least 50% of the equity of the clearing member and 
in such entity is, directly or indirectly, under common ownership.
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    OCC has learned that some OCC clearing members may initially have 
difficulty clearing security futures through OCC because the systems 
that they use to clear futures contracts are configured to interface 
with the clearing systems of commodity clearing organizations and not 
with OCC's systems. To accommodate these clearing members, OCC is 
proposing in this filing to amend Rule 1303(a) to allow OCC clearing 
members that are members of an ACH to clear security futures through 
the ACH for a period of time while systems issues are resolved.
    As in the case of affiliates of OCC clearing members, an OCC 
clearing member that elects to clear through an ACH would be permitted 
to do so only for the period specified in Rule 1303(b). That period was 
initially set to end on June 1, 2002, and was later extended to January 
1, 2003.\7\ Because the commencement of trading in security futures has 
repeatedly been postponed, OCC is proposing in this rule filing to set 
the grace period at ``one year after the commencement of general 
trading in security futures.'' OCC believes that this is a reasonable 
period of time for OCC clearing members and their affiliates to make 
the necessary arrangements to clear security futures directly through 
OCC. OCC nevertheless retains the ability under Rule 1303(b) to consent 
to a longer grace period if the circumstances of individual firms so 
require. As amended, Rule 1303 would continue to permit a clearing 
member of an ACH that is neither an OCC clearing member nor an 
affiliate of an OCC clearing member to clear through the ACH 
indefinitely.
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    \7\ Securities Exchange Act Release No. 45946 (May 22, 2002), 67 
FR 36056 [File No. SR-OCC-2001-16].
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3. OCX Clearing Agreement
    OCX is a joint venture among CME, the Chicago Board Options 
Exchange, and the Chicago Board of Trade. OCX and OCC have entered into 
the OCX Clearing Agreement so that OCC may clear and settle security 
futures transactions that take place on OCX.\8\ OCC seeks Commission 
approval of the OCX Clearing Agreement because it varies in several 
material respects from the NqLX Clearing Agreement approved by the 
Commission last year.\9\ Significant differences are discussed below.
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    \8\ The OCX Clearing Agreement is attached as Exhibit A to OCC's 
filing.
    \9\ A blackline version showing the differences between the NqLX 
Clearing Agreement and the OCX Clearing Agreement is attached as 
Exhibit A-1 to OCC's filing. OCC has filed with the Commission an 
amended and restated version of the NqLX Clearing Agreement, which 
has been amended to provide that OCC will clear and settle commodity 
futures (specifically, broad-based index options) traded on NqLX.
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    New Section 6(b), ``Clearing Members and Associate 
Clearinghouses,'' of the OCX Clearing Agreement requires OCC to 
designate CME as an ACH for OCX, subject to the terms of the ACH 
Agreement between OCC and CME (which terms are summarized below). The 
NqLX Clearing Agreement contains no similar provision. Section 6(b) of 
the OCX Clearing Agreement also provides that all present OCC clearing 
members and their successors may clear trades executed on OCX. However, 
future OCC clearing members will not be allowed to clear OCX trades 
without prior approval from OCX. OCX may require that future OCC 
clearing members become members of OCX as a condition to being allowed 
to clear trades on OCX. The NqLX Clearing Agreement contains no similar 
provision.
    Section 10(b), ``Risk Margin Offsets,'' of the OCX Clearing 
Agreement states that OCC will not make OCX products fungible with 
products traded on other markets, exchanges, or electronic trading 
platforms unless OCC is required to do so by law or has received prior 
written approval from OCX. The NqLX Clearing Agreement contains no 
similar provision.
    Section 13, ``Financial Arrangements,'' of the OCX Clearing 
Agreement states that OCC will charge clearing fees for trades executed 
on OCX to OCX rather than to clearing members. However, OCX will be 
required to pass OCC's fees through to OCC clearing member(s) on sides 
of OCX trades that are cleared directly through OCC.\10\ OCX negotiated 
a discount to the fees OCC normally charges for clearing services in 
exchange for giving up the right to participate in any year-end fee 
reductions or rebates. OCX may, however, opt into OCC's regular rebate-
eligible fee structure on a prospective basis at any time. The discount 
is greater for trade sides cleared through CME as an ACH reflecting the 
fact that CME is sharing the clearing function and the associated risk. 
OCC will charge no clearing fees when both sides are cleared through 
CME.
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    \10\ This requirement enables OCC to police ``the equitable 
allocation of reasonable dues, fees, and other charges among its 
participants'' required under Section 17A(b)(3)(D) of the Act.
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    Paragraph (b) of Section 14, ``CME as Associate Clearinghouse,'' of 
the OCX Clearing Agreement prohibits OCX from soliciting or providing 
incentives for CME members to clear OCX trades through CME rather than 
OCC. The reason for this restriction is discussed below in connection 
with related provisions of the ACH Agreement.
4. ACH Agreement
    OCC and CME have entered into the ACH Agreement \11\ so that CME 
may act as an ACH for purposes of clearing and settling transactions of 
certain CME clearing members on OCX. The ACH Agreement provides that 
CME generally will be treated as an OCC clearing member but with 
important exceptions. First, Section 2, ``CME an Associate

[[Page 53636]]

Clearinghouse,'' states that CME may clear through its accounts at OCC 
only security futures traded on OCX. Second, Section 3, ``Applicability 
of the Rules,'' makes clear that CME is bound only by certain OCC 
rules, which generally speaking are those that apply to OCC's clearance 
and settlement of security futures contracts and to OCC's right to 
suspend clearing members including an ACH with certain modifications 
set forth in the ACH Agreement. CME is not subject to OCC's by-laws and 
rules requiring deposits to OCC's clearing fund and requiring risk 
margin deposits. Likewise, under Section 6, ``Risk Margin; Clearing 
Fund Contributions; Security Deposits,'' OCC is not required to 
contribute to CME's clearing fund or to post margin with CME.
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    \11\ Attached as Exhibit B to OCC's filing.
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    Given that each clearing organization has credit exposure to the 
other, OCC and CME have determined that the cost of a mutual posting of 
collateral by each with the other would outweigh any benefits to be 
obtained. Although OCC is exposed to some uncollateralized credit risk 
with respect to CME (and vice versa), that risk is considered minimal 
because CME's clearinghouse division is a registered derivatives 
clearing organization subject to regulation and oversight by the 
Commodity Futures Trading Commission (``CFTC'') and is believed by OCC 
to be well run and highly creditworthy. Sections 3(c), ``Applicability 
of the Rules,'' and 10, ``Application of Chapter XI of the Rules,'' of 
the ACH Agreement provide that if CME fails to deliver securities or 
funds to OCC, breaches certain of its obligations under the Commodity 
Exchange Act (``CEA'') or the ACH Agreement, or is in such financial or 
operational difficulty that OCC believes suspension of CME as an ACH is 
required, OCC may without notice liquidate all positions in the CME ACH 
omnibus accounts regardless of whether any CME clearing member is in 
default to CME. OCC may then apply the proceeds from the CME 
Proprietary Account (described below) against all obligations of CME 
under the ACH Agreement and the proceeds from the CME Customer Account 
(described below) against all obligations in that account.
    Where both sides of a matched trade are submitted to OCC for the 
accounts of regular OCC clearing members, CME will have no role in the 
transaction. Where one side of a matched trade is submitted for the 
account of a regular OCC clearing member and the other is submitted for 
the account of a CME clearing member, the CME member's transaction will 
clear in the ACH account and CME as ACH will be the OCC clearing member 
on the trade. If both sides of a matched trade are cleared through CME, 
there will be no effect on the open interest on OCC's books, and OCC 
will have no obligation on the trade except to the limited extent 
described below in the case of delivery obligations on physically-
settled stock futures. The rights and obligations of CME members with 
respect to security futures cleared through CME be determined under the 
rules of CME, but Section 4(a) of the ACH Agreement requires that CME's 
rules provide that the terms of security futures cleared by CME will be 
identical to the terms of security futures cleared by OCC and that any 
adjustments to the terms of outstanding contracts must be identical and 
take effect at the same time to ensure fungibility and maintain a 
balanced open interest at both clearing organizations.
    Section 8, ``Allocation of Clearing Responsibilities,'' of the ACH 
Agreement is consistent with the terms of OCC Rule 1303 as proposed to 
be amended in this filing. It is intended to permit the use of the ACH 
arrangements by CME members only to the extent that clearing through 
OCC directly might reasonably impose a hardship. An OCC clearing member 
that is or that has an affiliate that is a CME clearing member may 
clear through CME until one year after the commencement of security 
futures trading, at which point all trades of such entity must be 
cleared through OCC unless OCC consents to an extension of time. 
However, where a futures affiliate of an OCC clearing member is 
substantially larger than the clearing member, OCC has agreed to permit 
the affiliate to clear through CME indefinitely on the ground that 
where the principal business of the consolidated entities is a futures 
business it is inappropriate to compel all security futures clearing to 
be directed through the securities affiliate.\12\ A CME clearing member 
that is not an OCC clearing member and is not an affiliate of an OCC 
clearing member may clear its security futures trades through CME 
indefinitely. By generally requiring firms that are OCC clearing 
members or that have affiliates that are OCC clearing members to take 
the necessary steps to clear their security futures activity directly 
through the OCC clearing member, the ACH Agreement limits the mutual 
uncollateralized exposure between OCC and CME and minimizes the number 
of transactions that require coordinated clearance and settlement by 
two clearing organizations.\13\ For the same purpose of minimizing 
unnecessary use of the ACH arrangement, the OCX Clearing Agreement as 
noted above prohibits the ACH from soliciting its members to clear 
transactions through the ACH rather than through OCC.
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    \12\ Proposed Interpretations and Policies .01 to Rule 1303.
    \13\ In approving OCC's previous ACH arrangement with the 
Associate Clearing House Amsterdam, the Commission stated, ``As a 
general matter, the Commission believes that OCC-issued options 
should be cleared through full OCC clearing members and not through 
intermediaries created only for clearing purposes.'' Securities 
Exchange Act Release No. 24832 (August 21, 1987), 52 FR 32377, n.16 
(File No. SR-OCC-87-9).
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    In order to comply with the customer segregation rules under the 
CEA, Section 9(a), ``Maintenance of CME Accounts,'' of the ACH 
Agreement requires CME to have two accounts at OCC, one for proprietary 
positions and one for customer positions. Each will function as an 
omnibus account containing the positions and margin carried by CME 
members for whom CME acts as an ACH. The ``CME Proprietary Account'' 
will carry only transactions of persons whose accounts on the books of 
the carrying CME clearing member are ``proprietary accounts'' as 
defined in CFTC Regulation 1.3(y). The ``CME Customer Account'' will 
carry only transactions of customers of CME clearing members and will 
be subject to the customer protection provisions of the CFTC. In 
accordance with those provisions, Section 9(b) of the ACH Agreement 
provides that OCC will have a lien on the positions in the CME Customer 
Account as security for CME's obligations to OCC only with respect to 
positions and transactions in that account. In contrast, OCC will have 
a lien on and security interest in the positions in the CME Proprietary 
Account as security for all obligations of CME to OCC under the ACH 
Agreement.
    As noted above, OCC has agreed in Section 4 of the ACH Agreement to 
perform a limited role in connection with delivery obligations of CME 
clearing members arising from physically-settled security futures in 
CME member accounts. CME will require each of its clearing members that 
trades physically-settled security futures to enter into arrangements 
satisfactory to OCC through which an OCC stock clearing member will 
agree to act on the CME clearing member's behalf for the purpose of 
settling through the facilities of National Securities Clearing 
Corporation (``NSCC'') or otherwise delivery obligations arising from 
maturing security futures contracts in its accounts at CME. Promptly 
following

[[Page 53637]]

the close of trading on the last trading day prior to maturity of any 
series of physically-settled security futures, CME will notify OCC of 
the identity of each OCC clearing member that will be obligated to 
receive or to deliver stock on behalf of CME members and the quantity 
of each underlying stock to be received or delivered. OCC will include 
these receive and deliver obligations with the other receive and 
deliver obligations of its clearing members in its reports to NSCC in 
accordance with OCC Rule 913. In the event that settlement is rejected 
by NSCC for any reason, settlement will be completed between the 
delivering and receiving OCC clearing members in accordance with OCC's 
rules, but CME will be responsible to OCC for any loss reasonably 
determined by OCC to have been incurred by it as a result of an OCC 
clearing member default in connection with settlements arising from 
security futures contracts in CME clearing member accounts. OCC will 
not require the delivering OCC clearing member or receiving OCC 
clearing member to deposit margin with OCC with respect to settlements 
attributable to security futures in CME clearing member accounts but 
will instead look to the credit of CME.
    OCC believes that the proposed rule change, OCX Clearing Agreement, 
and ACH Agreement are consistent with the requirements of Section 17A 
of the Act because they promote the prompt and accurate clearance and 
settlement of securities transactions, foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions, remove impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions, and in general, protect 
investors and the public interest.

(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.

VI. 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 will also be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to the File No. SR-OCC-2002-07 and should be submitted by 
September 6, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20855 Filed 8-15-02; 8:45 am]
BILLING CODE 8010-01-P