[Federal Register Volume 69, Number 62 (Wednesday, March 31, 2004)]
[Notices]
[Pages 17013-17016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7148]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49470; File No. SR-OCC-2004-03]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Amending OCC's Rules To Provide for Use of a Give-Up 
Service Provider and Revising OCC's Fee Schedule

March 25, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 16, 2004, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change described 
in Items I and II below, which items have been prepared primarily by 
OCC. The Commission is publishing this notice and order to solicit 
comments from interested persons and to grant accelerated approval of 
the proposal.
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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 purpose of the proposed rule change is to provide for OCC's use 
of a ``give-up service provider'' that will act as an intermediary in 
reporting certain futures and futures option transactions to OCC and to 
amend OCC's fee schedule to offset the costs OCC will incur in 
utilizing a give-up service provider.

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 the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Introduction
    The proposed rule change responds to a request by CBOE Futures 
Exchange, LLC (``CFE'') that OCC provide its clearing members with the 
ability to accept or reject on a trade-by-trade basis trades executed 
on CFE and given up for the account of a clearing member by another 
clearing member.
    Although the ability to accept or reject give-ups on a trade-by-
trade basis is standard in the futures markets, OCC's clearing system 
is not currently configured to provide these capabilities. In order to 
make this function available to clearing members that trade or clear 
trades executed on CFE, OCC has entered into a Master Processing 
Services Agreement (``Services Agreement'') with The Clearing 
Corporation (``TCC'').
    As part of the Services Agreement, OCC has agreed to pay TCC 
certain fees in connection with the services provided by TCC. OCC will 
pass some of these fees through to CFE pursuant to terms of the 
Implementation Agreement for Clearing and Settlement Services 
(``Implementation Agreement''). OCC will pass per-transaction fees 
charged by TCC through to clearing members in accordance with OCC's fee 
schedule. To the extent that the revenues generated from such 
transaction fees do not cover OCC's minimum transaction payment 
obligations to TCC, CFE will compensate OCC for the shortfall pursuant 
to the Implementation Agreement.
2. Give-Up Services
    Transactions given up by one OCC clearing member to another OCC 
clearing member are currently governed by OCC's Clearing Member Trade 
Assignment (``CMTA'') processing and CMTA agreements that are standard 
in the options industry. Under a CMTA agreement, an OCC clearing member 
(``carrying clearing member'') authorizes another clearing member 
(``executing clearing member'') to give up the name of the carrying 
clearing member with respect to any trade executed on a specific 
exchange. Unless the CMTA agreement has been revoked, the carrying 
clearing member is responsible for all trades given up to it by the 
executing clearing member on that exchange. A carrying clearing member 
may return positions to the executing clearing member only under the 
very limited circumstances specified in the CMTA agreement. If one of 
those

[[Page 17014]]

circumstances arises and the carrying clearing member notifies OCC 
before a specified cutoff time, OCC will return the position to the 
executing clearing member. Because CMTA agreements do not require 
contract-by-contract acceptance of give-up trades but rather presume 
that the trade is properly given-up to the carrying clearing member, 
OCC's clearing system accepts as final and accurate trades received in 
matched trade reports from an exchange unless OCC is notified of a 
return by the carrying clearing member before the cutoff time.
    In contrast to the CMTA processing used by OCC, futures 
clearinghouses typically allow a carrying clearing member to accept or 
reject on a trade-by-trade basis trades given up to the carrying 
clearing member by an executing clearing member. CFE has requested 
that, in accordance with futures industry custom, OCC carrying clearing 
members be provided with the opportunity to accept or reject on a 
trade-by-trade basis trades executed on CFE and given up for their 
accounts by executing clearing members. Because OCC's clearing system 
is not currently configured to require a carrying clearing member to 
review and accept a trade after the trade has been reported to OCC, OCC 
has entered into the Services Agreement with TCC. Pursuant to the 
Services Agreement, TCC will provide certain post trade execution 
services to OCC in support of certain futures and futures options 
contracts traded on CFE. The Services Agreement provides a process by 
which TCC may agree to provide similar services for other futures and 
futures options contracts traded on CFE and for other futures markets 
that are affiliated with OCC's current participant exchanges 
(``affiliated futures markets'').
    Pursuant to the Services Agreement, TCC will receive all matched 
trades reported by an affiliated futures market, advise clearing 
members of those trades on a real-time basis, accept any clearing 
member changes to noncritical trade data, accept clearing member give-
ups and responses to give-ups, permit clearing members to enter average 
pricing information for their transactions, and permit clearing members 
to give-up trades as of the trade date on a date after the trade date. 
TCC will also send real-time trade and give-up data to OCC in a matched 
trade layout and at the end of each trading day will report final trade 
data to OCC. OCC will accept for clearance all trades reported by TCC 
to OCC in accordance with the Services Agreement as if the trades had 
been reported directly by the exchange to OCC. TCC will not guarantee 
or otherwise have any financial responsibility for such trades. In 
essence, TCC functions as a front end service provider to OCC's system, 
providing certain trade processing services that neither the exchanges' 
nor OCC's systems currently provide.
    The Services Agreement is essentially an agreement for TCC to 
provide computer services to OCC on a contract basis. It contains 
provisions typical of a computer services outsourcing agreement. Of 
note with respect to the parties' roles in the clearing process are 
Section 3(b) which states that OCC and its clearing members will have 
financial responsibility for the clearance and settlement of all trades 
processed by TCC and Section 3(c) which states that OCC will require 
the affiliated futures exchanges to report matched trade information to 
TCC. Sections 5(b) and (c) require that TCC have and maintain a 
disaster recovery plan and audit TCC's system of receiving trades from 
the affiliated futures markets to ensure that the system is functioning 
properly. Section 9 describes the fees payable by OCC for TCC's 
services including: (a) Start-up fees; (b) fees of 6 cents per matched 
contract with minimum guaranteed transaction fees of $150,000 per year 
per market for the first two markets for which TCC provides services 
and of $50,000 per year for each additional market; and (c) fees for 
additional work requested by OCC. Under Section 10, the term of the 
Services Agreement is three years with annual renewal terms of one 
year.
    OCC has the right to terminate the Services Agreement without cause 
before the end of the three-year term. The Services Agreement will 
terminate automatically on May 1, 2005, if trading in contracts as to 
which TCC provides services under the Services Agreement has not yet 
begun. Under either of those termination scenarios, OCC would be 
required to make certain payments to TCC as provided in Section 10 of 
the Services Agreement, but under the Implementation Agreement, the 
affiliated futures market would be required to reimburse OCC for those 
payments. Section 15 mandates that OCC include certain language in its 
rules limiting the liability of TCC.
    OCC will be responsible for payment to TCC of all fees required 
under the Services Agreement. OCC will also accept responsibility to 
perform or to require performance of those tasks required of OCC or an 
affiliated futures market. In order to ensure that affiliated futures 
markets accept ultimate responsibility for fees and other requirements 
set forth in the Services Agreement that are appropriately attributable 
to those markets, OCC will enter into an Implementation Agreement with 
each affiliated futures market that requests that OCC use TCC's 
services. OCC has already entered into an Implementation Agreement with 
CFE.
    The Implementation Agreement establishes the financial and other 
obligations of OCC and passes through to the affiliated futures market 
certain costs and other obligations that are the responsibility of OCC 
under the Services Agreement. The Implementation Agreement provides 
that each affiliated futures market will be required to guarantee 
payment to OCC of any deficiency that might result between the amount 
paid by OCC to TCC and the yearly transaction fee minimum. For example, 
assume the yearly applicable minimum is $150,000 (which at 6 cents/
contract represents 2.5 million contracts). If only 2 million contracts 
are processed by TCC during the applicable year, the affiliated futures 
market will be obligated to pay OCC $30,000 (500,000 contracts at 6 
cents/contract). OCC will pay TCC on a monthly basis throughout the 
year and will receive any payments due from an affiliated futures 
market at the end of the calendar year. An affiliated futures market 
will also be obligated to reimburse OCC for any money OCC pays to TCC 
to expand the scope of TCC's give-up services, provided the request for 
such work was initiated by the affiliated futures market and for any 
fees payable by OCC to TCC in connection with the early termination of 
the Services Agreement.
    In order to implement the give-up process outlined above under 
OCC's By-Laws and Rules, OCC is adding the terms ``affiliated futures 
market'' and ``give-up service provider'' as defined terms in Article 
I, Section 1 of OCC's By-Laws. A futures market or security futures 
market is an ``affiliated futures market'' if it is at least 50% owned 
by a participant exchange or is under the ownership of an entity which 
also owns, directly or indirectly, at least 50% of a participant 
exchange. Changes are also being made to Article XII, Section 1 to 
incorporate the new ``affiliated futures market'' term.
    ``Give-up service provider'' refers generically to TCC and any 
other entity that has agreed with OCC to provide post trade execution 
services to OCC in support of futures and futures options trading on 
one or more affiliated futures markets. New language is added to Rule 
401 to indicate that if a give-up service provider is reporting to OCC 
transactions executed on an affiliated futures market, matched trade

[[Page 17015]]

information from the give-up service provider shall be deemed to be 
submitted to OCC by such affiliated futures market for all purposes of 
OCC's By-Laws and Rules. OCC will not be obligated with respect to any 
transaction until it receives matched trade information from the give-
up service provider as required in OCC's By-Laws and Rules. Proposed 
Rule 404(a) is added to describe a give-up service provider and its 
functions. Proposed Rules 404(b)-(d) set forth specific services that 
will be provided to clearing members as well as the rights and 
obligations of clearing members who take advantage of those services. 
Proposed Rules 404(e)-(g) add provisions limiting the liability of TCC 
as provided in Section 15 of the Services Agreement with TCC.
    Interpretation and Policy .01 following Rule 404 makes provision 
for clearing members to submit ``as-of give-up'' trades to the extent 
not inconsistent with exchange rules or applicable law. An as-of give-
up is typically used where a trade was given-up or intended to be given 
up on the trade date but either the ``Give-Up Clearing Member'' 
inadvertently failed to do so or the ``Given-Up Clearing Member'' 
neglected to accept the give-up.
    Interpretation and Policy .02 provides that clearing members may 
give average pricing information to TCC to the extent not prohibited by 
exchange rules or applicable law. Average pricing is permitted under 
the Commodity Exchange Act in certain circumstances. In those 
circumstances, a clearing member may submit instructions to TCC to 
report the average price for two or more transactions in the same 
series of futures or options that were executed at different prices. 
OCC will use the average price in clearing and settling the trades.
3. Revised Fee Schedule
    Futures clearing transaction fees are based on a fee election made 
by each futures market. OCC currently permits futures markets to elect 
between a 7 cent fixed rate schedule (7 cents/side with a sliding scale 
discount for large transactions) and the fee schedule applicable to 
securities options (9 cents ``floating''). OneChicago and Nasdaq Liffe 
Markets, LLC (``NQLX''), the futures markets currently cleared by OCC, 
have both elected the 7 cent fixed rate schedule.
    Affiliated futures markets that request that OCC utilize TCC's 
services will also be able to elect between the two fee schedules. 
However, in order to help offset the additional costs that OCC will 
incur to make TCC's services available, a ``give-up charge'' of 7 cents 
per give-up will be implemented by OCC. This fee is effectively one-
half the fee charged by other futures clearinghouses, including TCC, 
because OCC will only charge the executing side of the give-up rather 
than both sides as do other futures clearinghouses.
    OCC is also making two changes to the 7 cent fixed rate futures 
clearing fee schedule when TCC's services are being used. First, OCC is 
removing the cap applicable to large futures block transactions. The 
current cap provides that a trade totaling greater than two thousand 
contracts is assessed a flat $85 clearing fee. However, under Section 
9(a) of the Services Agreement, TCC charges OCC a 6 cent per contract 
clearing fee with no fee break for block size transactions. If OCC does 
not modify its fee schedule, it will be required to pay out to TCC more 
than it receives for large trades that generate fees for TCC in excess 
of $85. To avoid this result, OCC is amending its fee schedule so that 
trades greater than two thousand contracts will be charged 3 cents per 
side (6 cents total). Second, OCC is removing the fee break it gives to 
new futures contracts. OCC currently does not charge a fee for the 
first month a contract trades and implements a graduated phase-in of 
fees for the second and third months of trading in such contracts. 
However, Section 9(a) of the Services Agreement does not provide a 
similar fee waiver, and OCC will therefore not waive fees with respect 
to new contracts for which TCC's services are used.
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act \3\ and the rules and regulations thereunder 
applicable to OCC because it is designed to promote the prompt and 
accurate clearance and settlement of derivative transactions, assure 
the safeguarding of securities and funds which are in the custody or 
control of OCC, and, in general, to protect investors and the public 
interest by allowing OCC to provide its clearing members with the 
ability to accept or reject on a trade-by-trade basis trades executed 
on CFE and given-up for their account by another clearing member.
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    \3\ 15 U.S.C. 78q-1.
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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

    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).\4\ 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, and, in general, to protect investors and 
the public interest. The Commission finds that the approval of OCC's 
rule change is consistent with this section because it will allow OCC 
to protect itself, its clearing members, and ultimately investors, by 
providing its clearing members with the ability to accept or reject on 
a trade-by-trade basis trades in certain futures and futures options 
executed on CFE and given-up for their accounts by other clearing 
members.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC has requested that the Commission approve the proposed rule 
change prior to the thirtieth day after publication of the notice of 
the filing. The Commission finds good cause for approving the proposed 
rule change prior to the thirtieth day after the publication of notice 
because such approval will allow OCC to implement the proposed rule 
change before March 26, 2004, when CFE commences trading certain 
futures and futures options to be cleared and settled by OCC.

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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-OCC-2004-03. This file number should be included on the 
subject line

[[Page 17016]]

if e-mail is used. To help the Commission process and review your 
comments more efficiently, comments should be sent either in hardcopy 
or by e-mail but not by both methods. 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 also will be available for inspection and copying at the 
principal office of OCC and on OCC's Web site at http://www.optionsclearing.com. All submissions should refer to File No. SR-
OCC-2004-03 and should be submitted by April 21, 2004.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\5\ that the proposed rule change (File No. SR-OCC-2004-03) be and 
hereby is approved.
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    \5\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-7148 Filed 3-30-04; 8:45 am]
BILLING CODE 8010-01-P