[Federal Register Volume 69, Number 84 (Friday, April 30, 2004)]
[Notices]
[Pages 23846-23848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9790]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49582; File No. SR-OCC-2004-02]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Clearing Member Accounts

April 19, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 11, 2004, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') 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 amends OCC's by-laws and rules to permit 
clearing members to open and maintain with OCC two new types of 
accounts and to clarify that clearing members may carry multiple 
combined market makers' accounts that are separate from one another.

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 the proposed rule change is twofold. First, the rule 
change permits clearing members to open and maintain with OCC two new 
types of accounts: (1) A segregated futures professional account, in 
which a clearing member may carry the

[[Page 23847]]

positions and assets of futures floor traders and similar futures 
market professionals that are required to be segregated in accordance 
with Section 4d of the Commodity Exchange Act (``CEA'')\3\ and the 
regulations of the Commodity Futures Trading Commission (``CFTC'') and 
(2) an account in which a clearing member may carry the positions and 
assets of futures professionals that are not required to be segregated 
under those provisions. These new account types are intended to 
accommodate clearing members' requests in connection with the 
anticipated start of trading of the CBOE Futures Exchange, LLC 
(``CFE''). Second, the rule change clarifies that a clearing member is 
permitted to carry its market maker positions and the positions of 
proprietary market makers in a combined market makers' account, 
separate from other combined market makers' accounts; and that 
similarly a clearing member may commingle positions of associated 
market makers in a combined market makers' account, separate from other 
combined market makers' accounts.
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    \3\ 7 U.S.C. 1.
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    Futures clearing organizations have traditionally used only two 
account types: a ``firm'' or ``proprietary'' account and a ``customer'' 
account. OCC anticipated that clearing members clearing futures 
products would follow this practice and carry the positions of futures 
professionals in the same account as positions of all other futures 
customers. However, some clearing members view the structure of the 
combined market makers' account, which allows clearing firms to carry 
the positions of multiple options market makers, as providing a 
significant benefit from an administrative perspective. Although the 
combined market makers' account is margined on a net basis and treated 
as a single account for most purposes, it contains subaccounts so that 
positions of different market makers can be separately identified as a 
convenience to market makers and their clearing firms. In anticipation 
of the start of trading on CFE, clearing members have asked OCC to 
provide similar accounts for clearing the transactions of futures floor 
traders or other members of futures markets performing similar market 
making or liquidity providing functions (``futures professionals''). 
One account would be for futures professionals whose funds and 
positions are required to be segregated pursuant to Section 4d of the 
CEA and the CFTC's regulations governing customer segregated funds. The 
other account would be for futures professionals whose funds and 
positions are required to be treated as proprietary and therefore are 
not required to be segregated.
    In order to accommodate this request, OCC proposes to add three new 
defined terms to Article I, Section 1, Definitions, of its By-Laws. The 
new term ``futures professional'' means floor traders and persons who 
serve similar market making functions. The new term ``proprietary 
futures professional'' account means an account carrying positions only 
of futures professionals who are not futures customers. And the new 
term ``segregated futures professional'' account means a segregated 
futures account that carries positions only of futures professionals 
that are futures customers. Thus, these new definitions incorporate 
existing Article, I, Section 1 defined terms: segregated futures 
account, which is an account that carries positions only of futures 
customers, and futures customer, which is a person whose positions are 
carried by a futures commission merchant in a futures account required 
to be segregated under Section 4d of the CEA and the CFTC regulations.
    OCC also proposes to amend Article VI, Clearance of Exchange 
Transactions, of its By-Laws and Chapters VI, Margins, and XI, 
Suspension of a Clearing Member, of its Rules. New paragraph (j) to 
Article VI, Section 3, permits clearing members to open a segregated 
futures account solely for the positions of futures professionals who 
are futures customers and new paragraph (k) to that section permits 
clearing members to open a proprietary futures professional account for 
futures professionals who are not futures customers. Both accounts 
would be functionally identical to the existing combined market makers' 
account. Article VI, Section 3(f), is amended to clarify that a 
clearing member need not maintain a segregated futures account other 
than the segregated futures professional account if the clearing member 
effects transactions only for futures customers that are futures 
professionals and will carry the positions of such futures 
professionals in the segregated futures professional account instead of 
in the segregated futures account. Parenthetical language is added to 
Article VI, Section 4, merely as a reminder that a segregated futures 
professional account is a segregated futures account and, therefore, 
that upon liquidation of a clearing member all amounts in such accounts 
will be commingled in the segregated liquidating settlement account as 
segregated customer funds, reserved to pay the claims of future 
customers. Similarly, Rules 604 and 606 are amended to make clear that 
a clearing member may maintain more than one segregated futures account 
(i.e., a ``segregated futures account'' and a ``segregated futures 
professional account''), and Rules 1104 through 1107 are amended to 
provide that all segregated futures accounts will be liquidated 
together in the segregated liquidating settlement account. Finally, OCC 
is amending Rule 1105(c) to state that assets in the proprietary 
futures professional account of a suspended clearing member will be 
placed in the regular liquidating settlement account.
    OCC will not require clearing members to clear transactions of 
futures professionals in either futures professional account. Because 
the segregated futures professional account would be separately 
margined without regard to positions or assets in the segregated 
futures account, some clearing members may prefer to keep the positions 
of futures professionals in the regular segregated futures account in 
order to obtain the benefit of such offsets or for other reasons.
    Likewise, a clearing member may wish to maintain positions that 
could be carried in the proprietary futures professional account in the 
regular Article VI, Section 3(a), firm account. OCC believes that these 
alternatives should be preserved.
    Article VI, Section 3(c), of OCC's By-Laws currently states that a 
clearing member may not include the positions of a proprietary or 
associated market maker in a combined market makers accounts. The 
prohibition on carrying proprietary market maker positions in a 
combined market makers' account was intended to avoid any commingling 
with customer positions that might be interpreted as violating Rules 
8c-1 and 15c2-1 under the Exchange Act (``hypothecation rules''). With 
respect to associated market makers, the prohibition was intended to 
exclude from the combined market makers' account persons who, although 
customers for purposes of the hypothecation rules, are closely related 
to the clearing member and whose positions commingled in an account 
with positions of independent market makers could pose difficulties in 
transferring the account to another clearing member in an insolvency 
situation.\4\
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    \4\ See Securities Exchange Act Release No. 33492 (January 19, 
1994), 59 FR 3896 (January 27, 1994) [File No. SR-OCC-90-11].
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    Notwithstanding the foregoing prohibitions, it is fully consistent 
with

[[Page 23848]]

the intent of Article VI, Section 3(c), to permit OCC clearing members 
to use a combined market makers' account to carry the positions of 
multiple proprietary market makers or to carry the positions of 
multiple associated market makers, so long as such accounts are 
restricted to positions of proprietary market makers or associated 
market makers, respectively. OCC now proposes to amend Article VI, 
Section 3(c) to expressly so provide. In order to avoid compliance 
issues under the hypothecation rules, OCC would continue to prohibit 
the commingling of the positions of customer market makers, including 
associated market makers that have not elected to be treated as 
proprietary market makers, in the same combined accounts with 
proprietary market makers. And in order to avoid the difficulties 
associated with transferring a combined market makers' account holding 
the positions of both independent and associated market makers to 
another clearing member in an insolvency situation, OCC would continue 
to prohibit the commingling of the positions of associated market 
makers with the positions of independent market makers. As in the case 
of a separate market maker's account used for proprietary positions 
under Section 3(b) of Article VI, a combined market makers' account 
holding the positions of the clearing member or a proprietary market 
makers' account would be subject to a lien by OCC on all assets in such 
account to secure all of the clearing member's obligations to OCC, as 
provided in proposed subpart (v) of Section 3(c). Therefore, such 
proprietary market maker accounts are properly firm lien accounts, and 
the definition of firm account in Article 1 of the By-Laws, and related 
provisions in Article VI, Sections 3(b) and (c) and Interpretation and 
Policy .02, Rules 601 and 602, and Rule 1105(b) and (c) are amended to 
identify those accounts as such.
    OCC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder 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, 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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A)(iii) of the Act \5\ and Rule 19b-4(f)(4) \6\ promulgated 
thereunder because the proposal effects a change in an existing service 
of OCC that (A) does not adversely affect the safeguarding of 
securities or funds in the custody or control of OCC or for which it is 
responsible and (B) does not significantly affect the respective rights 
or obligations of OCC or persons using the service. At any time within 
sixty days of the filing of the proposed rule change, the Commission 
may summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
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    \5\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \6\ 17 CFR 240.19b-4(f)(4).
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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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml) or
     Send an E-mail to [email protected]. Please 
include File Number SR-OCC-2004-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-OCC-2004-02. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 www.optionsclearing.com. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-OCC-2004-02 and should be submitted on 
or before May 21, 2004.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9790 Filed 4-29-04; 8:45 am]
BILLING CODE 8010-01-P