[Federal Register Volume 69, Number 153 (Tuesday, August 10, 2004)]
[Notices]
[Pages 48546-48548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18282]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50141; File No. SR-OCC-2004-14]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Segregation of Long Leg After Close Out of Short Leg of a 
Spread

August 3, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 25, 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

[[Page 48547]]

solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would amend Article VI (Margins), Rule 611 
(Segregation of Long Positions) of OCC's Rules by adding Interpretation 
& Policy .01 to Rule 611. The Interpretation would make clear when 
clearing members must instruct OCC to segregate the long leg of a 
spread following the close out of the short leg.

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\
---------------------------------------------------------------------------

    \2\ The Commission has modified parts of these statements.
---------------------------------------------------------------------------

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 to amend Rule 611 in 
order to better align its provisions with those of Commission Rule 
15c3-3 by clarifying when a clearing member must instruct OCC to 
segregate the long leg of a spread after the short leg has been closed 
out.\3\
---------------------------------------------------------------------------

    \3\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

Background
    Each OCC clearing member conducting a public securities business is 
required under Article VI (Clearance of Exchange Transactions), Section 
3 (Maintenance of Accounts) paragraph (e) of OCC's By-Laws to maintain 
customer positions in a separate customers' account. As positions are 
carried in this account on an omnibus basis (i.e., identified by 
clearing member rather than by customer) and may include long options 
that are fully paid securities subject to the possession or control 
requirement of Commission Rule 15c3-3, OCC normally maintains all long 
positions in customers' accounts as segregated. Segregated long 
positions are free of any lien in favor of OCC, and their value does 
not reduce the margin requirement on short positions in the account.\4\
---------------------------------------------------------------------------

    \4\ Article I, Section S.(6) of OCC's By-Laws; OCC Rules 
602(d)(1) and 611(d)(1).
---------------------------------------------------------------------------

    In recognition of exchange rules allowing a clearing member to give 
its customers margin relief on short options positions ``spread'' 
against qualified long option positions, OCC Rule 611(c) affords a 
clearing member the opportunity to release such long positions from 
segregation. The effect of this release is to subject the long position 
to OCC's lien and to provide corresponding margin relief to the 
clearing member. Rule 611(c) further provides that a clearing member 
shall not permit a long position to remain unsegregated after the 
spread is broken, but it does not specify how quickly the clearing 
member must resegregate the long position.
Segregation Instructions Under Rule 611
    Clearing members may instruct OCC to release long customer 
positions from segregation or to resegregate positions that were 
previously released from segregation either by submitting a machine-
readable data file or by making appropriate entries on an online 
screen. In either case, OCC's window for accepting such instructions 
runs from the start of trading through 7:00 p.m. Central Time each day. 
Prior to submitting these instructions, however, many clearing members 
first reconcile their activity and end of day position records with 
OCC's records through files generated by OCC's data service. In 
addition, certain clearing members use these machine readable data 
service files to generate their segregation instructions. As data 
service is typically not available until 10:00 p.m. Central Time, three 
hours after the closing of the window for accepting instructions, files 
containing segregation instructions based upon the current day's 
closing position inventory are typically not processed until the 
following business day. Same day processing of instructions for 
clearing members not relying upon OCC's data service for balancing or 
generating segregation instructions is likewise impractical given the 
narrow processing timeframe between the close of trading and 7:00 p.m. 
Central Time.
    The resulting one-day lag is likely to cause either a temporary 
under-or over-segregation of customer long option positions. The effect 
of an over-segregated situation is an overstatement of the clearing 
member's margin requirement, as long contracts eligible for margin 
credit at OCC would not be recognized. There is, however, no violation 
of either OCC Rule 611(c) or Commission Rule 15c3-3.
    The effect of an under-segregated situation is an understatement of 
the clearing member's margin requirement, as long contracts no longer 
eligible for margin credit at OCC are nevertheless given credit for one 
more day in OCC's margin calculations. This situation occurs when a 
customer closes out the short leg of a spread. The long leg remains 
subject to OCC's lien until the clearing member's re-segregation 
instructions are processed the following day.
OCC Rule 611(c) and Commission Rule 15c3-3
    Rule 611(c) provides that no clearing member shall ``instruct the 
Corporation to release from segregation, or permit to remain 
unsegregated, any long position in option contracts carried in a 
customers' account or firm non-lien account for any customer or non-
customer unless the clearing member is simultaneously carrying in such 
account for such customer or non-customer a short position in option 
contracts and the margin required to be deposited by such customer or 
non-customer with respect to such short position has been reduced as a 
result of the carrying of such long position.'' As the purpose of Rule 
611(c) has always been to facilitate compliance with Commission Rule 
15c3-3 and not to establish any addition or more stringent 
requirements, Rule 15c3-3 is the appropriate point of reference for 
determining how quickly a clearing member is obligated to regain 
possession or control of the long leg of a spread once the short leg 
has been closed out.
    Rule15c3-3(b)(2) provides that a broker will not be deemed to be in 
violation of the rule if ``solely as a result of normal business 
operations, temporary lags occur between the time when a security is 
required to be in the possession or control of the broker or dealer and 
the time that it is placed in his physical possession or under his 
control, provided that the broker or dealer takes timely steps in good 
faith to establish prompt physical possession or control.'' Rule 15c3-
3(d) provides further guidance as to when the broker must initially 
determine that control is required.

    Not later than the next business day, a broker or dealer, as of 
the preceding business day, shall determine from his books or 
records the quantity of fully-paid securities and excess margin 
securities in his possession or control and the quantity of fully-
paid securities and excess margin securities not in his possession 
or control.


[[Page 48548]]


    Rule 15c3-3(d) goes on to provide that ``If such books and records 
indicate, as of such close of the business day, that such broker or 
dealer has not obtained physical possession or control of all fully-
paid and excess margin securities as required by this rule'' certain 
specified maximum time limits for issuing instructions and/or obtaining 
possession or control will apply. Those time limits vary depending on 
the situation. In the case of securities subject to a lien securing 
moneys borrowed or in the case of securities loaned, the broker-dealer 
must issue instructions for the release or the return of the securities 
no later than the business day following the determination that control 
must be obtained and must actually obtain possession or control within 
two business days after that in the case of securities securing a loan 
or within five days in the case of loaned securities. Time frames of up 
to 45 days apply in other circumstances. These time frames appear to 
reflect an assessment of reasonableness given the nature of the 
situation and of industry practices.
    While there are no provisions of Rule 15c3-3 establishing such 
specific time lines in the context of long options, OCC believes a 
reasonable interpretation of the more general provisions of Rule 15c3-3 
is that they do not require the segregation of long leg of a spread 
more promptly than the second business day following the day on which 
the short leg is closed if, as seems to be the case, a lag of that 
duration occurs ``as a result of normal business operations.'' 
Accordingly, OCC believes it is appropriate to clarify Rule 611(c) to 
provide more certainty regarding when segregation should occur. 
Therefore, OCC is adopting an interpretation of Rule 611(c) providing 
that when the short leg of a spread is closed out, a clearing member 
must issue resegregation instructions with respect to the long leg as 
soon thereafter as is reasonably practicable and in any event at or 
prior to the time OCC requires so that OCC can implement the 
instruction not later than the opening of business on the second 
business day following the day on which the short leg was closed.
    OCC believes that the proposed changes to its rules are consistent 
with the purpose and requirements of Section 17A of the Act because it 
provides greater clarity as to when clearing members need to issue 
segregation instructions to OCC under Rule 611 to further the 
protection of investors.

(A) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

(B) 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)(i) of the Act \5\ and Rule 19b-4(f)(1) \6\ thereunder 
because it constitutes a stated policy, practice or interpretation with 
respect to the meaning, enforcement or administration of an existing 
rule. 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.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78s(b)(3)(A)(i).
    \6\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

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-2004-14 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-2004-14. 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-2004-14 and should be submitted on 
or before August 31, 2004.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-18282 Filed 8-9-04; 8:45 am]
BILLING CODE 8010-01-P