[Federal Register Volume 69, Number 172 (Tuesday, September 7, 2004)]
[Notices]
[Pages 54172-54173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2078]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50280; File No. SR-OCC-2004-13]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Borrowing 
Against the Clearing Fund

August 27, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 23, 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 would amend Article VIII (Clearing Fund), 
Section 5 (Application of the Clearing Fund), paragraph (e) of OCC's 
By-Laws, which authorizes OCC to borrow against the clearing fund in 
specified situations.

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

    Article VIII, Section 5(e) of OCC's By-Laws authorizes OCC to take 
possession of and pledge as security for a loan cash and securities in 
its clearing fund under the following circumstances:
    (1) If a clearing member is suspended and OCC is unable to obtain 
prompt delivery of or convert promptly to cash any asset credited to 
any of the clearing member's accounts; and as a result OCC deems it 
necessary or advisable to borrow funds to meet obligations arising out 
of the suspension or
    (2) If OCC sustains a loss due to the failure of a bank or another 
clearing organization, and elects to borrow funds in lieu of 
immediately charging the loss to the clearing fund.
    In either case, OCC must first determine that it cannot borrow the 
necessary funds on an unsecured basis and must use the proceeds from 
the borrowing solely for the purposes above. Such use of clearing fund 
assets are limited to a maximum of 30 days. After 30 days, the amount 
of the loan must be charged against the clearing fund.
    In the event of a clearing member default, OCC may need immediate 
liquidity even before it has made the decision to suspend the clearing 
member. Historically, defaults tend to occur at 9 a.m. (CT) when 
clearing members' accounts are debited for options premiums, exercise 
settlement payments, and mark-to-market payments.\3\ Although OCC may 
be able to make settlement by using its own cash or by borrowing 
against its unsecured credit lines, which are currently $20 million, it 
is possible that those resources would not be sufficient.
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    \3\ 9 a.m. (CT) is also the time when members' accounts are 
debited for margin deficiencies; but margin payments, unlike 
premium, exercise settlement, and mark-to-market payments, are not 
pass-through payments.
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    In order to borrow against its secured lines of credit, which are 
currently $150 million and are in the process of being doubled, using a 
defaulting member's clearing fund contributions or collateral OCC would 
have to (i) suspend the clearing member and (ii) have difficulty in 
obtaining or liquidating the defaulting clearing member's collateral.

[[Page 54173]]

If a default is not quickly remedied, OCC will likely suspend the 
defaulting clearing member. However, OCC believes that it should not 
have to make the decision to suspend as a precondition to borrowing 
against the clearing fund. Similarly, OCC believes that it should not 
be a precondition to such use of the clearing fund that OCC is unable 
to obtain ``prompt'' delivery of, or convert ``promptly'' to cash, any 
asset credited to an account of a defaulting clearing member. OCC 
interprets ``prompt'' and ``promptly'' in this context as meaning ``in 
sufficient time to enable OCC to use the proceeds to meet its 
obligations.'' However, OCC does not believe that its ability to such 
use of the clearing fund should turn on questions of interpretation.
    Accordingly, OCC is proposing to amend Article VIII, Section 5(e) 
of its By-Laws to eliminate the requirements that OCC (i) suspend a 
defaulting clearing member and (ii) be unable to obtain prompt delivery 
of collateral or be unable to convert it promptly to cash as 
preconditions to use of the clearing fund. As amended, Section 5(e) 
would allow OCC to use clearing fund assets as collateral for loans 
whenever OCC deems such borrowings to be necessary or advisable in 
order to meet obligations arising out of the default or suspension of a 
clearing member or any action taken by OCC in connection therewith.
    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act and the regulations thereunder because it 
enhances OCC's ability to respond to and manage clearing member 
defaults in a manner that increases the protection of investors and 
persons facilitating transactions by and acting on behalf of investors 
and because it limits systematic risk.

(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. 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-2004-13 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-2004-13. 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 http://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-2004-13 and should be 
submitted on or before September 28, 2004. For the Commission by the 
Division of Market Regulation, pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2078 Filed 9-3-04; 8:45 am]
BILLING CODE 8010-01-P