[Federal Register Volume 69, Number 199 (Friday, October 15, 2004)]
[Notices]
[Pages 61289-61291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2656]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50509; File No. SR-OCC-2004-10)]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change To Establish an Internal Cross-Margin Program

October 8, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, notice is hereby given that on June 4, 2004, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change described in Items 
I, II, and III 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

    OCC is seeking to amend its By-Laws and Rules as set forth below to 
create an internal cross-margining program that will permit a clearing 
member to establish a non-proprietary account for market professionals 
in which securities and security futures that are cleared by OCC in its 
capacity as a securities clearing agency may be cross-margined with 
commodity futures and options on such futures that are cleared by OCC 
in its capacity as a derivatives clearing organization (``DCO'') 
registered as such under the Commodity Exchange Act (the ``CEA'').

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

[[Page 61290]]

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 these 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

    The purpose of this filing is to make cross-margining available to 
non-proprietary market professionals where the positions to be cross-
margined are all maintained with OCC. This program is similar to cross-
margining programs currently in effect between OCC and the Chicago 
Mercantile Exchange and other commodities clearing organizations with 
one major difference. The positions to be cross-margined under this 
proposal are all cleared by OCC. There is no second clearing 
organization. For this reason the program is called ``internal'' cross-
margining. Internal cross-margining is possible because OCC, in its 
capacity as a DCO, can now clear futures and futures options subject to 
the exclusive jurisdiction of the Commodity Futures Trading Commission 
(``CFTC'').
    In the existing ``external'' cross-margining programs, OCC 
contracts with a DCO, such as the Chicago Mercantile Exchange, to 
permit a clearing member of OCC that is (or has an affiliate that is) a 
clearing member of the DCO to margin as a single portfolio its 
positions in security options cleared by OCC and its (or its 
affiliate's) positions in related commodity futures and commodity 
options thereon cleared by the DCO. Margin is assessed based on the net 
risk of the portfolio, and to the extent that the contracts in the 
account are offsetting from a risk perspective, the clearing member's 
margin requirement is less than it would be if the commodity positions 
were carried in accounts separate from the security positions.
    Internal cross-margining functions in the same way except that the 
internal cross-margining account would contain only positions in 
contracts cleared by OCC. This greatly simplifies the arrangement in 
that it eliminates the need for contractual relationships between two 
clearing organizations, the holding of collateral for their joint 
benefit and loss sharing arrangements. As in the case of existing non-
proprietary cross-margining programs, the internal non-proprietary 
cross-margining account would be treated as a segregated futures 
account under Section 6d of the CEA and, in accordance with Appendix B 
to Part 190 of the CFTC's regulations, would be separately segregated 
from the regular segregated futures account that an OCC clearing member 
may maintain under Article VI, Section 3(f) of OCC's By-Laws. That 
futures account is confined to customer transactions in futures, 
futures options, and security futures (to the extent that such security 
futures are carried in futures accounts by the clearing member's 
customers) and may not include positions in security options.
    OCC is seeking approval of internal cross-margining only in 
relation to accounts of non-proprietary market professionals. A market 
professional is, in essence, a market-maker, specialist or person 
acting in a similar capacity on a securities exchange, or a member of a 
futures exchange trading for its own account. A non-proprietary market 
professional is any market professional that is required to be treated 
as a ``customer'' under the CEA and therefore excludes any market 
professional that is affiliated with the carrying clearing member in a 
way that would cause its account to be treated as a ``proprietary 
account'' under Section 1.3(y) of the CFTC's regulations.
    In the absence of an internal cross-margining program, clearing 
members would be unable to carry futures positions of non-proprietary 
market professionals in the same account as their positions in security 
options because of the segregation requirements applicable to the 
former under the Commodity Exchange Act.
    Since it granted approval of the first cross-margining program in 
1988, the Commission has repeatedly found that cross-margining programs 
are consistent with clearing agency responsibilities under Section 17A 
of the Act and highly beneficial to the clearing organization, its 
clearing members, and the public.\3\ Cross-margining programs enhance 
clearing member and systemic liquidity which results in lower initial 
margin deposits. They reduce the risk that a clearing member will 
become insolvent in a distressed market and the corresponding risk that 
one insolvency could lead to multiple insolvencies in a ripple effect. 
They enhance the security of the clearing system.\4\
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    \3\ Securities Exchange Act Release No. 26153 (Oct. 3, 1988), 53 
FR 39567 [SR-OCC-86-17].
    \4\ Securities Exchange Act Release No. 32708 (Aug. 2, 1993), 58 
FR 42586 [SR-OCC-93-13].
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    The following are particular points of interest about OCC's 
internal cross-margining program.
(1) Amended Definition
    The existing definition of ``Market Professional'' in Article I of 
OCC's By-Laws is amended to substitute a reference to OCC in place of 
the reference to the Intermarket Clearing Corporation, which has been 
merged into OCC.
(2) Absence of Cross-Margining Agreement
    All established external cross-margining programs involving OCC 
have a cross-margining agreement as the constitutive and governing 
document. The parties to these cross-margining agreements are the 
clearing organizations that clear the trades in the cross-margining 
accounts of a joint clearing member or a pair of affiliated clearing 
members. Internal cross-margining, however, does not require a cross-
margining agreement because the only participating clearing 
organization is OCC.
(3) Requirement of Market Professional's Agreement
    The terms governing the cross-margining arrangements between OCC 
and each participating clearing member are set forth in OCC's By-Laws 
and Rules. The rights and obligations of a non-proprietary market 
professional that wants the benefits of internal cross-margining vis-a-
vis the clearing member through which it clears are not covered in the 
By-Laws and Rules and so must be made the subject of a separate 
agreement. The execution of such an agreement, the ``Market 
Professional's Agreement for Internal Cross-Margining,'' is a 
requirement for the market professional's participation in the 
program.\5\
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    \5\ A copy of the form Market Professional's Agreement for 
Internal Cross-Margining is attached as part of the OCC filing.
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(4) Amendments to Chapter XI of the Rules
    Amendments to Rules 1104 through 1107 of Chapter XI of OCC's Rules, 
which governs the suspension of a clearing member, all relate to the 
liquidation of a suspended clearing member that participates in the 
internal cross-margining program. Similar to the separate rules that 
govern the liquidation of the segregated futures account, additional 
separate rules were created to govern the liquidation of the internal 
non-proprietary cross-margining account. They are both segregated 
accounts under the

[[Page 61291]]

Commodity Exchange Act, and the positions and other assets of each 
account may not be commingled with those not in that account or be used 
to satisfy obligations other than those arising from activity in that 
account. Thus, in each place where special provision in OCC's Rules is 
made for the segregated futures account, a parallel provision for the 
internal non-proprietary cross-margining account has been inserted with 
a parallel purpose and effect.
(5) Regulatory Approvals
    In addition to the approval of the Commission, OCC must also obtain 
the approval of the CFTC to the commingling of positions of non-
proprietary market professionals in futures products with their 
security options positions. OCC is concurrently applying to the CFTC 
for such approval.

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

    OCC does not believe that the proposed rule change will 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) \6\ of the Act, which requires that the rules of a 
clearing agency be designed to provide for the safeguarding of 
securities and funds which are in its possession or control or for 
which it is responsible. By establishing an internal cross-margin 
program, OCC will provide its members with the benefits of cross-
margining, including greater liquidity and more efficient use of 
collateral, in a manner that is consistent with OCC's overall risk 
management process.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing because such approval will allow OCC to implement the 
proposed rule change so that its members immediately have the benefits 
of cross-margining options on variability indexes with commodity 
futures on variability indexes.

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-2004-10 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-2004-10. 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-2004-10 and should be 
submitted on or before November 5, 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. E4-2656 Filed 10-14-04; 8:45 am]
BILLING CODE 8010-01-P