[Federal Register Volume 69, Number 202 (Wednesday, October 20, 2004)]
[Notices]
[Page 61701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2722]



[[Page 61701]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50526; File No. SR-OCC-2004-13]


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

October 13, 2004.

I. Introduction

    On June 23, 2004, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2004-13 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on September 7, 2004.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 50280, (August 27, 
2004), 69 FR 54172.
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II. Description

    The proposed rule change amends Article VIII of OCC's By-Laws, 
which authorizes OCC to borrow against the clearing fund in specified 
situations. Section 5(e) of Article VIII 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\ This 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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    Under the current By-Laws provisions 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. 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 amending 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) will 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.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, 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.\4\ OCC's By-Laws 
currently provide that OCC may borrow against the clearing fund to meet 
its obligations in the event a clearing member is suspended and OCC 
cannot promptly access the clearing member's assets. The proposed rule 
change modifies OCC's By-Laws by allowing OCC to borrow against the 
clearing fund if a clearing member defaults on its obligations without 
having to suspend the clearing member and determine that it cannot 
obtain or liquidate the member's assets. The proposed rule change 
should allow OCC to more readily have the liquidity it may need in the 
event of a clearing member default and does not otherwise affect the 
rights and obligations of OCC or its members regarding the clearing 
fund. Accordingly, because the proposed rule change is designed to help 
assure that OCC will be able to meet its settlement obligations and 
does not jeopardize the integrity of OCC's clearing fund, it is 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of OCC or for which OCC is responsible.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2004-13) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2722 Filed 10-19-04; 8:45 am]
BILLING CODE 8010-01-P