[Federal Register Volume 70, Number 48 (Monday, March 14, 2005)]
[Notices]
[Pages 12525-12527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1062]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51331; File No. SR-OCC-2002-16]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to Unsegregation of 
Long Option Positions

March 8, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 9, 2002, the Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on December 12, 2002, and January 11, 
2005, amended, 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

    OCC Rule 611 permits a clearing member to issue instructions to OCC 
to release from segregation a long option position carried in a 
customers' account or firm non-lien account provided that the clearing 
member is simultaneously carrying in such account for such customer a 
short position in option contracts and the margin requirement of the 
customer has been reduced as a result of carrying the long option 
position. The proposed rule change would amend Rule 611 to permit a 
clearing member to issue such spread instructions where one leg of the 
spread is a long option position and the other is a position in a 
security futures contract.

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 12526]]

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 proposed rule change is submitted by OCC in connection with 
trading in security futures. The Commission approved the basic rules 
for the clearance of security futures by OCC in File Nos. SR-OCC-2001-
05 and SR-OCC-2001-07.\3\ The proposed rule change is submitted in 
light of joint rules (``joint margin rules'') that were adopted by the 
Commission and by the Commodity Futures Trading Commission (``CFTC'') 
on August 1, 2002,\4\ pursuant to section 7(c)(2) of the Act and 
related provisions of the Commodity Exchange Act governing the setting 
of margin requirements for security futures.
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    \3\ Securities Exchange Act Release Nos. 44434 (June 15, 2001), 
66 FR 33283 and 44727 (August 20, 2001), 66 FR 45351.
    \4\ Securities Exchange Act Release No. 46292, 67 FR 53146 [File 
No. S7-16-01].
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    Rule 15c3-3 under the Act requires broker-dealers to maintain 
customer fully-paid and excess margin securities in a control location 
free of any lien.\5\ Rules 8c-1 and 15c2-1 under the Act, which govern 
hypothecation of customer securities, also place limitations on broker-
dealers rights to encumber customer securities.\6\ In order to permit 
compliance by clearing members with Rule 15c3-3 and with the 
hypothecation rules, OCC's Rule 611(a) presently provides that long 
option positions in a customers' account established under Article VI, 
section 3(e) of OCC's By-Laws are deemed to be segregated and therefore 
not subject to OCC's lien except to the extent that the clearing member 
gives contrary instructions to OCC in accordance with the rule.\7\ 
Under paragraph (c) of Rule 611, a clearing member is entitled to give 
an instruction to unsegregate such a long position if the long position 
constitutes the long leg of a spread position, the short leg that 
constitutes the short leg of the spread position is held by the same 
customer, and the customer's margin requirement has been reduced to 
reflect the net risk of the spread position. These provisions reflect 
the Commission's long-standing interpretation that under those 
circumstances the long leg of a customer spread need not be treated as 
fully-paid or excess margin securities for purposes of Rule 15c3-3 and 
pledging it to OCC will not violate Rule 15c3-3 or the hypothecation 
rules.\8\
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    \5\ 17 CFR 240.15c3-3.
    \6\ 7 CFR 240.8c-1 and 15c2-1.
    \7\ The provisions of Rule 611 also apply to long option 
positions of certain ``non-customers'' carried in a ``firm non-lien 
account'' under Article VI, section 3(a) of OCC's By-Laws. At 
present, no clearing member carries such an account.
    \8\ The Commission staff has stated that ``provision by OCC of 
clearing-level spread margin treatment of customer positions was 
consistent with Exchange Act Rules 15c3-3, 15c2-1 and 8c-1'' so long 
as the conditions cited above are complied with. Securities Exchange 
Act Release No. 31626 (Dec. 21, 1992), 57 FR 62588 [File No. OCC-92-
14], n.10, citing letter to Burton R. Rissman, Schiff Hardin & 
Waite, from Lee A. Pickard, Director, Division of Market Regulation 
(April 18, 1975).
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    Section 7(c)(2)(B) of the Act requires that the margin requirements 
for security futures products be consistent with the margin 
requirements for comparable options contracts traded on any exchange 
registered pursuant to section 6(a) of the Act. OCC anticipates that 
clearing members will be permitted under the joint margin rules and 
exchange and security futures market rules adopted thereunder to reduce 
a customer's margin requirement when the customer has offsetting 
positions in security futures and options on the same underlying 
interest. Accordingly, a clearing member should be permitted under 
OCC's Rule 611 to unsegregate long option positions in the customers' 
account and firm non-lien account when the customer holds an offsetting 
long or short security futures position and the clearing member has 
reduced the customer's margin requirement in recognition of the spread. 
It should not matter whether the other leg of the spread is a security 
future or an option.\9\
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    \9\ Under OCC Rule 611(a), all positions in security futures are 
deemed to be unsegregated because a futures contract, which 
represents a potential liability as well as a potential asset, is 
never deemed to be fully-paid or to represent excess margin 
securities. Accordingly, this rule filing addresses only the case 
where long put or call options are spread against long or short 
futures contracts.
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    The proposed change in OCC Rule 611(c) merely extends the same 
basic rule applicable to permitted spread positions in options 
contracts to any permitted spread position where one leg of the spread 
is a long option position and the other is a position in a security 
futures contract. The proposed rule is drafted in such a way that its 
operation is dependent on the joint margin rules and the rules of the 
exchanges and security futures markets adopted thereunder. Only if a 
particular spread position involving a long option qualifies for 
reduced margin treatment under those rules could the option be treated 
as unsegregated for purposes of Rule 611. With approval of this 
proposed rule change, consistency between the joint margin rules and 
Rule 611(c) would be therefore assured.\10\
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    \10\ OCC has requested no action relief from the Commission's 
Division of Market Regulation that a clearing member who gives an 
instruction to unsegregate long option positions pursuant to this 
amended rule will not be deemed to be in violation of Rule 15c3-3 or 
the hypothecation rules.
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    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 promotes the prompt and accurate clearance and 
settlement of securities transactions, fosters cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions, and removes impediments to and perfects the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions.

(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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

[[Page 12527]]

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-2002-16 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-2002-16. 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-2002-16 and should be 
submitted on or before April 4, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1062 Filed 3-11-05; 8:45 am]
BILLING CODE 8010-01-P