[Federal Register Volume 70, Number 48 (Monday, March 14, 2005)]
[Notices]
[Pages 12527-12529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1063]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51330; File No. SR-OCC-2003-04]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to a New Customers' 
Lien Account

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 21, 2003, the Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') and on December 20, 2004, 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

    The proposed rule change would amend OCC's By-Laws and Rules to 
support the introduction of a new customers' lien account that may be 
carried at OCC by a clearing member.

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

    The proposed rule change would provide for the introduction of a 
new ``customers' lien account'' that may be carried at OCC by a 
clearing member. The new account type would be used only to clear 
transactions of eligible customers that an OCC clearing member has 
agreed to margin on a portfolio risk basis or that a commodity clearing 
organization has agreed to margin in connection with a cross-margining 
arrangement in accordance with rules proposed by certain exchanges.
    OCC, in conjunction with the Chicago Board Options Exchange 
(``CBOE''), American Stock Exchange, New York Stock Exchange 
(``NYSE''), Chicago Mercantile Exchange (``CME''), Chicago Board of 
Trade and various member firms, is seeking to establish a program under 
which eligible customers may elect to establish accounts, limited to 
specified derivative products, that would be margined on a risk-based 
or portfolio margining basis rather than under the ``strategy-based'' 
method currently set forth in the exchanges' margin rules. The proposed 
program is described in detail in a proposed rule change filed by CBOE 
( ``CBOE Rule Filing'') in which CBOE proposes to amend its margin 
rules to provide for the program.\3\ The proposed program would permit 
eligible customers to establish risk-based margin accounts that would 
be limited to specified derivative products subject to regulation by 
the Commission, and it would also provide for accounts in which 
derivative products regulated by the Commission may be cross-margined 
with related futures products regulated exclusively by the Commodity 
Futures Trading Commission (the ``CFTC''). Under the current proposal, 
a cross-margining account of an eligible customer would be treated as a 
securities account for regulatory purposes.\4\ A single ``customers' 
lien account'' created under the proposed new paragraph (i) of Article 
VI, Section 3 of OCC's By-Laws would be used to clear all transactions 
of eligible customers under a portfolio margining program or cross-
margining program so long as the products included in the account are 
all cleared by OCC.\5\ OCC would have a lien on all positions and 
assets in a customers' lien account as security for the OCC clearing 
member's obligations to OCC relating to the

[[Page 12528]]

account.\6\ OCC would continue to require full premium payment from the 
clearing firm for all options purchased whether or not the firm extends 
credit to a customer for the purchase.
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    \3\ Securities Exchange Act Release No. 50886 (December 20, 
2004), 69 FR 77275 (December 27, 2004) [File No. SR-CBOE-2002-03]. A 
similar proposed rule change was filed by NYSE. Securities Exchange 
Act Release No. 50885 (December 20, 2004), 69 FR 77287 (December 27, 
2004) [File No. SR-NYSE-2002-19].
    \4\ CBOE plans to submit a request to the CFTC for an exemption 
from the segregation requirements and from other provisions of the 
CEA to the extent necessary to permit futures contracts to be 
carried in securities accounts subject to regulation by the 
Commission.
    \5\ OCC is registered as a derivatives clearing organization 
under the Commodity Exchange Act and is therefore able to clear 
CFTC-regulated derivative products as well as Commission-regulated 
derivative products.
    \6\ Under Commission Rules 8c-1, 15c2-1, and 15c3-3, securities 
held for the account of a customer generally may not be subject to 
liens to secure obligations of the carrying broker-dealer in an 
amount that exceeds the amount of total customer indebtedness. To 
facilitate compliance with these customer protection rules, OCC's 
rules require clearing members to carry positions of public 
securities customers in a customers' account under which all long 
positions are considered ``segregated'' and therefore free of OCC's 
lien, unless specifically designated as ``unsegregated.'' All long 
options positions in customers' lien accounts, however, would 
automatically be considered unsegregated for purposes of OCC's 
placing a lien on these positions. OCC has requested no-action 
relief from the Commission's Division of Market Regulation which 
will permit OCC to treat these positions as unsegregated 
notwithstanding these provisions of Rules 8c-1, 15c2-1 and 15c3-3.
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    Where cross-margining accounts include products cleared by OCC as 
well as futures products cleared by CME or other derivatives clearing 
organizations other than OCC, under a cross-margining program OCC's 
clearing function would occur in a separate customers' lien account to 
be established for each such program. A corresponding account would be 
established at the participating derivatives clearing organizations. 
Liquidation of these accounts would be subject to a cross-margining 
agreement between or among OCC and the participating derivatives 
clearing organizations just as in the case of the existing cross-
margining programs. These agreements or appropriate amendments to 
existing agreements would be separately filed with the Commission for 
approval. It is anticipated that a clearing member may establish a 
customers' lien account corresponding to a cross-margining agreement 
among OCC, CME and the New York Clearing Corporation. Separate 
customers' lien accounts would correspond to cross-margining agreements 
between OCC and other futures clearing organizations.
    As stated in the CBOE rule filing, the currently proposed program 
includes only the following eligible products: (i) All broad-based U.S. 
market index options (including stock index warrants) listed on a 
national securities exchange; (ii) marginable exchange-traded funds; 
and (iii) index futures contracts and futures options contracts to the 
extent they are cross-margined with listed index options.
    The following proposed revisions to OCC's By-Laws and Rules are 
necessary to provide for the introduction of customers' lien accounts.
    New Defined Term: OCC proposes to add a new defined term, 
``customers' lien account,'' in Article I of the By-Laws. The 
definition simply cross-references the description of the account in 
Article VI, Section 3(i).
    Amendments to Article VI of the By-Laws: Article VI sets out the 
basic terms of option contracts and the general rules for the clearance 
of exchange transactions. Section 3 contains a description of each of 
the types of accounts that clearing members may establish and maintain 
with OCC. A new Section 3(i) would be added that would contain a 
description of the proposed ``customers' lien account,'' including 
provisions setting forth OCC's lien on all long positions, securities, 
margin, and other funds in such accounts and OCC's right to close out 
positions in these accounts. As provided in the proposed amendment to 
Rule 611 below, positions in customers' lien accounts would be deemed 
to be unsegregated. Section 3 would be further amended to correct the 
paragraph numbers of the Interpretations and Policies to Section 3.
    A minor, conforming amendment has been made to Section 4 of Article 
VI.
    Amendments to the Rules: OCC's Rule 611 treats all long option 
positions in the regular securities customers' account as 
``segregated'' and therefore free of OCC's lien except to the extent 
that a clearing member is entitled to ``unsegregate'' long positions 
that are part of a customer spread. Rule 611 would be amended to 
provide that all positions in customers' lien accounts will be deemed 
to be ``unsegregated.''
    Changes are being proposed in Chapter XI of the Rules to provide 
for the liquidation of a clearing member's customers' lien account in 
the event that the clearing member is suspended. In essence, a 
customers' lien account would be treated in exactly the same manner as 
a combined market-maker account. Under these provisions, proceeds of 
long options or security futures in a customers' lien account would be 
applied only to satisfy obligations arising from that account.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act because it provides 
for operational and economic efficiencies in customer margining and 
increases the safety of the clearing system by applying previously 
approved risk-based margining procedures to clearing accounts 
containing the transactions of eligible customers. The proposed rule 
change is not inconsistent with the existing rules of OCC, including 
any other rules proposed to be amended.

(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 
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-2003-04 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-2003-04. 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

[[Page 12529]]

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-2003-04 and should be submitted on or before April 4, 2005. 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).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1063 Filed 3-11-05; 8:45 am]
BILLING CODE 8010-01-P