[Federal Register Volume 70, Number 118 (Tuesday, June 21, 2005)]
[Notices]
[Pages 35755-35756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3195]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51826; File No. SR-OCC-2004-17]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to 
Calculating Net Capital Under OCC Rule 307

June 13, 2005.

I.Introduction

    On September 27, 2004, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2004-17 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 April 18, 2005.\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. 51521, (April 11, 2005), 
70 FR 20198.
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II. Description

    The proposed rule change amends OCC Rule 307 by adopting 
Interpretation and Policy .01 (``IP .01'') thereunder that would 
require clearing members that could otherwise take advantage of 
Commission Rule 15c3-1(a)(6) under the Act to include the risk-based 
haircuts associated with proprietary securities positions in 
determining their compliance with OCC's minimum net capital 
requirements.
    OCC Rule 307 requires a clearing member to compute its ``net 
capital,'' ``aggregate indebtedness,'' and ``debt-equity total'' in 
accordance with Commission Rule 15c3-1 under the Act for purposes of 
OCC Rules.\3\ New IP .01 under OCC Rule 307 will require clearing 
members that could otherwise take advantage of Commission Rule 15c3-
1(a)(6) to deduct the risk-based haircuts associated with proprietary 
securities positions in determining their compliance with OCC's minimum 
net capital requirements.\4\ Although the exemption in Rule 15c3-
1(a)(6) from the securities haircuts in Rule 15c3-1(c)(2)(vi) and 
Appendix A under Rule 15c3-1 ensures from a systemic standpoint that 
capital exists to support open positions, it does not ensure that 
capital is maintained in the entity to which OCC has credit exposure. 
As a result, OCC is exposed to the volatility of the positions relative 
to the clearing

[[Page 35756]]

member's net income without any reserve against net capital. OCC 
believes that the exemption in Rule 15c3-1(a)(6) gives those clearing 
members added leverage enabling them to expand positions to several 
times their net capital.
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    \3\ OCC Rule 307 provides that a clearing member that is 
registered as a futures commission merchant and is not otherwise 
required to calculate net capital in accordance with Rule 15c3-1 may 
instead calculate net capital as required under the rules of the 
Commodity Futures Trading Commission.
    \4\ Rule 15c3-1 requires that every broker or dealer maintain 
net capital no less than the minimum net capital as set forth by the 
rule. Paragraph (c) of the rule defines net capital as the net worth 
of a broker or dealer, adjusted by among other things, securities 
haircuts that are set forth in paragraph (c)(vi) and appendix A of 
the rule. Paragraph (a)(6) allows market makers, specialists, and 
certain other dealers to elect to apply paragraph (a)(6)(iii) in 
lieu of paragraph (c)(vi) or Appendix A under Rule 15c3-1. In 
general, paragraph (a)(6)(iii) requires that a dealer maintain a 
liquidating equity with respect to securities positions in his 
market maker or specialist account at least equal to 25 percent of 
the market value of the long positions and 30 percent of the market 
value of the short positions.
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    In order to provide an adjustment period for those clearing members 
that may be affected by IP .01, IP .01 will not take effect until July 
27, 2005, for firms that are clearing members at the time when it 
becomes effective.

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 its custody or control or for 
which it is responsible.\5\ The proposed rule change imposes a more 
stringent net capital requirement than is currently in OCC's rules for 
the purpose of assuring that OCC has collected sufficient capital from 
its members in relation to such members' clearance and settlement 
activity. The Commission is satisfied with OCC's explanation that for 
purposes of OCC's minimum net capital requirement those members that 
qualify for the exemption in Rule 15c3-1(a)(6) should be required to 
deduct the risk based haircuts in Rule 15c3-1(c)(2)(vi) and Appendix A 
under Rule 15c3-1. This more conservative approach to minimum net 
capital requirements should better enable OCC to protect itself and its 
members from the potential losses associated with insolvency 
situations. Accordingly, the Commission finds that the proposed rule 
change is designed to assure the safeguarding of securities and funds 
which are in OCC's custody or control or for which OCC is responsible.
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    \5\ 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-2004-17) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3195 Filed 6-20-05; 8:45 am]
BILLING CODE 8010-01-P