[Federal Register Volume 70, Number 140 (Friday, July 22, 2005)]
[Notices]
[Pages 42403-42404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3914]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52035; File No. SR-OCC-2002-16]


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

July 14, 2005.

I. Introduction

    On July 9, 2002, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2002-16 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ On December 12, 2002, and 
January 11, 2005, OCC amended the proposed rule change. Notice of the 
proposal was published in the Federal Register on March 14, 2005.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 51331, (March 8, 2005), 
70 FR 12525.
---------------------------------------------------------------------------

II. Description

    OCC Rule 611 permits a clearing member to issue instructions to OCC 
to release from segregation a long position in options contracts 
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 amends Rule 611(c) 
to permit a clearing member to issue such instructions where one leg of 
the spread is a long option position and the other is a long or short 
position in a security futures contract.
    The proposed rule change was submitted in light of joint margin 
rules that were adopted by the Commission and by the Commodity Futures 
Trading Commission (``CFTC'') on August 1, 2002,\3\ 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. 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 unsegregated pursuant to Rule 
611. With approval of this proposed rule change, consistency between 
the joint margin rules and Rule 611(c) will be assured.\4\
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 46292, 67 FR 53146 
(August 14, 2002) [File No. S7-16-01].
    \4\ OCC has requested a no action position from the Commission's 
Division of Market Regulation that a clearing member that gives an 
instruction to unsegregate long option positions pursuant to this 
amended rule will not be deemed to be in violation of Rules 15c3-3, 
8c-1, and 15c2-1 under the Act. Supra, note 12.
---------------------------------------------------------------------------

    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.\5\ Clearing members are 
permittedunder the joint margin rules \6\ and exchange and

[[Page 42404]]

security futures market rules adopted thereunder \7\ to reduce a 
customer's margin requirement when the customer has offsetting 
positions in security futures and options on the same underlying 
interest. Accordingly, OCC is amending its Rule 611(c) to also allow a 
clearing member to unsegregate long option positions in a customers' 
account or in a 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.\8\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78g(c)(2)(B)(iii)(I).
    \6\ Supra, note 3.
    \7\ See, e.g., Securities Exchange Act Release Nos. 47460 (March 
6, 2003), 68 FR 12123 (March 13, 2003) [File No. SR-NYSE-2003-05], 
47541 (March 20, 2003), 68 FR 14725 (March 26, 2003) [File No. SR-
CBOE-2002-67], and 47550 (March 20, 2003), 68 FR 15015 (March 27, 
2003) [File No. SR-NASD-2003-45 (Orders approving amendments to NYSE 
Rule 431, CBOE Rule 12.3, and NASD Rule 2520 relating to margin 
requirements for security futures contracts.)
    \8\ 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.
---------------------------------------------------------------------------

    Rule 15c3-3 under the Act requires broker-dealers to maintain 
physical possession or control of customer fully-paid and excess margin 
securities.\9\ 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.\10\ 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.\11\ 
Under Rule 611(c), 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. OCC has requested and has been granted no 
action relief from the Commission's Division of Market Regulation 
regarding the proposed rule change with respect to Rules 8c-1, 15c2-1 
and 15c3-3 of the Act.\12\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.15c3-3(b).
    \10\ 17 CFR 240.8c-1 and 15c2-1.
    \11\ 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.
    \12\ Letter from Bonnie Gauch, Attorney, Division of Market 
Regulation to William H. Navin, General Counsel, OCC (July 14, 
2005). Specifically, the letter states that the Division will not 
recommend to the Commission that enforcement action be taken 
pursuant to Exchange Act Rules 8c-1, 15c2-1, and 15c3-3 if, in 
accordance with the amendments to Rule 611, a broker-dealer releases 
from segregation or permits to remain unsegregated, a customer long 
option position if (1) the broker-dealer is simultaneously carrying 
in that customer's account an offsetting security future contract, 
and (2) the margin required to be deposited by the customer with 
respect to the security future contract has been reduced as a result 
of the carrying of the long option position.
---------------------------------------------------------------------------

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in the clearing agency's 
custody or control or for which it is responsible.\13\ The purpose of 
OCC's Rule 611(c) is to provide consistency between the clearing level-
margin requirement under OCC's rules and the customer-level margin 
requirement under applicable exchange rules. The joint margin rules and 
the customer margin rules adopted by the security exchanges and the 
security futures markets permit reduced customer margin levels for 
specific offsetting positions in options and security futures. By 
allowing clearing members to issue instructions to unsegregate long 
option positions in order to take advantage of the offsets allowed at 
the customer level, the proposed rule change eliminates a disparity in 
the customer-level and clearing-level margin requirements and thereby 
reduces the likelihood that clearing members will experience a 
financial ``squeeze'' resulting because the amount of clearing-level 
margin the member is required to deposit with OCC is greater than the 
amount of customer-level margin the member collects from its 
customers.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ The Commission has previously approved similar amendments 
to Rule 611(c). See, e.g., Securities Exchange Act Release No. 31626 
(December 21, 1992), 57 FR 62588 (December 31, 1992) [File No. SR-
OCC-92-14] (Order approving a proposed rule change that eliminated 
the requirement that spread positions be carried for the same 
customer and be on a contract-for-contract basis. The rule change 
gave clearing-level spread margin treatment to pairs of positions 
where the customer's margin requirement had been reduced in 
accordance with applicable exchange margin rules).
---------------------------------------------------------------------------

    As a consequence of the proposed rule change, OCC will collect less 
margin from its clearing members than it does under current Rule 
611(c). However, this result is consistent with the joint margin rules 
and with the exchange and security futures market rules which were 
approved by the Commission. Furthermore, because the proposed rule 
change requires that anylong options position that is used to offset a 
security futures position will be unsegregated and therefore subject to 
OCC's lien, OCC and its members will be protected from financial loss 
in the event an OCC member fails to meet its obligations with respect 
to such short security futures position. Accordingly, because the 
proposed rule change is designed so that it provides consistent 
treatment between OCC's rules, the joint margin rules, and the margin 
rules of the exchanges and the security futures markets without 
jeopardizing the adequacy of collateral available to OCC, the proposed 
rule change should promote the prompt and accurate clearance and 
settlement of securities transactions and should help assure the 
safeguarding of securities and funds which are in OCC's custody or 
control or for which OCC is responsible.

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-2002-16) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3914 Filed 7-21-05; 8:45 am]
BILLING CODE 8010-01-P