[Federal Register Volume 70, Number 140 (Friday, July 22, 2005)]
[Notices]
[Pages 42405-42406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3915]



[[Page 42405]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52030; File No. SR-OCC-2003-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to a New 
Customers' Lien Account

July 14, 2005.

I. Introduction

    On July 21, 2003, 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 20, 2004 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 51330 (March 8, 2005), 
70 FR 12527.
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II. Description

    The proposed rule change provides for the introduction of a new 
``customers' lien account'' that may be carried at OCC by a clearing 
member. The new account type will be used only for customers that are 
margined on a portfolio risk basis or that are margined pursuant to a 
cross-margining arrangement in accordance with exchange rules.
    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, OCC has established a program under which eligible 
customers may elect to establish accounts, limited to specified 
derivative products, that will be margined on a portfolio margining 
basis rather than under the ``strategy-based'' margining method 
currently set forth in the exchanges' margin rules.\3\ The program will 
permit eligible customers to establish risk-based margin accounts that 
will be limited to specified derivative products subject to regulation 
by the Commission, and it will 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 (``CFTC''). Under the current proposal, a 
cross-margining account of an eligible customer will be treated as a 
securities account for regulatory purposes.\4\ A single ``customers' 
lien account'' created under new paragraph (i) of Article VI (Clearance 
of Exchange Transactions), Section 3 (Maintenance of Accounts) of OCC's 
By-Laws will 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 
will 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 account.\6\ OCC will 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\ For a detailed description of the program see Securities 
Exchange Act Release Nos. 51614 (April 26, 2005), 70 FR 22935 (May 
3, 2005) [File No. SR-CBOE-2002-03] and 51615 (April 26, 2005), 70 
FR 22953 (May 3, 2005) [File No. SR-NYSE-2002-19]. The Commission 
notes that OCC's proposed rule change is applicable to any exchange 
with Commission approved rules providing for such margining.
    \4\ CBOE has submitted a request to the CFTC for an exemption 
from the segregation requirements and from other provisions of the 
Commodity Exchange Act 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, fully paid 
for securities held for the account of a customer generally may not 
be subject to liens to secure obligations of the carrying broker-
dealer. To facilitate compliance with these customer protection 
rules, OCC's rules require clearing members to carry fully paid for 
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 and received a no-action letter from the Commission's 
Division of Market Regulation with respect to OCC treating these 
positions as unsegregated notwithstanding these provisions of Rules 
8c-1, 15c2-1 and 15c3-3. Letter from Bonnie Gauch, Attorney, 
Division of Market Regulation, to William H. Navin, General Counsel, 
OCC (July 14, 2005).
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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, OCC's clearing function will occur in a 
separate customers' lien account to be established for each cross-
margining program. A corresponding account will be established at each 
participating derivatives clearing organization. Liquidation of these 
accounts would be subject to the cross-margining agreement between or 
among OCC and the participating derivatives clearing organization(s) 
just as liquidation under the cross-margining programs would occur 
today. Any new cross-margining agreements or any amendments to existing 
cross-margining agreements will be separately filed with the Commission 
for approval. It is anticipated that clearing members 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 current program includes 
only the following eligible products: (i) Broad-based securities index 
options (including stock index warrants) listed on a national 
securities exchange; (ii) related marginable exchange-traded funds; and 
(iii) broad-based securities index futures contracts and futures 
options contracts to the extent they are cross-margined with listed 
index options.
    OCC is making the following revisions to its By-Laws and Rules to 
provide for the introduction of customers' lien accounts.
    First, OCC is adding a new defined term, ``customers' lien 
account,'' to Article I of its By-Laws. The definition simply cross-
references the description of the account in Article VI, Section 3(i) 
of the By-Laws.
    Second, Article VI of the By-Laws 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) is being added that contains a description of the 
proposed ``customers' lien account'' and provisions setting forth OCC's 
lien on all long positions, securities, margin, and other funds in 
these accounts and OCC's right to close out positions in these 
accounts. As provided in the amendment to Rule 611, which is described 
below, positions in customers' lien accounts will be deemed to be 
unsegregated. Section 3 is also being amended to correct the paragraph 
numbers of the Interpretations and Policies to Section 3.
    Third, OCC is making a minor, conforming amendment to Section 4 of 
Article VI of the By-Laws.

[[Page 42406]]

    Fourth, 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 is being amended to provide that all positions in 
customers' lien accounts will be deemed to be ``unsegregated.''
    Fifth, Chapter XI of OCC's Rules is being amended 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 will 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 will be applied only 
to satisfy obligations arising from that account.

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.\7\ The proposed rule change is designed to 
facilitate a new portfolio customer margining program that was the 
subject of proposed rule changes filed by NYSE and CBOE and was 
approved by the Commission.\8\ In order to reduce the disparity between 
the customer-level margin requirement and the clearing-level margin 
requirement that would occur if portfolio margining were allowed at the 
customer level but not at the clearing member level, the member's 
portfolio of eligible transactions will be cleared and settled at OCC 
through a new customers' lien account and OCC will compute margin for 
such account using the same portfolio margining methodology (OCC's TIMS 
methodology) that is used to calculate margin at the customer level.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ Securities Exchange Act Release No. XXXXX (July, 2005).
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    OCC's Rule 611(c) currently allows a clearing member to unsegregate 
a customer's long option position only if the position is offset by a 
short position being carried for the same customer and if the 
customer's margin requirement is reduced as a result of the offsetting 
positions. Under the customer portfolio margining methodology program, 
all long positions in the customers' lien account will be available as 
an offset to all short positions, regardless of the identity of the 
customer. This should provide for a greater diversification benefit to 
OCC's clearing members in the calculation of their margin. However, 
because all positions in the customers' lien account will be 
unsegregated and therefore will be subject to OCC's lien, the long 
positions in the account will be available to OCC in the event a 
clearing member fails to settle its obligations relating to a short 
position. Accordingly, because the proposed rule change is designed to 
ensure that transactions in securities which are eligible for the new 
portfolio margining program approved by the Commission will be cleared 
and settled by OCC in a manner that will not reduce the adequacy of 
collateral available to OCC, the proposed rule change should not 
adversely affect OCC's ability to assure the safeguarding of securities 
and funds which are in OCC's custody and 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-2003-04) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3915 Filed 7-21-05; 8:45 am]
BILLING CODE 8010-01-P