[Federal Register Volume 70, Number 145 (Friday, July 29, 2005)]
[Notices]
[Pages 43922-43923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4064]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52120; File No. SR-OCC-2005-10]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify Certain Procedures With Respect to the OCC's Stock Loan/Borrow 
Program

July 25, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 7, 2005, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change 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 parties.
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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 codifies certain administrative procedures 
with respect to the OCC's stock loan/borrow program.

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 these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The principal purpose of the proposed rule change is to add 
Interpretations and Policies reflecting changes in OCC's administrative 
procedures intended to provide hedge clearing members with the 
flexibility to allocate stock loan and stock borrow positions among 
their OCC accounts at any time during the business day. The proposed 
Interpretations also codify certain existing policies with respect to 
OCC's Stock Loan/Hedge Program.
    Clearing members participating in the stock loan program process 
loan and return transactions through The Depository Trust Company 
(``DTC'') and designate them as eligible for clearance at OCC through 
use of special codes. DTC transmits a file containing stock loan 
transaction data to OCC each business day around 3:15 p.m. A clearing 
member's transactions are identified only by its depository account 
number which is translated by OCC's systems to an OCC clearing number. 
After processing this data, OCC permits clearing members to access its 
stock loan system between about 4:00 p.m. (CT) and about 7:00 p.m. (CT) 
(``allocation window'') in order to allocate both existing and new 
positions among the clearing member's accounts. Any unallocated 
positions are posted to the clearing member's designated default 
account for this purpose.\3\ Currently, clearing members are permitted 
to perform such allocations only with respect to accounts maintained 
under the OCC clearing number in which the stock loan/borrow positions 
were cleared.
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    \3\ OCC permits some clearing members to carry stock loan and 
stock borrow positions in a designated account on a ``margin 
ineligible'' basis, meaning that the positions are excluded from the 
calculation of the margin requirement for that account. Stock loan 
and stock borrow positions carried on a margin ineligible basis will 
neither generate or increase a margin requirement nor reduce a 
margin requirement.
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    As reflected in the proposed Interpretations and Policies to Rule 
2201, OCC is changing its administrative procedures in two respects in 
order to address comments from clearing members. First, clearing 
members will now have the ability to make allocations of stock loan and 
stock borrow positions at any time during the day even though DTC has 
not yet reported the current day's transactions. Second, OCC will now 
permit a clearing member that is assigned more than one clearing member 
number to allocate stock loan and borrow positions to accounts across 
all of its clearing numbers.\4\
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    \4\ Some clearing members have more than one clearing member 
number as a result of having acquired other clearing members or 
having requested separate numbers to identify particular divisions 
or sets of accounts for internal purposes. In other cases, OCC may 
assign additional clearing member numbers to a clearing member in 
order to permit the clearing member to maintain additional accounts 
that cannot be accommodated under the same number within OCC's 
system.
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    Clearing members have advised OCC that they are often aware of the 
specific stock loan/borrow activity taking place during the day and can 
predict with

[[Page 43923]]

reasonable accuracy the final loan position that will be available for 
allocation at the end of the day. Providing the requested functionality 
will enable clearing members to: (i) Perform all or a significant 
portion of their allocations earlier in the day, which makes it easier 
for OCC to begin stock loan/borrow processing at the scheduled time and 
(ii) apply stock loan and borrow positions to accounts maintained under 
other clearing numbers in order to more effectively reduce their margin 
requirements.
    While clearing members will have the ability to review, verify, and 
change their allocations until a specified deadline, it is possible 
that the total number of loaned or borrowed shares that a clearing 
member has allocated may not match the clearing member's total end of 
day loan/borrow position in the DTC file. To address that possibility, 
clearing members will be required to give standing instructions 
specifying the order in which they prefer loaned and borrowed shares to 
be allocated to their accounts. In accordance with those instructions, 
OCC will allocate the inventory of loaned or borrowed shares to the 
account with the highest preference designated by the clearing member 
up to the number of shares that the clearing member allocated to that 
account. If there are remaining shares, OCC will allocate such shares 
to the next preferred account up to the amount allocated by the 
clearing member. OCC will continue this process until all shares have 
been allocated. Any shares in excess of the aggregate amount allocated 
by the clearing member will be applied to the clearing member's 
designated default account.
    In order to process a return of fewer than all of the loaned/
borrowed shares of a particular stock in the clearing member's 
inventory, OCC will first return shares from the least preferred 
account (as designated by the clearing member) up to the total amount 
of loaned/borrowed shares in that account. If additional shares are to 
be returned, OCC will return shares from the next priority account. OCC 
will continue this process until the entire amount of the return has 
been applied. Clearing members that participate on the Stock Loan 
Roundtable have endorsed the adoption of these allocation preference 
guidelines.
    The Interpretations and Policies proposed to be added to Article 
XXI, Section 5 of OCC's By-laws merely clarifies the existing policy. A 
hedge clearing member is not permitted to allocate any stock loan or 
stock borrow position to any proprietary cross-margin account, non-
proprietary cross-margin account, internal non-proprietary cross-
margining account, or segregated futures accounts. Although OCC 
anticipates that it will propose to change this policy in the future, 
the existing practice will apply until appropriate regulatory approvals 
are obtained.
    The proposed change is consistent with Section 17A of the Act \5\ 
and the rules and regulations thereunder applicable to OCC because the 
changes are designed to promote the prompt and accurate clearance and 
settlement of transactions and to assure safeguarding of securities and 
funds in the custody and control of OCC. The proposed rule change is 
not inconsistent with the By-laws and Rules of OCC, including any rules 
proposed to be amended.
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    \5\ 15 U.S.C. 78q-1.
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(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

    The foregoing rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A)(iii) of the Act \6\ and Rule 19b-4(f)(4) \7\ 
thereunder because it effects a change that (i) does not adversely 
affect the safeguarding of securities or funds in the custody or 
control of the clearing agency or for which it is responsible and (ii) 
does not significantly affect the respective rights or obligations of 
the clearing agency or persons using the service. At any time within 
sixty days of the filing of such rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
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    \6\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \7\ 17 CFR 240.19b-4(f)(4).
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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-2005-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-OCC-2005-10. 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, 100 F Street, 
NE., 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-2005-10 and should be submitted on 
or before August 19, 2005.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4064 Filed 7-28-05; 8:45 am]
BILLING CODE 8010-01-P