[Federal Register Volume 71, Number 9 (Friday, January 13, 2006)]
[Notices]
[Pages 2283-2284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53053; File No. SR-OCC-2003-13]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Establish a Comprehensive 
Standard of Care and Limitation of Liability With Respect to Clearing 
Members

January 5, 2006.

I. Introduction

    On November 5, 2003, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on August 18, 2004, amended \1\ proposed rule change SR-OCC-2003-13 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\2\ Notice of the proposal was published in the Federal 
Register on November 23, 2005.\3\ No comment letters were received. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.
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    \1\ Letter from William H. Navin, Executive Vice President, 
General Counsel, and Secretary, OCC (August 17, 2005).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 52783 (November 16, 
2005), 70 FR 70910.
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II. Description

    In its 1980 release setting forth standards for registration of 
clearing agencies, the Commission's Division of Market Regulation 
stated that it was ``of the view that clearing agencies should 
undertake to perform their obligations with a high degree of care.'' 
\4\ In its 1983 order registering nine clearing agencies, the 
Commission stated that it did ``not believe sufficient justification 
exists at this time to require a unique federal standard of care for 
registered clearing agencies.'' \5\ The Commission has left to user-
governed clearing agencies the question of how to allocate losses 
associated with, among other things, clearing agency functions. Along 
this line, in its 1986 order approving a proposed rule change of the 
Midwest Securities Trust Company (``MSTC'') to clarify the rights and 
liabilities of MSTC and its participants with respect to certain 
services, the Commission stated:
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    \4\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 45167 (June 23, 1980).
    \5\ Securities Exchange Act Release No. 20221 (September 23, 
1983), 48 FR 45167 (October 3, 1983).

    The Act does not specify the standard of care that must be 
exercised by registered clearing agencies and the Commission has 
determined that imposition of a unique federal standard of care for 
registered clearing agencies is not appropriate at this time. 
[citing Securities Exchange Act Release No. 20221, supra note 6] For 
those reasons the Commission believes that the clearing agency 
standard of care and the allocation of rights and responsibilities 
between a clearing agency and its participants applicable to 
clearing agency services generally may be set by the clearing agency 
and its participants. The Commission believes it should review 
clearing agency proposed rule changes in this area on a case-by-case 
basis and balance the need for a high degree of clearing agency care 
with the effect resulting liabilities may have on clearing agency 
operations, costs, and safeguarding of securities and funds.\6\
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    \6\ Securities Exchange Act Release No. 22940 (February 24, 
1986), 51 FR 7169 (February 28, 1986).

Because standards of care represent an allocation of rights and 
liabilities between a clearing agency and its users, which are 
generally sophisticated financial entities, the Commission has 
continued to refrain from establishing a unique federal standard of 
care and has allowed clearing agencies and other self-regulatory 
organizations and their users to establish their own standards of 
care.\7\
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    \7\ See, e.g., Securities Exchange Act Release Nos. 51669 (May 
9, 2005), 70 FR 25634 (May 13, 2005) [File No. SR-NSCC-2004-09]; 
48201 (July 21, 2003), 68 FR 44128 (July 25, 2003) [File No. SR-
GSCC-2002-10]; 37563 (August 14, 1996), 61 FR 43285 (August 21, 
1996) [SR-PSE-96-21]; and 37421 (July 11, 1996), 61 FR 37513 (July 
18, 1996) [SR-CBOE-96-02].
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    With this rule change, OCC is establishing a comprehensive gross 
negligence standard of care and limitation of liability with respect to 
its clearing members. In connection with this filing, OCC has made the 
following representations. OCC states in its original filing that since 
its founding in 1973, it has performed its clearing services with an 
exemplary level of care. Its record of fulfilling its commitments to 
its clearing members for over 30 years reflects OCC's commitment to 
serving the best interests of its clearing members. It has 
comprehensive systems and operating procedures in place to ensure that 
its clearing functions are executed with the highest level of accuracy. 
In addition to its own concern for accuracy, it is subject to extensive 
regulatory oversight by the Commission. Furthermore, in its amendment 
to the filing, OCC states that (1) gross negligence is the standard of 
care generally used by other clearing agencies such as the Fixed Income 
Clearing Corporation, (2) the decision to apply a gross negligence 
standard of care to OCC is a conscious allocation of risk between OCC 
and its members, (3) the filing was unanimously approved by OCC's 
directors, a majority of whom are officers of clearing members, and (4) 
the

[[Page 2284]]

proposed rule change in no way will affect the very high level of care 
to which OCC has always held itself and to which it is held through the 
regulatory oversight of the Commission.\8\ As such, OCC believes that a 
gross negligence standard of care is appropriate for OCC.\9\
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    \8\ Letter from William H. Navin, supra, n. 1.
    \9\ Specifically, OCC is amending Article VI of its By-Laws, 
``Clearance of Exchange Transactions,'' by adding new Section 25, 
``Limitation of Liability,'' which states:
    (a) Notwithstanding any other provision in the By-Laws and 
Rules, the Corporation will not be liable for any action taken, or 
any delay or failure to take any action, under the By-Laws and Rules 
or otherwise, to fulfill the Corporation's obligations to its 
Clearing Members, other than for losses caused directly by the 
Corporation's gross negligence, willful misconduct, or violation of 
federal securities laws for which there is a private right of 
action. Under no circumstances will the Corporation be liable for 
the acts, delays, omissions, bankruptcy, or insolvency of any third 
party, including, without limitation, any bank or other depository, 
custodian, sub-custodian, clearing or settlement system, data 
communication service, or other third party, unless the Corporation 
was grossly negligent, engaged in willful misconduct, or was in 
violation of federal securities laws for which there is a private 
right of action, in selecting such third party; and
    (b) Under no circumstances will the Corporation be liable for 
any indirect, consequential, incidental, special, punitive or 
exemplary loss or damage (including, but not limited to, loss of 
business, loss of profits, trading losses, loss of opportunity and 
loss of use) however suffered or incurred, regardless of whether the 
Corporation has been advised of the possibility of such damages or 
whether such damages otherwise could have been foreseen or 
prevented.
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III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(F) of the Act requires that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds which are in its custody or control.\10\ The 
Commission believes that OCC's rule change is consistent with this 
Section because it will permit the resources of OCC to be appropriately 
utilized to protect funds and assets.\11\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ The Commission notes that OCC's adoption of a comprehensive 
gross negligence standard of care and limitation of liability with 
respect to its clearing members does not affect the regulatory 
standards (e.g., those set forth in Section 17A of the Act) that 
apply to OCC or the way in which OCC conducts its clearing agency 
operations.
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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.\12\
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    \12\ The Commission notes that the rule change does not 
alleviate OCC from liability for violation of the Federal securities 
laws where there exists a private right of action and therefore is 
not designed to adversely affect OCC's compliance with the Federal 
securities laws and private rights of action that exist for 
violations of the Federal securities laws.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2003-13) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-252 Filed 1-12-06; 8:45 am]
BILLING CODE 8010-01-P