[Federal Register Volume 72, Number 66 (Friday, April 6, 2007)]
[Notices]
[Pages 17210-17212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-6493]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55565; File No. SR-OCC-2007-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Portfolio Margining of Customer Securities

April 2, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), notice is hereby given that on March 2, 2007, 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 and order to solicit comments 
from interested persons and to grant accelerated approval of the 
proposal.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change amends OCC's Rule 611, Segregation of Long 
Option Positions, to allow a clearing member to instruct OCC to 
unsegregate a long options position that is carried in a customer's 
portfolio margining account.

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.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In a rule filing submitted in 2003 and subsequently approved by the 
Commission,\1\ OCC created a ``customers' lien account'' in which 
clearing members are permitted to carry positions and collateral that 
are carried

[[Page 17211]]

for customers at the firm level in portfolio margining accounts. In a 
regular customers account at OCC, all long positions must be 
``segregated'' (i.e., held free of OCC's lien and therefore given no 
value in determining margin requirements) except when a long position 
is part of a customer spread. This practice was adopted to comply with 
Commission Rule 15c3-3, which requires that customers' ``fully paid'' 
and ``excess margin'' securities be held free of lien. Because it is 
anticipated that brokers will ordinarily be extending credit in 
portfolio margin accounts, the Commission approved OCC's rule filing 
effectively providing that longs in such accounts need never be treated 
as fully paid or excess margin securities. The Division of Market 
Regulation also issued a ``no action'' letter to the effect that no 
enforcement action would be taken against broker-dealers under Rule 
15c3-3 for failing to segregate customer longs carried in portfolio 
margin accounts.\2\
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    \1\ Securities Exchange Act Release No,. 50509 (October 8, 
2004), 69 FR 61289 (October 15, 2004) (OCC-2003-04).
    \2\ Letter to William H. Navin, Executive Vice President, 
General Counsel and Secretary, OCC (July 14, 2005).
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    OCC has been informed by several clearing members that a customers' 
lien account is not practical for them because their customer trades 
are routed to them from many sources and having more than one 
customers' account could result in a large number of clearing 
errors.\3\ OCC is therefore proposing an alternative procedure 
(``Proposed Procedure'') for clearing members that are unable or that 
elect not to use a customers' lien account. Under the Proposed 
Procedure, a clearing member would be permitted to carry portfolio 
margin positions in its regular securities customers' account at OCC. 
When the clearing member submits instructions to unsegregate customer 
longs that are part of a spread position, it will also submit 
instructions to unsegregate all longs that are carried at the firm 
level in customers' portfolio margin accounts. The result of the 
Proposed Procedure will be that long options required to be segregated 
in the customers' account will continue to be segregated and longs that 
would be unsegregated in a customers' lien account will be unsegregated 
in the regular customers' account.
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    \3\ Information from Jean Cawley, Deputy General Counsel (March 
26, 2007).
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    The lien language in both the regular customers' account and in the 
customers' lien account provides in effect that to the extent that OCC 
has a lien on property in the account, the lien secures only other 
assets in that particular account. This limitation not only ensures 
that customer longs are not pledged to secure proprietary obligations 
of the firm in violation of the hypothecation rules, but it is 
conservative in that it does not allow the longs to secure positions in 
other customer accounts. Thus, to the extent that regular clearing 
member customers have unsegregated longs in the account, those 
positions would be subject to a lien securing the obligations of such 
clearing member with respect to its portfolio-margining customers whose 
short positions may be included in the account as well. Conversely, the 
longs belonging to portfolio-margining customers would collateralize 
the shorts of regular customers.
    OCC believes that the proposed procedure is appropriate under Rule 
15c3-3 and the hypothecation rules (Rules 8c-1 and 15c-2) and is 
appropriate as a matter of policy and fairness. There is no requirement 
to separate positions of portfolio margining customers from positions 
of other customers and the separate customers' lien account was 
intended merely as a convenience to avoid the need for daily submission 
of instructions to unsegregate long positions in portfolio margining 
accounts. Clearing members that are willing to accept that burden in 
order to carry the positions in a regular customers' account should be 
permitted to do so. OCC has requested supplemental no-action relief 
from the Commission staff in order to confirm the applicability of the 
previous no-action relief to long positions in customer's portfolio 
margining accounts that are carried on an unsegregated basis in the 
regular customers' account at OCC rather than in a customers' lien 
account.
    In SR-OCC-2003-04, Rule 611 was amended to provide that ``all 
positions in cleared securities that are carried in a customers' lien 
account shall be deemed to be unsegregated for purposes of this Rule 
611.'' Although OCC's rules do not specifically require that positions 
in a portfolio margin account at the firm level be carried in a 
customers' lien account at OCC, the rule filing indicated that they 
would be. In approving SR-OCC-2003-04 creating the customers' lien 
account and amending Rule 611, the Commission stated:

    Under the 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 will be therefore 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 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 or 
control or for which OCC is responsible.

    The Commission's rationale for approving SR-OCC-2003-04 should 
apply to the Proposed Procedure as well. Rule 611 would simply be 
amended to provide an additional basis by which a clearing member may 
give instructions to release long options from segregation--namely when 
they are carried for a customer in a porfolio margin account.
    The proposed rule change is consistent with the purpose and 
requirements of Section 17A of the Act because it fosters cooperation 
and competition with persons engaged in the clearance and settlement of 
securities transactions, removes impediments to and perfects the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions, and in general protects 
investors and the public interest by facilitating the implementation of 
portfolio margining programs previously approved by the Commission. The 
proposed rule change is not inconsistent with the existing rules of 
OCC, including any other rules proposed to be amended.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will 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 Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F) \4\ of the Act, which

[[Page 17212]]

requires that the rules of a clearing agency be designed to provide for 
the safeguarding of securities and funds which are in its possession or 
control or for which it is responsible. The proposed rule change will 
allow OCC's clearing members and their customers to benefit from the 
portfolio margining program, which includes having greater liquidity 
and more efficient use of collateral, in a manner that is consistent 
with OCC's overall risk management process.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing because such approval will allow OCC's members to 
immediately participate in the expanded portfolio margining pilot 
scheduled to be implemented on April 2, 2007.

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-2007-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-OCC-2007-04. 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-2007-04 and should be submitted on 
or before April 27, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2007-04) be and hereby 
is approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-6493 Filed 4-5-07; 8:45 am]
BILLING CODE 8010-01-P