[Federal Register Volume 73, Number 229 (Wednesday, November 26, 2008)]
[Notices]
[Pages 72098-72100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-28095]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58988; File Nos. SR-OCC-2008-18 and SR-NSCC-2008-09]


Self-Regulatory Organizations; The Options Clearing Corporation 
and National Securities Clearing Corporation; Notice of Filing and 
Order Granting Accelerated Approval of Proposed Rule Changes Relating 
to Amendment No. 2 to the Third Amended and Restated Options Exercise 
Settlement Agreement

November 20, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 17, 2008, The 
Options Clearing Corporation (``OCC'') and the National Securities 
Clearing Corporation (``NSCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes described in 
Items I and II, and III below, which items have been prepared primarily 
by OCC and NSCC. The Commission is publishing this notice and order to 
solicit comments from interested persons and to grant approval of the 
proposals.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The proposed rule changes would amend the Third Amended and 
Restated Options Exercise Settlement Agreement between OCC and NSCC as 
described herein.

II. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, OCC and NSCC included 
statements concerning the purpose of and basis for the proposed rule 
changes and discussed any comments they received on the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. OCC and NSCC have 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 and NSCC.
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(A) Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for the Proposed Rule Changes

    The purpose of the proposed rule changes is to reduce the burden on 
clearing members of OCC that are also members of NSCC that results from 
duplicative margin requirements relating to option exercises and 
assignments and to allow clearing members to use stock deposited as 
margin with OCC to meet settlement obligations at NSCC.
    OCC and NSCC are parties to a Third Amended and Restated Options 
Exercise Settlement Agreement dated as of February 16, 1995, as amended 
(``OCC/NSCC Accord''), which provides for a two-way guaranty between 
OCC and NSCC of the mark-to-market amounts for which NSCC has 
guaranteed settlement. Through these rule changes, OCC and NSCC seek 
approval for an Amendment No. 2 to the OCC/NSCC Accord (``Amendment'') 
that would address the matters stated above.
    Under the OCC/NSCC Accord currently in effect, OCC guarantees to 
NSCC the performance by NSCC members of settlement obligations 
resulting from exercise and assignment (``E&A'') positions, with the 
amount guaranteed by OCC with respect to the performance of an NSCC 
member's settlement obligation equal to the smaller of the ``Net Member 
Debit to NSCC'' and the ``Calculated Margin Requirement'' with respect 
to the NSCC member. OCC can make this guarantee because it continues to 
margin E&A activity through the settlement date.\3\ Similarly, NSCC 
guarantees to OCC the smaller of the ``Net Member Debit to OCC'' and 
the ``Calculated Margin Credit.'' NSCC can make this guarantee because 
it collects risk-based margin on the member's entire portfolio of E&A 
activity.\4\
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    \3\ In the case of E&A activity resulting from exercises at 
expiration (``Expiration E&A Activity''), the settlement date is 
normally the Wednesday after expiration.
    \4\ Because OCC marks E&A activity to the market and guarantees 
that amount to NSCC, NSCC does not mark E&A positions to the market. 
However, it does collect VAR margin to cover potential losses in 
liquidating E&A positions.
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    Both OCC and NSCC collect margin with respect to E&A positions 
through settlement, calculated utilizing risk-based margining 
methodologies which include volatility charges. OCC collects risk 
margin to cover (i) the risk that NSCC might decline to settle a 
defaulting member's pending E&A activity \5\ thereby forcing OCC to 
guarantee buy-ins and sell-outs and (ii) the risk that the market might 
move against E&A positions accepted by NSCC for settlement thereby 
increasing OCC's potential liability to NSCC under the OCC/NSCC Accord. 
NSCC collects a

[[Page 72099]]

volatility charge because OCC's liability under the OCC/NSCC Accord is 
limited to the negative mark-to-market value of E&A positions as of the 
close on the day before the member was suspended. To a considerable 
degree, NSCC's VAR margin and OCC's risk margin overlap, covering the 
same risk.
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    \5\ Under its rules, NSCC's guaranty does not attach until 
midnight on T+1. For exercises on expiration weekend, T+1 is 
normally the following Monday.
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    This dual obligation to OCC and NSCC with respect to E&A positions 
may constitute a significant temporary financial burden on NSCC members 
and OCC clearing members, particularly during the three business days 
following options expiration each calendar month. This burden has 
significantly grown as recent market conditions have caused an increase 
in the volatility charges of both clearing corporations. The Amendment 
addresses this problem in two ways. First, it accelerates NSCC's 
guarantee of Expiration E&A Activity to the time on T+1 when the member 
meets its morning NSCC clearing fund requirement instead of midnight.
    Second, it provides that in calculating OCC's obligations to NSCC, 
Expiration E&A Activity would be marked to the previous day's close 
only: (i) On T+1 (because even if the member failed to settle with OCC 
on T+1, OCC would be holding risk margin collected on T to cover that 
risk) and (ii) on T+2 and T+3 if, and only if, OCC had collected that 
morning's mark-to market payment. If the member failed before OCC 
collected that morning's mark, pending Expiration E&A Activity would be 
marked to the second previous day's close.\6\
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    \6\ See the example at the end of Section 3 of the Amendment. 
Copies of the Amendment are attached as Exhibit 5 to the proposed 
rule changes and is available at http://www.theocc.com/publications/rules/proposed_changes/sr_occ_08_18.pdf and http://www.dtcc.com/downloads/legal/rule_filings/2008/nscc/2008-09.pdf.
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    The combined effect of these two changes is to enable OCC to stop 
collecting risk margin on Expiration E&A Activity after the morning of 
T+1. Once the member meets its morning clearing fund requirement at 
NSCC on T+1, NSCC would be responsible for settling those positions, 
and OCC could not be liable to NSCC under the Accord for more than the 
mark-to-market that OCC had already collected so there would be no risk 
to be margined. NSCC's risk in this regard would be covered by its 
collection of margin.
    OCC estimates that if this arrangement had been in place during 
recent months, it would have reduced daily margins for OCC clearing 
members during the week after expiration by $2 billion in August 
(affecting 89 members), $3.7 billion in September (93 members), and $3 
billion in October (95 members). The Amendment is intended to mitigate 
burdens on NSCC and OCC members while retaining adequate margin to 
protect both OCC and NSCC.
    In order to further mitigate financial burden and facilitate the 
settlement, on any exercise settlement date, of the settlement 
obligations relating to assigned short positions, OCC and NSCC, 
together with DTC, have established a program to permit an NSCC member 
that has a security deliver obligation on an exercise settlement date 
with respect to an assigned short position to request OCC to release 
underlying securities pledged to OCC at DTC by the NSCC member to meet 
the NSCC member's OCC margin or cover requirement so that the NSCC 
member may fully or partially complete its continuous net settlement 
security deliver obligation at NSCC on such exercise settlement date. 
Some OCC members use stock held at DTC and pledged to OCC as a 
``specific deposit'' to cover short positions. However, if the short 
position is assigned, the member has to obtain other stock to deliver 
to NSCC. OCC will release the specific deposit once the member settles 
with NSCC, but obtaining stock to deliver to NSCC can strain the 
member's liquidity. Until recently, clearing members expressed little 
or no interest in using systems designed to allow members to use 
deposited stock to meet settlement obligations at NSCC if covered 
positions were assigned. However, clearing members have expressed 
increased interest given current demands on member liquidity. For OCC 
to be able to activate these systems, the Amendment will exclude 
positions settled by the delivery of specific deposits from the 
calculation of OCC's guarantee exposure. OCC also needs to perform some 
minor coding and testing. In order to avoid the need for a separate 
amendment when that work is completed, the necessary amendment is 
included in Section 4 of the Amendment.\7\ Section 4 will become 
effective when NSCC and OCC jointly announce that the systems are ready 
for use.
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    \7\ Supra, note 6.
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    The Amendment recites that it will be in effect until November 1, 
2009 unless further extended by mutual agreement. The reason for this 
``sunset'' provision is that OCC and NSCC intend to restate the OCC/
NSCC Accord in its entirety in order to address and clarify various 
issues.
    OCC and NSCC believe that the proposed rule changes are consistent 
with the purposes and requirements of Section 17A of the Act because it 
is designed to promote the prompt and accurate clearance and settlement 
of options exercises and assignments, to remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of such transactions, and, in general, to 
protect investors and the public interest. It accomplishes this purpose 
by eliminating duplicative margin requirements and providing more 
efficient stock settlement procedures where stock required to be 
delivered to NSCC is pledged to OCC.

(B) Self-Regulatory Organizations' Statements on Burden on Competition

    OCC and NSCC do not believe that the proposed rule changes would 
impose any burden on competition.

(C) Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants, or Others

    Written comments relating to the proposed rule changes have not 
been solicited or received.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    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 the custody or control of the 
clearing agency or for which it is responsible and to foster 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions.\8\ While the Amendment should 
reduce duplicative margin holdings and enable increased efficiency in 
stock settlement procedures where stock required to be delivered to 
NSCC is pledged as margin collateral with OCC the Commission believes 
that the proposals have been designed in such a manner that they are 
consistent with OCC's and NSCC's obligations to assure the safeguarding 
of securities and funds in the custody or control of the clearing 
agency or for which they are responsible. Additionally, the proposed 
rule changes should foster cooperation and coordination between OCC and 
NSCC.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC and NSCC have requested that the Commission approve the 
proposed rules prior to the thirtieth day after publication of the 
notice of filing. The Commission finds good cause for approving the 
proposed rule changes prior to the thirtieth day after publication of 
notice because such

[[Page 72100]]

approval will permit OCC and NSCC to implement the proposed rule 
changes prior to the November options expiration on November 22, 2008.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
changes are 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 Numbers SR-OCC-2008-18 and SR-NSCC-2008-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Numbers SR-OCC-2008-18 and SR-
NSCC-2008-09. These file numbers 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 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes 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 Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filings also will be available for inspection and copying at the 
principal offices of OCC and NSCC and on OCC's and NSCC's Web sites at 
http://www.theocc.com/publications/rules/proposed_changes/sr_occ_08_18.pdf and http://www.dtcc.com/downloads/legal/rule_filings/2008/nscc/2008-09.pdf, respectively. 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 Numbers SR-OCC-2008-18 and SR-NSCC-2008-09 and should be submitted 
on or before December 17, 2008.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular Section 17A of the Act and the rules and regulations 
thereunder.\9\
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    \9\ In approving the proposed rule changes, the Commission 
considered the proposals' impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule changes (File No. SR-OCC-2008-18 and SR-NSCC-
2008-09) be and hereby are approved on an accelerated basis.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-28095 Filed 11-25-08; 8:45 am]
BILLING CODE 8011-01-P