[Federal Register Volume 74, Number 192 (Tuesday, October 6, 2009)]
[Notices]
[Pages 51348-51350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23992]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60743; File No. SR-OCC-2009-15]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change to Revise the Minimum 
Eligibility Criteria for Common Stock Loaned Through Stock Loan 
Programs and Deposited as Margin Collateral

September 29, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on August 28, 2009, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as 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 persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The proposed rule change would revise minimum eligibility criteria 
applicable to common stock loaned through OCC's Stock Loan Programs and 
deposited as margin collateral.

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.\3\
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    \3\ 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 purpose of this rule change is to revise OCC's minimum 
eligibility requirements for stock borrows and loans accepted in the 
OCC's Stock Loan Programs and common stock accepted as margin 
collateral.\4\
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    \4\ This proposal furthers OCC's continuing efforts to utilize 
its System for Theoretical Analysis and Numerical Simulations 
(``STANS'') to its fullest risk-management potential resulting in 
lower risk to OCC while also increasing margin offset opportunities 
for OCC clearing members. Recent OCC rule filings with a similar 
objective include (i) a rule change eliminating the practice of 
allowing clearing members to carry stock loan and borrow positions 
without collecting risk margin and requiring instead that all such 
positions be included in the STANS margin calculation [Securities 
Exchange Act Release No. 59036 (December 12, 2006), 73 FR 74554 
(December 8, 2008)] and (ii) a rule change (``Collateral in 
Margins'') providing that common stock deposited as collateral be 
included in the STANS calculation rather than valuing the collateral 
at a current market price less an arbitrary 30% haircut [Securities 
Exchange Act Release No. 58158 (July 15, 2008), 73 FR 42646 (July 
22, 2008)]. In addition, largely in response to market conditions, 
OCC recently reduced the minimum price for common stocks held as 
collateral from $10 to $3 and eliminated the 10% concentration test 
for certain ETFs held as collateral. Securities Exchange Act Release 
No. 59845 (April 29, 2009), 74 FR 21039 (May 6, 2009).
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Stock Loan Programs
    OCC's clearing services involve common stock \5\ in several ways. 
Stocks are: (i) Underlying securities for exchange-traded equity option 
contracts, (ii) constituent securities of stock indexes that underlie 
stock index options or of indexes on which underlying ETFs are based, 
(iii) constituent securities of ETFs that although are not underlying 
securities are based on indexes that underlie index options (``Index 
Option Related ETFs''), (iv) the subject of stock loan or borrow 
transactions cleared pursuant to OCC's Stock Loan Programs, and (v) 
deposited with OCC as margin collateral. Rationalizing the 
interrelationship among the criteria applied to stocks for these 
various purposes will maximize the potential for offsets and reduce 
risk in the clearing system.
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    \5\ The term ``common stock'' or ``stock'' is broadly used in 
this rule change to refer to different types of equity securities 
including ETFs but not preferred stock.
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    Under OCC's Stock Loan Programs, only loans of stocks that are 
either underlying securities for options or futures or ETFs based on a 
stock index underlying an index option contract are eligible for 
clearance through OCC (collectively, ``Options-Related Stocks''). OCC 
restricted stock loan activity to limit its risk to loans supporting 
short sales that might be serving as hedges for options transactions or 
helping to add liquidity to the options markets. At the time this 
criterion was implemented in 2002, OCC managed the risk of stock loan 
transactions for most clearing members on a credit basis--that is OCC 
did not collect margin on such transactions. As noted above, OCC now 
requires margin on all stock loan transactions thus reducing the risk 
associated with this activity. Accordingly, OCC believes that it is no 
longer necessary or appropriate to limit stock loan transactions to 
Options-Related Stocks.
    In connection with the foregoing change, OCC is proposing to 
supplement its existing criteria for stock eligible for the Stock Loan 
Programs by requiring that in order to qualify as an ``Eligible Stock'' 
for purposes of the Stock Loan Programs a stock must be a ``covered 
security'' as defined in Section 18(b)(1) of the Securities Act of 
1933.\6\ By agreement with the options exchanges, OCC already requires 
that all underlying stocks meet this criterion, and OCC believes that 
it is an appropriate minimum assurance of quality. In addition, OCC is 
imposing a $3 minimum share price requirement

[[Page 51349]]

that would be applicable only to stocks other than Options-Related 
Stocks.\7\ OCC would, however, retain the ability to waive the $3 
minimum price where specified other factors suggest that the stock is 
nevertheless suitable for inclusion in the Stock Loan Programs.
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    \6\ ``Covered securities'' are securities that are authorized 
for listing on the New York Stock Exchange, the American Stock 
Exchange, the National Market System of the Nasdaq Stock Market 
(collectively, ``Exchanges''), or any other national securities 
exchange, or tiers thereof, that the Commission determines are 
substantially similar to the listing standards applicable to 
securities on the Exchanges. 15 U.S.C. 77r(b)(1).
    \7\ This minimum price requirement corresponds to the minimum 
price standard contained in the criteria used by the options 
exchanges for initial selection of underlying securities that are 
also ``covered securities''
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Common Stock as Collateral
    Under current OCC Rule 604(b)(4), clearing members can deposit 
common stocks that meet the following criteria: minimum price of $3 per 
share and traded on a national securities exchange, or traded in the 
Nasdaq Global Market or the Nasdaq Capital Market. The aggregate value 
of margin attributed to a single stock cannot exceed 10% of a clearing 
member's total margin requirement. Stocks are haircut by 30% for margin 
valuation purposes. Stocks that have been suspended from trading by or 
are subject to special margin requirements under the rules of a listing 
market because of volatility, lack of liquidity, or similar 
characteristics are not eligible for deposit as margin.
    Under the approved but not yet implemented Collateral in Margins 
program, any common stock that meets the above criteria except the 
minimum price requirement and that is deliverable upon exercise or 
maturity of a cleared contract (i.e., is an underlying security), as 
well as index option related ETFs, will be afforded collateral value as 
determined by STANS. Moreover, the margin concentration requirement 
will be inapplicable to such deposits. Thus, upon implementation of the 
Collateral in Margins proposal, the minimum price requirement and 
margin concentration requirement would be eliminated for common stocks 
that are underlying securities or index option related ETFs. The 
minimum price requirement is being eliminated for these securities in 
order to provide a greater opportunity for members to hedge their 
equity options positions with pledges of the underlying securities. 
This decision also reflects OCC's judgment that the minimum price 
requirement is less important in the current environment where OCC is 
able to closely monitor collateral in the form of common stock and to 
apply the sophisticated risk management technique incorporated in STANS 
in order to determine the appropriate value to assign to such 
collateral. The concentration test requirement is being eliminated 
because STANS contains its own built-in functionality that adequately 
handles concentrated options and collateral holdings.
    In anticipation of the implementation of the Collateral in Margins 
program, and effective with such implementation, OCC proposes to 
further amend Rule 604(b)(4)(i) as follows:
    (1) Replace the requirement of listing on a national securities 
exchange or specific Nasdaq markets with the requirement that all 
common stocks deposited as margin must be ``covered securities'' as 
described above;
    (2) Provide that the $3 minimum share price requirement will apply 
to deposits of common stocks that are not Options Related Stocks;
    (3) permit OCC to waive the $3 minimum share price if it determines 
that other factors, including trading volume, the number of 
shareholders, the number of outstanding shares, and current bid/ask 
spreads warrant such action;
    (4) delete Interpretation and Policy .13, adopted in SR-OCC-2009-
08, which made the 10% concentration test inapplicable to certain ETFs 
because the 10% test will be eliminated for all stocks (including ETFs) 
when Collateral in Margins is implemented.
    In addition, OCC proposes to amend Rule 1001 to provide that the 
determination of ``average aggregate daily margin requirement'' and 
``daily margin requirement'' would be performed without reference to 
any deposits of securities (e.g., common stocks including fund shares) 
that were valued within STANS pursuant to Rule 601. This change ensures 
that contributions to the clearing fund will be determined without 
taking into account any reduction in margin requirements resulting from 
valuing deposits of such securities under STANS. Other proposed changes 
to Rule 1001 are conforming or clarifying in nature.
    The changes proposed in this rule filing more closely align both 
the stock collateral and stock loan eligibility criteria with the 
criteria for selection of underlying equity securities. While some 
differences still exist, OCC believes that the proposed discretionary 
authority will provide OCC with sufficient flexibility to treat equity 
options, stock loan transactions, and stock collateral in a consistent 
manner when appropriate. For example, the $3 minimum price requirement 
is similar or identical to requirements contained in the equity options 
listing criteria of the options exchanges. In addition, the factors 
that OCC proposes to be considered in determining whether an exception 
to the $3 minimum may be granted are consistent with those reflected in 
such criteria. These factors are widely regarded as among the most 
relevant in determining whether a stock is liquid.
    STANS's functionality permits OCC to propose there changes. STANS 
considers a security's historical price volatility in generating its 
simulated market moves resulting in coverage parameters that vary based 
on the overall risk of a particular underlying security. STANS also 
identifies and addresses concentrated positions. By incorporating 
equity options positions, stock loan positions, and upon implementation 
of the Collateral in Margins changes common stock deposits within a 
single concentration analysis, OCC can identify where hedged positions 
exist and can also identify areas of cumulative exposure where 
additional collateral may be appropriate (e.g., where a clearing member 
has long options, stock loan positions, and margin deposits all 
relating to the same security).
    Upon Commission approval, OCC proposes to implement the changes to 
stock loan eligibility criteria immediately. OCC proposes that the 
changes in eligibility criteria for common stock deposited as margin be 
implemented concurrently with implementation of the Collateral in 
Margins program, which is currently scheduled for implementation in the 
fourth quarter 2009.
    OCC believes the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act \8\ and the rules 
and regulations thereunder because the proposed rule change will 
promote the prompt and accurate clearance and settlement of 
transactions in securities and safeguard assets within OCC's custody or 
control by facilitating appropriate offsets among equity options, stock 
loan and borrow positions, and stock collateral that are held in a 
single clearing member account thereby increasing market efficiency 
without increasing risk.
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    \8\ 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

[[Page 51350]]

have been received. OCC will notify the Commission of any written 
comments received by OCC.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to [email protected]. Please include 
File Number SR-OCC-2009-15 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 Number SR-OCC-2009-15. 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, D.C. 20549-1090, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of the OCC 
and on OCC's Web site at http://www.optionsclearing.com/publications/rules/proposed_changes/sr_occ_09_15.pdf. 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-2009-15 and should be submitted on 
or before October 27, 2009.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23992 Filed 10-5-09; 8:45 am]
BILLING CODE 8011-01-P