[Federal Register Volume 76, Number 122 (Friday, June 24, 2011)]
[Notices]
[Pages 37162-37163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-15850]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64712; File No. SR-OCC-2011-03]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Allow for an Expansion of OCC's 
Internal Cross-Margining Program To Include the Ability of a Pair of 
Affiliated Clearing Members To Establish an Internal Non-Proprietary 
Cross-Margining Account

June 21, 2011.

I. Introduction

    On March 17, 2011, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2011-03 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change 
was published for comment in the Federal Register on April 7, 2011.\2\ 
The Commission received three comment letters on the proposal, 
including OCC's letter responding to one of the commenters.\3\ This 
order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 34-63811 (February 1, 
2011), 76 FR 6648 (February 7, 2011).
    \3\ Letter from Gene Thomas (Retired), (April 24, 2011); letter 
from Andrew S. Margolin, Associate General Counsel, Bank of America 
Corporation, to Elizabeth M. Murphy, Secretary, Commission (April 
21, 2010); and letter from Stephen M. Szamarck, V.P. Associate 
General Counsel, OCC, to Elizabeth M. Murphy, Secretary, Commission 
(May 23, 2011).
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II. Description of the Proposal

    The purpose of this rule change is to expand OCC's internal cross-
margining program to permit a pair of affiliated clearing members to 
establish a cross-margining account (``Internal Non-Proprietary Cross-
Margining Account'') in which securities and security futures that are 
cleared by OCC in its capacity as a securities clearing agency may be 
cross-margined with commodity futures and options on such futures that 
are cleared by OCC in its capacity as a derivatives clearing 
organization (``DCO'') registered with the Commodity Futures Trading 
Commission (``CFTC'') under the Commodity Exchange Act (``CEA'').
    In 2004, the CFTC and the Commission \4\ approved OCC's proposal to 
create an ``internal cross-margining'' program under which an OCC 
clearing member could elect to cross-margin a non-proprietary futures 
account of a ``market professional'' \5\ with a non-proprietary 
securities account containing positions of the same market 
professional. At OCC, the securities and futures positions of all 
market professionals with cross-margined accounts at the clearing 
member are combined in a single Internal Non-Proprietary Cross-
Margining Account of the clearing member at OCC. The existing program, 
which has operated successfully since 2004, requires that the same 
clearing member clear the securities and futures positions. In 
contrast, the existing cross-margining programs between OCC and other 
DCOs, such as the clearing division of the Chicago Mercantile Exchange 
(``CME'') and ICE Clear U.S., permit cross-margining where the member 
of the futures clearing organization is a different entity from its 
affiliate that is an OCC clearing member. The purpose of this proposed 
rule change is to expand the existing internal cross-margining program 
in an analogous way so that it would permit an Internal Non-Proprietary 
Cross-Margining Account to be maintained at OCC jointly by a pair of 
affiliated clearing members that clear transactions in securities 
options and in futures products through two different entities. In 
order to participate, both OCC clearing members would have to be 
affiliates of one another and would have to be registered as both a 
futures commission merchant under the CEA and as a broker-dealer under 
the Act.
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    \4\ Securities Exchange Act Release No. 34-50509 (October 8, 
2004), 69 FR 61289 (October 15, 2004).
    \5\ As set forth in OCC's By-Laws, a market professional could 
be a market-maker, specialist or person acting in a similar capacity 
on a securities exchange, or a member of a futures exchange trading 
for its own account. A non-proprietary market professional is any 
market professional that is required to be treated as a ``customer'' 
under the CEA, and therefore excludes any market professional that 
is affiliated with the carrying clearing member in a way that would 
cause its account to be treated as a ``proprietary account'' under 
Section 1.3(y) of the CFTC's regulations. OCC By-Laws, Article I, 
Definitions.
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    OCC's current internal cross-margining program does not provide for 
internal cross-margining accounts to be carried jointly by a pair of 
affiliated clearing members because OCC did not believe in 2004 that 
there was any clearing member demand for such a service. Recently, 
however, OCC has learned that there is demand for such a service. Under 
OCC's current proposal, two affiliated clearing members will jointly 
maintain an Internal Non-Proprietary Cross-Margining Account. The 
clearing member that normally clears transactions in securities options 
would submit transactions in eligible securities options to the account 
for clearance, and the clearing member that normally clears 
transactions in futures

[[Page 37163]]

products would submit transactions in eligible futures products to the 
account for clearance.
    OCC is amending its current By-Laws and Rules governing internal 
cross-margining to create rules similar to the rules of the long-
standing cross-margining program between OCC and CME, for example, for 
affiliated clearing members. In the case of the cross-margining 
programs between OCC and other DCOs, there are two accounts at the 
clearing level--one at each of the participating clearing 
organizations. In the internal cross-margining program, there is no 
need for two separate accounts, which would in any event be margined 
together and for which the affiliated clearing members would in any 
event be jointly and severally liable as they are for the two accounts 
in the case of the OCC-CME program.
    Article VI, Section 25(b) of OCC's By-Laws currently requires 
clearing members to obtain a ``Market Professional's Agreement for 
Internal Cross-Margining'' from each market professional whose 
positions are included in an Internal Non-Proprietary Cross-Margining 
Account. OCC will use a modified form of this agreement for the account 
held jointly by a pair of affiliated clearing members.\6\ OCC does not 
intend to require current participants in the internal cross-margining 
program to obtain reexecuted agreements in updated form because the 
modifications are clarifications only and not substantive changes.
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    \6\ The proposed form of the agreement, titled ``Market 
Professional's Agreement for Internal Cross-Margining (Affiliated 
Clearing Members)'' is attached as Exhibit 5A to the proposed rule 
change filing. The existing ``Market Professional's Agreement for 
Internal Cross-Margining'' applicable to the internal cross-
margining program for single clearing members has been renamed 
``Market Professional's Agreement for Internal Cross-Margining 
(Single Clearing Member)'' and is attached as Exhibit 5B to the 
proposed rule change filing. In addition to modifying the title to 
the form of the agreement applicable to single clearing members, a 
sentence has been added at the end of paragraph seven of that 
agreement to conform it to the corresponding provision in the form 
of the agreement for affiliated clearing members.
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    As in the case of the existing internal cross-margining program, 
the Internal Non-Proprietary Cross-Margining Account would be treated 
as a segregated futures account under Section 4d of the CEA and, in 
accordance with Appendix B to Part 190 of the CFTC's regulations, would 
be separately segregated from the regular segregated futures account 
that an OCC clearing member may maintain under Article VI, Section 3(f) 
of OCC's By-Laws. In order to expand the internal cross-margining 
program to include accounts carried by pairs of affiliated clearing 
members, OCC has requested that the CFTC either issue a new or amended 
order under Section 4d of the CEA.\7\
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    \7\ OCC will not implement the internal cross-margining program 
for affiliated clearing members until after such time that the CFTC 
has issued an order or amended order under Section 4d of the CEA as 
discussed above.
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III. Comment Letters

    The Commission received one comment letter opposing the proposed 
rule change \8\ and one comment letter in favor of the proposed rule 
change.\9\ OCC responded to the letter in opposition to the 
proposal.\10\ The commenter opposing OCC's proposal stated that there 
was ``no universal advantage to commingled monies or other valued 
properties'' and that he ``visualize[d] the possibility of from [sic] 
frequent disagreements between the Dual Registrants and OCC.'' In its 
response, OCC disagreed and stated that cross-margining programs ``are 
consistent with clearing agency responsibilities under Section 17A of 
the Securities Exchange Act of 1934 and are highly beneficial to the 
clearing organizations, its clearing members and the public.''\11\ OCC 
also stated in its response that the internal cross-margining program 
is limited to OCC clearing members and that participation in the 
program is completely voluntary. OCC response also indicated that it 
was not aware of any disagreements between dual registrants and OCC 
over the many years that the various cross-margining agreements have 
been in operation.
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    \8\ Letter from Gene Thomas, supra note 3.
    \9\ Letter from Andrew Margolin, supra note 3.
    \10\ Letter from OCC, supra note 3.
    \11\ Id at 1.
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    The commenter in support of OCC's proposed rule change stated he 
supported the proposal because it ``would harmonize the manner in which 
OCC conducts its internal cross-margining program with the manner in 
which existing cross-margining programs between OCC and other 
derivatives clearing organizations (e.g., the Chicago Mercantile 
Exchange) are conducted.'' \12\
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    \12\ See BofA Letter at 2.
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IV. Discussion

    Section 17A(b)(3)(F) of the Act \13\ requires, among other things, 
that the rules of a clearing agency be designed to remove impediments 
to and perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions. Since it 
granted approval of the first cross-margining program in 1988,\14\ the 
Commission has found that cross-margining programs are consistent with 
clearing agency responsibilities under Section 17A of the Act \15\ and 
highly beneficial to the clearing organization, its clearing members, 
and the public. The Commission has found that cross-margining programs 
enhance clearing member and systemic liquidity both in times of normal 
market conditions and in times of stress. They result in lower initial 
margin deposits, which can reduce the risk that a clearing member will 
become insolvent in a distressed market and the risk of a ripple effect 
of multiple insolvencies caused by the demise of a major market 
participant.\16\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ Securities Exchange Act Release No. 34-26153 (October 3, 
1988), 53 FR 39567 (October 7, 1988).
    \15\ 15 U.S.C. 78q-1.
    \16\ Securities Exchange Act Release No. 34-32708 (August 2, 
1993), 58 FR 42586 (August 10, 1993).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \17\ and the 
rules and regulations thereunder.
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    \17\ 15 U.S.C. 78q-1.
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    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (File No. SR-OCC-2011-03) be, 
and hereby is, approved.\19\
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15850 Filed 6-23-11; 8:45 am]
BILLING CODE 8011-01-P