[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79731-79732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32780]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65990; File No. SR-OCC-2011-17]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Novation of Trades at OCC
December 16, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ notice is hereby given that on December 12, 2011, The Options
Clearing Corporation (``OCC'') filed with the Securities and Exchange
Commission (``the Commission'') the proposed rule change as described
in Items I and II below, which items have been prepared primarily by
OCC. OCC filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \2\ and Rule 19b-4(f)(4) thereunder \3\ so
that the proposal was effective upon filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
\3\ 17 CFR 240.19b-4(f)(4).
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I. Self-Regulatory Organization's Statement of Terms of Substance of
the Proposed Rule Change
The proposed rule change would make clarifying amendments to
provisions of OCC's By-Laws relating to the timing of OCC's acceptance
or ``novation'' of exchange transactions in order to provide clearing
members with certainty as to when their credit exposure to the original
counterparty to a trade is terminated and OCC becomes obligated with
respect to such trades.\4\
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\4\ The proposed rule change neither alters the rights of
members nor the timing of OCC's novation. Telephone conference
between Steve Szarmack, Vice President and Associate General
Counsel, OCC, and Pamela Kesner, Special Counsel, Securities and
Exchange Commission Division of Trading and Markets on December 14,
2011.
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II. Self-Regulatory Organization's Statement of 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 such statements.
A. Self-Regulatory Organization's Statement of Purpose of, and
Statutory Basis for, the Proposed Rule Change
Recently, certain OCC clearing members have expressed uncertainty
as to the time when an exchange transaction is accepted for clearing
and the ``novation'' of such transaction occurs under OCC's By-Laws and
Rules. The purpose of this proposed rule change is to make clarifying
amendments to provisions of OCC's By-Laws relating to the timing of
OCC's acceptance or ``novation'' of exchange transactions in order to
provide clearing members with certainty as to when their credit
exposure to the original counterparty to a trade is terminated and OCC
becomes obligated with respect to such trades.
Background
Article VI, Section 5 of OCC's By-Laws generally establishes that
exchange transactions (i.e., matched trades in an option, future, or
other cleared contract) are deemed to be accepted by OCC for clearing
at the ``commencement time'' for such transactions, or in the case of a
future, when a matched trade has been properly reported to OCC. The
definition of ``commencement time'' in Article I of OCC's By-Laws
contains substantive provisions establishing specific times when
exchange transactions are deemed accepted for clearing for the majority
of exchange transactions (i.e., commencement time is when daily
position reports are made available to clearing members) as well as
exceptions establishing different commencement times for cross-rate
currency options, FX Index Options and certain non-competitively
executed transactions in cleared futures. However, neither Section 5 of
Article VI nor the definition of ``commencement time'' expressly state
that OCC's ``novation'' of trades occurs at this time, and the term
``novation'' is used only once in OCC's By-Laws--in an interpretation
following Section 6 of Article IV (Issuance of Cleared Contracts).
Confusion may also arise from the fact that Article VI, Section 5
of the By-Laws states that futures contracts are accepted for clearing
when they are properly reported to OCC, rather than at the commencement
time of such transactions. This provision appears to give futures
contracts more favorable treatment than options, although there is no
such result as a practical matter. Section 8 of Article VI provides
that, except with respect to trades in certain narrow categories of
options, OCC generally has no right to reject any exchange options
transaction due to the failure of the purchasing clearing member to pay
any amount due to OCC at or before the settlement time.\5\ Accordingly,
exchange transactions in most option products will inevitably be
accepted for clearing and novated under the rules at the commencement
time of such transactions simply due to the passage of time. Prior to
the 1987 crash, OCC reserved the right to reject trades in options due
to non-payment of premiums. However, OCC subsequently gave up that
right (with limited exceptions) in order to create greater certainty
for clearing members.\6\ Therefore, the right to reject an exchange
transaction for non-payment is now the exception rather than the rule.
When OCC began clearing futures, it was deemed appropriate to state in
the By-Laws that futures contracts would be accepted when properly
reported because futures do not require premium payments.\7\
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\5\ The exceptions are contained in the Articles governing
specific products. For example, Section 5 of Article XX (addressing
cross-rate foreign currency options and Section 7 of Article XXIII
(addressing FX Index Options) condition OCC's acceptance of trades
in those products for clearing on the completion of settlement
payments in respect of such trades. These exceptions apply because
settlements involving foreign currencies in different time zones
create heightened exposure to OCC if a Clearing Member were to
default.
\6\ The staff notes that this change was adopted in filing SR-
OCC-90-05. See Securities Exchange Act Release No. 29853 (October
25, 1991), 56 FR 55968 (October 30, 1991).
\7\ Article XII, Section 7 of the By-Laws makes an exception for
non-competitively executed futures trades. Because such trades may
be executed away from the market price, OCC does not accept them
until the initial variation payment is made.
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Proposed By-Law Changes
OCC proposes to amend the definition of ``commencement time'' in
Article I of the By-Laws to (i) remove the substantive provisions
establishing the specific times when exchange transactions in various
products are deemed accepted for clearing (as such provisions should be
placed in the
[[Page 79732]]
Articles governing those products), and (ii) add a cross reference
within the definition that will direct the reader to the locations
within the By-Laws where the specific times can be found. In connection
therewith, OCC proposes to amend Section 5 of Article VI, Section 7 of
Article XII, Section 1 of Article XX and Section 1 of Article XXIII to
establish the specific commencement times for transactions in various
products. OCC also proposes to amend Section 5 of Article VI (i) to
expressly state that novation occurs when exchange transactions are
accepted for clearing by OCC, and (ii) to delete the language that
appears to give futures contracts more favorable treatment than
options. Finally, OCC proposes to amend the bracketed language
following the definitions in Section 1 of Article XX and Section 1 of
Article XXIII to eliminate unnecessary complexity and conform such
language stylistically to similar language elsewhere in the By-laws
(e.g., the bracketed language following the definitions in Section 1 of
Article XXII).
OCC believes that the proposed changes to OCC's By-Laws are
consistent with the purposes and requirements of Section 17A of the
Securities Exchange Act of 1934, as amended (the ``Exchange Act''),
because they are clarifying amendments that do not adversely affect
OCC's obligations with respect to the prompt and accurate clearance and
settlement of securities transactions or the protection of securities
investors and the public interest.\8\ The proposed rule change is not
inconsistent with any rules of OCC.
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\8\ The staff notes that Rule 19b-4(f)(4) provides that a
proposed rule change may take effect upon filing with the Commission
pursuant to Section 19(b)(3)(A) of the Exchange Act if the change
does not adversely affect the safeguarding of securities or funds in
the custody or control of the clearing agency or for which it is
responsible and does not significantly affect the respective rights
or obligations of the clearing agency or persons using the service.
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B. Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will have any
impact or impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
OCC has not solicited or received written comments relating to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(4) \10\ and became
effective on filing. At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
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\9\ Supra note 2.
\10\ Supra note 3.
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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 email to [email protected]. Please include
File No. SR-OCC-2011-17 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-OCC-2011-17. This file
number should be included on the subject line if email 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 Web site viewing and
printing 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 OCC's principal office and OCC's Web site
(http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_11_17.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 No. SR-OCC-
2011-17 and should be submitted on or before January 12, 2012.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32780 Filed 12-21-11; 8:45 am]
BILLING CODE 8011-01-P