[Federal Register Volume 77, Number 231 (Friday, November 30, 2012)]
[Notices]
[Pages 71466-71468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-28944]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68288 File No. SR-OCC-2012-22]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Clarify the Use of Certain 
Amounts Credited to the Liquidating Settlement Account To Settle Mark-
to-Market Payments Arising From Stock Loan and Borrow Positions Carried 
in the Customers' Account

November 26, 2012.
    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 November 13, 2012, 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 Substance 
of the Proposed Rule Change

    OCC proposes to make certain changes to Rule 1104 in order to 
eliminate potential ambiguity as to OCC's right, in connection with the 
suspension of a clearing member, to use

[[Page 71467]]

margin and other amounts credited to the Liquidating Settlement Account 
pursuant to Rule 1104, to settle mark-to-market payments arising from 
stock loan and borrow positions carried in the clearing member's 
customers' account, notwithstanding that such payments are required by 
OCC's Rules to be settled in the clearing member's firm account or its 
combined market makers' account. In addition, OCC proposes to amend 
Rule 1104 to provide that any proceeds from stock loan and borrow 
positions carried in the customers' account could be applied only to 
obligations arising in such 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 such 
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 the proposed rule changes is to eliminate potential 
ambiguity as to OCC's right to use margin and other amounts credited to 
the Liquidating Settlement Account pursuant to Rule 1104 to settle 
mark-to-market payments arising from stock loan and borrow positions 
carried in the clearing member's customers' account even though such 
payments are required by OCC's Rules to be settled in the clearing 
member's firm account or its combined market makers' account. In 
addition, a proposed amendment to Rule 1104 would provide that any 
proceeds from stock loan and borrow positions carried in the customers' 
account could be applied only to obligations arising in such account as 
is the case with margin assets deposited in respect of that account.
Background
    OCC's By-Laws currently provide that stock loan and borrow 
positions (collectively, ``Stock Loan Positions'') may be carried at 
OCC in any eligible account of a clearing member, including the firm, 
market-maker, and customers' accounts. More specifically, under Section 
5 of Articles XXI and XXIA of the By-Laws, and notwithstanding the 
provisions of Section 3 of Article VI of the By-Laws (requiring 
separation of firm and customer positions), clearing members have 
discretion as to which Stock Loan Positions may be carried in which 
eligible accounts, subject only to the clearing member's general 
representations under Rules 2202(e) and 2202A(f) that the clearing 
member's participation in the lending and borrowing activity is in 
compliance with all applicable laws and regulations. However, Rules 
2201(a) and 2201A(a) provide that a clearing member must designate 
either its firm account or its combined market-makers' account as the 
account to or from which all stock loan mark-to-market payments are to 
be made, regardless of the account in which particular Stock Loan 
Positions may be held.
    Rule 1104 generally provides that, upon suspension of a clearing 
member, OCC shall promptly liquidate, in the most orderly manner 
practicable, all margins deposited with OCC by such clearing member in 
all accounts (excluding securities held in a specific deposit or escrow 
deposit) and all of such clearing member's contributions to the 
clearing fund, subject to certain conditions. Under Rule 1104, in 
general, these and all other funds of the suspended clearing member 
subject to the control of OCC (except proceeds of segregated long 
positions, funds disposed of pursuant to Rules 1105 through 1107, and 
funds held in or payable to a segregated futures account) shall be 
credited by OCC to a special account, to be known as the Liquidating 
Settlement Account, in the name of the suspended clearing member, for 
the purposes specified in Chapter 11.
    Under Rule 1104, therefore, in general, proceeds of all margin 
(other than margin held in segregated futures accounts) including 
margin in a clearing member's securities customers' account, are 
credited to the Liquidating Settlement Account. However, for purposes 
of administration of the liquidation, the margin does not lose its 
identity as being derived from the customers' account. Rules 2210 and 
2210A (relating to the Stock Loan/Hedge Program and Market Loan 
Program, respectively) provide that net proceeds from, or amounts due 
in respect of, the termination of Stock Loan Positions shall be 
credited to or withdrawn from the Liquidating Settlement Account. The 
Liquidating Settlement Account will include any mark-to-market payments 
received that day. In addition, Rule 1104 provides that the proceeds 
from the liquidation of securities, or from drawing on letters of 
credit, held as margin in a restricted lien account (such as the 
customers' account) may be withdrawn and applied to the closing out of 
pending transactions, open positions, and exercised or matured 
contracts in such accounts pursuant to Rules 1105, 1106, and 1107, 
respectively.\4\ To the extent that the proceeds derived from assets 
maintained in accounts subject to OCC's restricted lien exceed the 
proceeds used from such accounts for that purpose, such proceeds must 
be remitted by the Corporation to the suspended clearing member or its 
representative for distribution to the persons entitled thereto in 
accordance with applicable law.
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    \4\ The term ``restricted lien account'' is defined in Article 
I, Section 1 of OCC's By-Laws as follows: ``any account of a 
Clearing Member with the Corporation over which the Corporation has 
a restricted lien with respect to specified assets (including any 
proceeds thereof) in such account.'' The term ``restricted lien`` is 
defined in Article I, Section 1 of OCC's By-Laws as follows: a 
security interest of the Corporation in specified assets (including 
any proceeds thereof) in an account of a Clearing Member with the 
Corporation as security for the Clearing Member's obligations to the 
Corporation arising from such account or, to the extent so provided 
in the By-Laws or Rules, a specified group of accounts that includes 
such account including, without limitation, obligations in respect 
of all Exchange transactions effected through such account or group 
of accounts, short positions maintained in such account or group of 
accounts, and exercise notices assigned to such account or group of 
accounts.''
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Description of Rule Change
    For the avoidance of doubt, OCC proposes to insert an 
interpretation indicating that when mark-to-market payments are owed 
with respect to Stock Loan Positions maintained in a clearing member's 
customers' account, proceeds of margin and unsegregated long positions, 
and all other amounts credited to the Liquidating Settlement Account in 
respect of the customers' account, may be used to satisfy the mark-to-
market obligations arising from the Stock Loan Positions in such 
customers' account, even though such mark-to-market payments may settle 
in the clearing member's firm account or its combined market makers' 
account.
    OCC's By-Laws clearly provide that Stock Loan Positions may be 
included in the customers' account and that such positions will be 
margined in that account along with positions in options and other 
cleared contracts in the account. It would therefore be inconsistent to 
conclude that margin required under OCC's Rules to be deposited in the 
customers' account to margin Stock Loan Positions cannot be used to 
settle mark-to-market payments

[[Page 71468]]

in respect of those positions if the clearing member is suspended. The 
proposed rule changes are intended to eliminate any doubt in that 
regard.
    In addition, as noted above, the liquidation rules for Stock Loan 
Positions in Rules 2210 and 2210A provide that any net proceeds of 
closing out Stock Loan Positions shall be credited to the Liquidating 
Settlement Account and that any net amounts payable in respect of such 
close-outs may be withdrawn from such account. However, Rule 1104 as 
currently drafted does not limit the use of proceeds of Stock Loan 
Positions carried in a restricted lien account to obligations arising 
from that restricted lien account as it does in the case of proceeds 
from a restricted lien account that are credited pursuant to Rules 1105 
through 1107. While such a restriction might be implied from the fact 
that the Stock Loan Positions themselves are subject to a restricted 
lien and not a general lien pursuant to Section 3(e) of Article VI of 
the By-Laws, OCC believes that Rule 1104 should be amended to make this 
restriction explicit. Because margin and other proceeds from a 
restricted lien account that are credited to the Liquidating Settlement 
Account may be applied to mark-to-market payments owed in respect of 
Stock Loan Positions in the restricted lien account, any proceeds of 
such positions should be subject to the same restriction applicable to 
proceeds from other positions in the restricted lien account that are 
credited to the Liquidating Settlement Account. They should be applied 
only to obligations arising from that restricted lien account. OCC 
therefore also proposes to amend Rule 1104 to include references to 
Rules 2210 and 2210A to clearly provide that margin and other proceeds 
from the customers' account that are credited to the Liquidating 
Settlement Account may be applied to amounts payable with respect to 
Stock Loan Positions in the customers' account and that proceeds from 
Stock Loan Positions in such customers' account may be applied only to 
obligations arising in that account.
    OCC believes that the proposed changes are consistent with Section 
17A of the Act, because they would help assure that the Rules of OCC 
are designed to safeguard securities and funds which are in the custody 
or control of the Corporation or for which it is responsible, and would 
protect investors and the public interest by eliminating potential 
ambiguity as to OCC's right, in connection with the suspension of a 
clearing member, to use the collateral held in a clearing member's 
customers' account to settle mark-to-market payments arising from Stock 
Loan Positions carried in the clearing member's customers' account, 
notwithstanding that such payments are required by OCC's Rules to be 
settled in the clearing member's firm account or its combined market 
makers' account. The proposed changes are not inconsistent with the 
existing rules of OCC.

(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 not necessary or appropriate in furtherance of 
the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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 email to [email protected]. Please include File Number 
SR-OCC-2012-22 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 Number SR-OCC-2012-22. 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 Section, 100 F Street 
NE., Washington, DC 20549, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_22.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-2012-22 
and should be submitted on or before December 21, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28944 Filed 11-29-12; 8:45 am]
BILLING CODE 8011-01-P