[Federal Register Volume 78, Number 1 (Wednesday, January 2, 2013)]
[Notices]
[Pages 140-142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-31463]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68535; File No. SR-OCC-2012-24]


 Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Make Its By-Laws and Rules Consistent With Recent System Changes to the 
Stock Loan/Hedge Program and Market Loan Program and Delete Certain 
Terms and Provisions No Longer Applicable

December 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 December 13, 2012, The Options Clearing Corporation (``OCC'' or the 
``Corporation'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I, II and 
III below, which items have been prepared primarily by OCC. OCC filed 
the proposal pursuant to Section 19(b)(3)(A)(iii) of the Act,\3\ and 
Rule 19b-4(f)(4)(i) \4\ thereunder 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\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(4)(i).
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I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    OCC is amending its By-Laws and Rules to make them consistent with 
recent system changes to the Stock Loan/Hedge Program and Market Loan 
Program and delete certain terms and provisions that are no longer 
applicable.

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 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.\5\
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    \5\ The Commission has modified the text of the summaries 
prepared by OCC.
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A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the rule change is to make certain technical changes 
to the By-Laws and Rules governing OCC's Stock Loan/Hedge Program and 
Market Loan Program (collectively, the ``Programs'') in order to make 
them consistent with recent system changes to the Programs and to 
delete certain terms and provisions that are no longer applicable.
Background
    OCC's Stock Loan/Hedge Program is provided for in Article XXI of 
the By-Laws and Chapter XXII of the Rules, and provides a means for OCC 
clearing members to submit broker-to-broker stock loan transactions to 
OCC for clearance. Broker-to-broker transactions are independently-
executed stock loan transactions that are negotiated directly between 
two OCC clearing members. OCC's Market Loan Program, provided for in 
Article XXIA of the By-Laws and Chapter XXIIA of the Rules, 
accommodates securities loan transactions executed through electronic 
trading platforms that match lenders and borrowers on an anonymous 
basis. Anonymous stock loan transactions are initiated when a lender or 
borrower, who is either an OCC clearing member participating in the 
Market Loan Program or a non-clearing member who has a clearing 
relationship with an OCC clearing member participating in the Market 
Loan Program, accepts a bid/offer displayed on a trading platform. A 
clearing member participating in the Market Loan Program will be 
obligated to OCC as principal with respect to transactions effected by 
its customers that are non-clearing members of a trading platform.
    Where a stock loan transaction is submitted to, and accepted by, 
OCC for clearance, OCC substitutes itself as the lender to the borrower 
and the borrower to the lender, thus serving a function for the stock 
loan market similar to the one it serves within the listed options 
market. OCC thereby guarantees the future daily mark-to-market payments 
between the lending clearing member and borrowing clearing member, 
which are effected through OCC's cash settlement system, and the return 
of the loaned stock to the lending clearing member and the collateral 
to the borrowing clearing member upon close-out of the stock loan 
transaction. OCC leverages The Depository Trust Company's (``DTC'' or 
the ``Depository'') infrastructure to transfer loaned stock and 
collateral between OCC clearing members.
    Recently, OCC performed a series of procedural changes and system 
enhancements designed to automate processes that had previously been 
performed manually and improve the allocation process for stock loan 
and borrow positions of OCC members who participate in the Stock Loan/
Hedge Program and the Market Loan Program. For example, OCC has 
simplified the process in which stock loan positions are allocated or 
transferred across a clearing member's account structure. Clearing 
members now specify a ``default'' account into which stock loan and 
borrow positions are automatically allocated, and from which transfers 
and returns are processed, unless otherwise specified in an instruction 
submitted by the clearing member. Additionally, OCC now has the 
functionality to receive messages from DTC in real-time, including 
reclaim requests (i.e., requests submitted by a lender or borrower to 
DTC to reverse an initial delivery order). Although OCC had previously 
processed such messages on a manual basis, system changes now enable 
OCC to automatically process reclaim requests received from DTC on a 
real-time basis throughout the day. As such, clearing members may now 
view their positions in real-time, and perform transfers throughout the 
day based on real-time position information. OCC system changes also 
provide clearing members with additional mark-to-market rounding 
flexibility, allowing clearing members to now round their mark-to-
market pay and collect amounts to decimals. Finally, the system changes 
provide clearing members the ability to use sub-accounting 
functionality that already exists for other products cleared by OCC. In 
particular, the use of sub-accounting functionality allows a clearing 
member to segregate individual accounts within its customer, firm, or 
market-maker ranges, providing greater flexibility in how the clearing 
member manages individual account positions and margin requirements.
    While these system changes and procedural changes increase the 
efficiency and accuracy of the processes by which stock loan and borrow 
transactions are processed and positions are maintained, OCC believes 
they have

[[Page 141]]

no impact on the substantive rights or obligations of OCC or any 
clearing member.
Description of Rule Change
1. Designation of Accounts for Stock Loan Transactions and Transfers 
Between Accounts
    The current versions of Rules 2201(a) and 2201A(a) describe a 
process by which clearing members provide OCC with standing 
instructions designating one or more accounts in which the clearing 
member's stock loan and borrow positions may be carried. OCC is 
amending these provisions to conform with recent system changes to the 
Programs, as described in the Background section above. Under the 
system changes, clearing members are required to designate one default 
account, which can be any of the clearing member's accounts or sub-
accounts thereof (e.g., Customers', Firm, or Market Maker) that are 
eligible under Article XXI, Section 5, Interpretation .01 of the By-
Laws to hold stock loan and borrow positions, to which the Corporation 
can allocate new stock loan and borrow positions in the absence of 
executable instructions from the clearing member to allocate the new 
positions to a different account. When a clearing member effects a new 
loan or borrow, the clearing member can designate an account (or a sub-
account thereof) to which the position is to be allocated. If, however, 
there is no such designation, or the designation is invalid for any 
reason, the position is allocated to the default account. The clearing 
member may thereafter transfer stock loan or borrow positions among 
eligible accounts by submitting an appropriate instruction to OCC.
    Interpretation .01 under each of Rule 2201 and Rule 2201A provides 
details of the process by which a clearing member may transfer existing 
stock loan or borrow positions (in whole or in part) among its accounts 
and permits the clearing member to specify a sequence of accounts for 
the allocation by OCC of its positions if the clearing member attempts 
to transfer more or fewer shares than its end-of-day loan or borrow 
position. Under the new system, in connection with a transfer of an 
existing stock loan or borrow position, shares are taken from the 
account or sub-account specified by the clearing member. If there are 
not enough shares in a stock loan or borrow position in that account, 
the transfer instruction will be rejected. The Corporation is revising 
Interpretation .01 under Rules 2201 and 2201A to make it consistent 
with this new system for processing transfers among accounts.
    Interpretation .01 to each of Rule 2201 and Rule 2201A also 
currently uses the term ``allocated'' when describing how a clearing 
member can move positions among its accounts. The Corporation is 
changing the term ``allocate'' to ``transfer'' as ``transfer'' is a 
more accurate description that distinguishes the process from the 
initial ``allocation'' of a transaction to a designated account.
    With respect to returns of stock, Interpretation .02 under each of 
Rule 2201 and Rule 2201A describes the current system which relies in 
part upon the sequence of accounts specified by a clearing member 
(referred to in the preceding paragraph) to allocate returns among the 
clearing member's accounts with stock loan or borrow positions in the 
returned stock. Under the new system, returns are reflected in the 
clearing member's account or sub-account specified on the original 
delivery order submitted by DTC. If there are not enough shares in the 
position in that account, the excess shares to be returned are 
reflected in the clearing member's default account. If there are not 
enough shares in the applicable position in the default account, the 
remaining shares are rejected and the return instruction is void to 
that extent. If no account is designated in the DTC delivery order, 
then shares are taken from the clearing member's default account and 
any excess shares are rejected and the return instruction is void to 
that extent. The Corporation is amending Interpretation .02 under Rules 
2201 and 2201A to reflect the new process.
2. Reclaim Transactions
    Reclaim transactions are submitted to DTC by either the borrower 
(to reclaim new loans) or the lender (to reclaim returns) to reverse 
initial Delivery Orders (``DO'') for a variety of reasons (e.g., DK, 
wrong quantity, wrong security, wrong money). When DTC receives a 
reclaim for a previously submitted Stock Loan/Hedge transaction, DTC 
attempts to match the reclaim to a DO from the same day. Previously, 
this process occurred throughout the day at DTC, and OCC received only 
a final positions file after all transactions were processed. As such, 
the end-of-day file received by OCC did not contain information about 
reclaims.
    OCC now receives messages in real-time from DTC, which include 
reclaim transactions. Although OCC previously handled reclaim 
transactions automatically, OCC's system changes now enable OCC to 
process reclaims systemically. More specifically, OCC system changes 
enable OCC to begin processing intra-day real-time messages, rather 
than end-of-day batch files. Under the new process: (i) If OCC receives 
a reclaim message, the system will attempt to match it to a new loan, 
borrow or return that occurred that same day and, if a match is found, 
the system will void the original transaction; (ii) OCC will reject any 
attempted reclaim of a new loan, borrow or return done on a previous 
day; and (iii) OCC will reject reclaims that create excess shares 
(i.e., not enough shares in the account to reduce). Rejected reclaims 
will not be processed, but will be provided to the clearing member 
through an on-demand report listing rejected reclaims, along with the 
basis for the rejection. In connection with reclaim transactions, OCC 
proposes to include provisions in the Rules to provide certain 
protections for OCC in the situation where DTC sends a notice to OCC to 
reverse an initial DO. Specifically, the Corporation is adding to Rule 
2202(b) a provision that, if OCC determines that it is able to process 
a reclaim, OCC may disregard the initial DO and such DO shall be deemed 
null and void and given no effect for purposes of OCC's By-Laws and 
Rules. In addition, amended Rule 2202(b) would provide that OCC shall 
have no obligation or liability to any clearing member in acting, or 
failing to act, pursuant to a DTC notification to reverse an initial 
DO. OCC may not process a reclaim for various reasons, including but 
not limited to: (i) Securities that are not eligible for stock loan 
transactions; (ii) invalid clearing member; or (iii) reclaim is 
received not on the same day as the initial delivery order. Finally, 
the Corporation is adding Interpretation .01 to Rule 2202 to provide 
that although the Corporation now makes updated stock loan and borrow 
position information available to each clearing member during a 
business day, such updated position information is considered 
provisional and informational only and is subject to revision at any 
time, and that only the official daily position report may be relied 
upon as definitely reflecting a clearing member's final stock loan and 
borrow positions because positions may be altered during the day, for 
example, to reflect reclaim transactions.
3. Margin-Ineligible Accounts and Stock Loan and Borrow Baskets
    The current By-Laws and Rules contain references to ``margin-
ineligible'' and ``margin-eligible'' accounts. As there are no longer 
any margin-ineligible accounts (i.e., all stock loan and borrow 
positions are now

[[Page 142]]

included in margin calculations),\6\ the Corporation is removing 
references to ``margin-ineligible'' and ``margin-eligible'' accounts 
from the By-Laws and Rules.
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    \6\ Securities Exchange Act Release No. 59036 (Dec. 1, 2008), 73 
FR 74554 (Dec. 8, 2008) (SR-OCC-2008-06).
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    The By-Laws and Rules also currently contain references to ``stock 
loan baskets'' and ``stock borrow baskets.'' As OCC no longer allows 
these products,\7\ the Corporation is removing references to ``stock 
loan baskets'' and ``stock borrow baskets'' from the By-Laws and Rules.
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    \7\ Securities Exchange Act Release No. 34-47898 (May 21, 2003), 
68 FR 32164 (May 29, 2003) (SR-OCC-2002-11).
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4. Receiver Authorized Delivery Processing
    DTC has made changes to its systems such that transactions that OCC 
submits to DTC via the Market Loan Program will no longer be subject to 
DTC's Receiver Authorized Delivery (``RAD'') processing.\8\ To ensure 
that deliveries in the Market Loan Program flowed through to OCC 
unimpeded, Interpretation .07A under Article V, Section 1 of the By-
Laws requires each clearing member that is a Market Loan Participant to 
set its RAD limit to the highest level permitted under DTC's rules. DTC 
has made system changes such that transactions that OCC submits to DTC 
via the Market Loan Program will no longer be subject to RAD 
processing. Accordingly, all transactions will flow through unimpeded 
without the need for Market Loan Participants to set RAD limits.\9\ As 
a result, OCC is removing Interpretation .07A under Article V, Section 
1 of the By-Laws.
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    \8\ Securities Exchange Act Release No. 66179 (Jan. 18, 2012), 
77 FR 3531 (Jan. 24, 2012) (SR-DTC-2011-08). RAD is generally a 
control mechanism of DTC that allows users to review and either 
approve or cancel incoming deliveries before they are processed to 
avoid reclamations. DTC's system establishes a minimum RAD limit of 
$15 million for delivery orders, and each firm is responsible for 
setting its own RAD limits for each counterparty.
    \9\ Exclusion of Market Loan Program transactions from RAD 
limits will in no way impede OCC's ability to manage risk of stock 
loan and borrow positions because OCC never relied on the DTC RAD 
limits as a risk management tool.
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    OCC believes the rule change is consistent with the purposes and 
requirements of Section 17A of the Act because they are designed to 
promote the prompt and accurate clearance and settlement of stock loan 
and borrow transactions and to remove impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of such transactions\10\ by automating processes that 
had previously been performed manually and improving the allocation 
process for stock loan and borrow positions of OCC members. The rule 
change is not inconsistent with the existing rules of OCC, including 
any other rules proposed to be amended.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the rule change would impose any burden 
on competition that is 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

    Written comments were not and are not intended to be solicited with 
respect to the rule change and none have been received.

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) \11\ of the Act and Rule 19b-4(f)(4)(i) \12\ 
thereunder on the basis that the rule change effect a change in an 
existing service of a registered clearing agency that 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. OCC will delay the 
implementation of the rule change until it is deemed certified under 
CFTC Regulation Sec.  40.6. At any time within 60 days of the filing of 
the 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.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(4)(i).
    \13\ 15 U.S.C. 78s(b)(3)(C).
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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 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-2012-24 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-2012-24. 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 rule change that are filed with 
the Commission, and all written communications relating to the 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 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's Web site at 
http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_12_24.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-2012-24 
and should be submitted on or before January 23, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-31463 Filed 12-31-12; 8:45 am]
BILLING CODE 8011-01-P