[Federal Register Volume 78, Number 214 (Tuesday, November 5, 2013)]
[Proposed Rules]
[Pages 66318-66320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-26165]



17 CFR Part 300

[Release No. SIPA-171; File No. SIPC-2012-01]

Securities Investor Protection Corporation

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.


SUMMARY: The Securities Investor Protection Corporation (``SIPC'') 
filed a proposed rule change with the Securities and Exchange 
Commission (``Commission''). The proposed rule change amends SIPC Rule 
400, entitled ``Rules Relating to Satisfaction of Customer Claims for 
Standardized Options,'' which relates to the satisfaction of customer 
claims for standardized options under the Securities Investor 
Protection Act of 1970 (``SIPA''). The Commission is publishing the 
proposed rule change for public comment. Because SIPC rules have the 
force and effect as if promulgated by the Commission, those rules are 
published in Title 17 of the Code of Federal Regulations.

DATES: Comments are to be received on or before November 26, 2013.

ADDRESSES: Interested persons are invited to submit written data, 
views, and arguments concerning the foregoing by any of the following 

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include 
File Number SIPC-2012-01 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 letters should refer to File Number SIPC-2012-01. 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/other.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 
10:00 a.m. and 3:00 p.m. 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.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Deputy Associate 
Director, at (202) 551-5521; Sheila Dombal Swartz, Special Counsel, at 
(202) 551-5545; or Kimberly N. Chehardy, Special Counsel, at (202) 551-
5791, Office of Financial Responsibility, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: Pursuant to Section 3(e)(2)(A) of SIPA,\1\ 
notice is hereby given that SIPC filed with the Commission on November 
7, 2012, a proposed rule change, as described in Item I below, which 
item has been substantially prepared by SIPC. On January 31, 2013, SIPC 
filed Amendment No. 1 to the proposed rule change.\2\ The Commission is 

[[Page 66319]]

this notice to solicit comments on the proposed rule change, as 
modified by Amendment No. 1, from interested persons.

    \1\ 15 U.S.C. 78ccc(e)(2)(A).
    \2\ Amendment No. 1 is a partial amendment which modifies the 
initial proposed changes to subsection (h) of Rule 400, by inserting 
the phrase ``a `security' under section 16(14) of the Act and is'' 
prior to the words ``issued by a securities clearing agency. . . .''

I. SIPC'S Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rule Change

    In its filing with the Commission, SIPC 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 above. 
SIPC has prepared the following summary of the purpose of and statutory 
basis for the proposed rule change.\3\

    \3\ The Commission has modified the language in this section.

    SIPC Rule 400, 17 CFR 300.400 (``Rule 400'' or ``the Rule''), was 
enacted to provide clarity in the treatment of customer claims based on 
``Standardized Options'' positions, in the liquidation of broker-
dealers under SIPA. Currently, Rule 400 generally provides for the 
closeout of open Standardized Options positions upon the commencement 
of a SIPA liquidation. Based upon the amounts realized upon closeout, 
the trustee calculates the value of customers' Standardized Options 
positions, and credits or debits customers' accounts by the appropriate 
amounts. The purpose of the proposed rule change is to amend SIPC Rule 
400 in the following respects: (1) To provide trustees appointed under 
SIPA with greater flexibility in the distribution of Standardized 
Options upon the commencement of a SIPA liquidation proceeding; and (2) 
to modify the definition of Standardized Options under Rule 400(h), to 
include an option that is a ``security'' under SIPA and is issued by an 
SEC-registered securities clearing agency or a foreign securities 
clearing agency, i.e., an over-the-counter option (``OTC Option''). The 
proposed amendments create an alternative to closeout by allowing the 
SIPA trustee, with SIPC's consent, to transfer some or all of such 
Standardized Options positions to another SIPC member for the accounts 
of customers.
    Under SIPC Rule 400(h), ``Standardized Options'' means options 
traded on a national securities exchange, an automated quotation system 
of a registered securities association, or a foreign securities 
exchange. The proposed amendments also would modify the definition of 
``Standardized Options'' to include any other option that is a 
``security'' under section 16(14) of SIPA and is issued by a registered 
securities clearing agency or foreign securities clearing agency.\4\ 
For example, the Options Clearing Corporation (``OCC'') proposed, and 
the Commission approved, a rule change to establish a legal and 
operational framework for OCC to provide central clearing for OTC 
Options.\5\ If OCC clears OTC Options, these options will be deemed 
``Standardized Options'' and subject to closeout or transfer in a SIPA 

    \4\ Existing Rule 400 applies to options traded on foreign 
securities exchanges as well as U.S. exchanges. For consistency, 
amended Rule 400 will apply to OTC options issued by foreign 
securities clearing agencies as well as U.S.-registered clearing 
    \5\ See Securities Exchange Act Release No. 67835 (Sept. 12, 
2012), 77 FR 57602 (Sept. 18, 2012), (SR-OCC-2012-14); see also 
Securities Exchange Act Release No. 68434 (Dec. 14, 2012), 77 FR 
75243 (Dec. 19, 2012) (approving proposed rule change). OCC also 
filed, and received accelerated approval of, a proposed rule change 
to reflect enhancements in its system for theoretical analysis and 
numerical simulations as applied to longer-tenor options. Securities 
Exchange Act Release No. 70719 (Oct. 18, 2013), 78 FR 63548 (Oct. 
24, 2013), (SR-OCC-2013-16).

    In light of experience and knowledge gained from the liquidation of 
Lehman Brothers Inc. (``Lehman'') and other SIPA proceedings, SIPC has 
determined that allowing SIPA trustees the flexibility, subject to SIPC 
approval, of transferring customers' options positions or of 
liquidating their positions, would be beneficial to the investing 
public and consistent with the customer protection purposes of SIPA. 
Moreover, because the OTC Options are similar to exchange-traded index 
options, and generally would be cleared by a securities clearing agency 
registered under Section 17A of the Exchange Act subject to the same 
basic rules and procedures used for the clearance of index options, 
there appears to be no practical basis to treat OTC Options differently 
under SIPA. Indeed, modifying the definition of ``Standardized 
Options'' under Rule 400(h) to include OTC Options would update, and 
therefore enhance, the protections afforded customers in the event of a 
liquidation of their broker-dealer.

A. Past Experience

    The ability to transfer Standardized Options positions to another 
brokerage in lieu of an automatic closeout gives SIPA trustees more 
flexibility in distributing such customer assets after the commencement 
of a SIPA liquidation proceeding, and more closely approximates what 
the customer would expect to be in his account but for the failure of 
the broker-dealer. This is particularly true where the trustee, as in 
the Lehman case, was able promptly to effectuate bulk transfers of 
customer accounts to other brokerages enabling customers to re-gain 
access to their accounts in the form in which the accounts existed pre-
liquidation, with comparatively minimal disruption. In such instances, 
customers generally are better served by having their options positions 
transferred with their other securities to their accounts at their new 
broker-dealer. The proposed amendments would provide clear authority 
for a SIPA trustee to transfer the Standardized Options positions, with 
SIPC's consent. This greater flexibility in the treatment of open 
positions would enhance customer protection under exigent 
circumstances, and potentially avoid exacerbating the turmoil or harm 
to customers and/or the markets that could be caused by the forced 
liquidation of open positions.

B. OTC Options

    In view of the potential clearing of OTC Options, modifying the 
definition of Standardized Options to include such options is 
appropriate and in keeping with the customer protection functions of 
SIPA. OTC Options will be ``securities'' for purposes of both the 
Securities Act of 1933 and the Exchange Act. They also will be a 
``security'' under section 16(14) of SIPA, 15 U.S.C. 78lll(14), which 
provides that that the term ``security'' means ``any put, call, 
straddle, option, or privilege on any security, or group or index of 
securities'' (emphasis added).
    In a SIPA liquidation, customers would be protected against the 
loss of their OTC Options custodied with the SIPC member broker-dealer. 
Section 16(2) of SIPA, 15 U.S.C. 78lll(2), provides that ``[t]he term 
`customer' of a debtor means any person . . . who has a claim on 
account of securities received, acquired, or held by the debtor in the 
ordinary course of business. . . .'' OTC Options will be created in the 
customers' account and held there by the clearing member for the 
benefit of its customers in the same way that Standardized Options are 
held. A clearing agency will be the issuer of those options in 
precisely the same way that it is the issuer of listed options. Thus, 
the OTC Options created in the omnibus customers' account of a clearing 
member at a clearing agency would be ``received, acquired, or held'' by 
the customer's broker-dealer in the ordinary course of business.
    For example, OTC Options at OCC will be carried in a clearing 

[[Page 66320]]

clearing accounts. Proprietary positions will be carried in the 
clearing member's firm account, and customer positions in its 
securities customers' account. Positions in OTC Options will be 
margined at OCC in the omnibus customers' account on the same basis as 
listed options. If a clearing member takes the other side of a 
transaction with its customer in an OTC Option, the transaction will 
result in the creation of a long or short position (as applicable) in 
the omnibus customers' account and in the opposite position in the 
clearing member's firm account.
    OCC indicates that it expects to clear the OTC Options subject to 
the same basic rules and procedures used for the clearance of index 
options. OCC will require that the transactions be cleared through a 
clearing member of OCC that is registered with the SEC as a broker-
dealer, or one of the small number of clearing members that are ``non-
U.S. securities firms'' as defined in OCC's By-Laws. Further, the OTC 
Options that OCC will clear will be options on the S&P 500 Index.\6\ 
The OTC Options will be similar to exchange-traded index options called 
``FLEX Options'' that currently are traded on the Chicago Board Options 
Exchange. While the OTC Options will allow for customization of certain 
terms, such as the type of option, exercise price, and expiration date, 
OTC Options will not be exchange traded. Rather, they will be bilateral 
trades that will be submitted to OCC for clearance.

    \6\ OCC is licensed by S&P to clear options on the S&P MidCap 
400 Index and the S&P Small Cap 600 Index, and in the future, OCC 
may decide to clear OTC Options on other indices, or on individual 
equity securities.

II. 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 of not more than ninety days after such date 
if it finds such longer period to be appropriate and publishes its 
reasons for so finding or (ii) as to which SIPC consents, the 
Commission shall:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether such proposed rule 
change should be disapproved.
    To allow public access to SIPC's rules, SIPC rules that are 
approved by the Commission are published under Part 300 of 17 CFR 
Chapter II.

III. Statutory Authority

    Pursuant to SIPA, 15 U.S.C. 78aaa et seq., and particularly, 
section 3(e) (15 U.S.C. 78ccc(e)), SIPC proposes to amend 300.400 of 
Title 17 of the Code of Federal Regulations in the manner set forth 

List of Subjects in 17 CFR Part 300

    Brokers, Securities.

Text of the Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:


1. The authority citation for part 300 is revised to read as follows:

    Authority:  15 U.S.C. 78ccc.

2. Section 300.400 is amended by:
a. In paragraph (b), adding the phrase ``except to the extent that the 
trustee, with SIPC's consent, or SIPC as trustee, as the case may be, 
has arranged or is able promptly to arrange, a transfer of some or all 
of such positions to another SIPC member'' after the phrase ``accounts 
of customers'';
b. In paragraph (e), adding the phrase ``except to the extent that such 
positions have been transferred as provided in paragraph (b) of this 
section'' after the phrase ``section 7(b)(1) of the Act''; and
c. In paragraph (h), adding the phrase ``, and any other option that is 
a security under section 16(14) of the Act, 15 U.S.C. 78lll(14), and is 
issued by a securities clearing agency registered under Section 17A of 
the Securities Exchange Act of 1934, 15 U.S.C. 78q-1, or a foreign 
securities clearing agency'' after the phrase ``foreign securities 

    Dated: October 29, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority in 17 CFR 200.30-3(f)(3).
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26165 Filed 11-4-13; 8:45 am]