Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Establish a Comprehensive Standard of Care and Limitation of Liability With Respect to Clearing Members, 2283-2284 [E6-252]

Download as PDF Federal Register / Vol. 71, No. 9 / Friday, January 13, 2006 / Notices Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2005–91 on the subject line. [Release No. 34–53053; File No. SR–OCC– 2003–13] Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Establish a Comprehensive Standard of Care and Limitation of Liability With Respect to Clearing Members January 5, 2006. Paper Comments I. Introduction On November 5, 2003, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) and on August 18, 2004, amended 1 proposed rule change SR–OCC–2003–13 pursuant All submissions should refer to File to Section 19(b)(1) of the Securities Number SR–NYSE–2005–91. This file Exchange Act of 1934 (‘‘Act’’).2 Notice number should be included on the of the proposal was published in the subject line if e-mail is used. To help the Federal Register on November 23, Commission process and review your 2005.3 No comment letters were comments more efficiently, please use received. For the reasons discussed only one method. The Commission will below, the Commission is approving the post all comments on the Commission’s proposed rule change. Internet Web site (http://www.sec.gov/ II. Description rules/sro.shtml). Copies of the In its 1980 release setting forth submission, all subsequent standards for registration of clearing amendments, all written statements agencies, the Commission’s Division of with respect to the proposed rule Market Regulation stated that it was ‘‘of change that are filed with the the view that clearing agencies should Commission, and all written undertake to perform their obligations communications relating to the with a high degree of care.’’ 4 In its 1983 proposed rule change between the order registering nine clearing agencies, Commission and any person, other than the Commission stated that it did ‘‘not those that may be withheld from the believe sufficient justification exists at public in accordance with the this time to require a unique federal provisions of 5 U.S.C. 552, will be standard of care for registered clearing available for inspection and copying in agencies.’’ 5 The Commission has left to the Commission’s Public Reference user-governed clearing agencies the Room. Copies of the filing also will be question of how to allocate losses available for inspection and copying at associated with, among other things, the principal office of the NYSE. All clearing agency functions. Along this comments received will be posted line, in its 1986 order approving a without change; the Commission does proposed rule change of the Midwest not edit personal identifying Securities Trust Company (‘‘MSTC’’) to information from submissions. You clarify the rights and liabilities of MSTC should submit only information that and its participants with respect to you wish to make available publicly. All certain services, the Commission stated: submissions should refer to File The Act does not specify the standard of Number SR–NYSE–2005–91 and should care that must be exercised by registered clearing agencies and the Commission has be submitted on or before February 3, determined that imposition of a unique 2006. hsrobinson on PROD1PC70 with NOTICES • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–9303. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Nancy M. Morris, Secretary. [FR Doc. E6–325 Filed 1–12–06; 8:45 am] BILLING CODE 8010–01–P 15 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 15:41 Jan 12, 2006 Jkt 208001 federal standard of care for registered 1 Letter from William H. Navin, Executive Vice President, General Counsel, and Secretary, OCC (August 17, 2005). 2 15 U.S.C. 78s(b)(1). 3 Securities Exchange Act Release No. 52783 (November 16, 2005), 70 FR 70910. 4 Securities Exchange Act Release No. 16900 (June 17, 1980), 45 FR 45167 (June 23, 1980). 5 Securities Exchange Act Release No. 20221 (September 23, 1983), 48 FR 45167 (October 3, 1983). PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 2283 clearing agencies is not appropriate at this time. [citing Securities Exchange Act Release No. 20221, supra note 6] For those reasons the Commission believes that the clearing agency standard of care and the allocation of rights and responsibilities between a clearing agency and its participants applicable to clearing agency services generally may be set by the clearing agency and its participants. The Commission believes it should review clearing agency proposed rule changes in this area on a case-by-case basis and balance the need for a high degree of clearing agency care with the effect resulting liabilities may have on clearing agency operations, costs, and safeguarding of securities and funds.6 Because standards of care represent an allocation of rights and liabilities between a clearing agency and its users, which are generally sophisticated financial entities, the Commission has continued to refrain from establishing a unique federal standard of care and has allowed clearing agencies and other selfregulatory organizations and their users to establish their own standards of care.7 With this rule change, OCC is establishing a comprehensive gross negligence standard of care and limitation of liability with respect to its clearing members. In connection with this filing, OCC has made the following representations. OCC states in its original filing that since its founding in 1973, it has performed its clearing services with an exemplary level of care. Its record of fulfilling its commitments to its clearing members for over 30 years reflects OCC’s commitment to serving the best interests of its clearing members. It has comprehensive systems and operating procedures in place to ensure that its clearing functions are executed with the highest level of accuracy. In addition to its own concern for accuracy, it is subject to extensive regulatory oversight by the Commission. Furthermore, in its amendment to the filing, OCC states that (1) gross negligence is the standard of care generally used by other clearing agencies such as the Fixed Income Clearing Corporation, (2) the decision to apply a gross negligence standard of care to OCC is a conscious allocation of risk between OCC and its members, (3) the filing was unanimously approved by OCC’s directors, a majority of whom are officers of clearing members, and (4) the 6 Securities Exchange Act Release No. 22940 (February 24, 1986), 51 FR 7169 (February 28, 1986). 7 See, e.g., Securities Exchange Act Release Nos. 51669 (May 9, 2005), 70 FR 25634 (May 13, 2005) [File No. SR–NSCC–2004–09]; 48201 (July 21, 2003), 68 FR 44128 (July 25, 2003) [File No. SR– GSCC–2002–10]; 37563 (August 14, 1996), 61 FR 43285 (August 21, 1996) [SR–PSE–96–21]; and 37421 (July 11, 1996), 61 FR 37513 (July 18, 1996) [SR–CBOE–96–02]. E:\FR\FM\13JAN1.SGM 13JAN1 2284 Federal Register / Vol. 71, No. 9 / Friday, January 13, 2006 / Notices proposed rule change in no way will affect the very high level of care to which OCC has always held itself and to which it is held through the regulatory oversight of the Commission.8 As such, OCC believes that a gross negligence standard of care is appropriate for OCC.9 III. Discussion Section 19(b) of the Act directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in its custody or control.10 The Commission believes that OCC’s rule change is consistent with this Section because it will permit the resources of OCC to be appropriately utilized to protect funds and assets.11 IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in 8 Letter hsrobinson on PROD1PC70 with NOTICES VerDate Aug<31>2005 15:41 Jan 12, 2006 Jkt 208001 For the Commission by the Division of Market Regulation, pursuant to delegated authority.13 Nancy M. Morris, Secretary. [FR Doc. E6–252 Filed 1–12–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53069; File No. SR–PCX– 2006–01] Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Minimum Price Variation for Entry of Orders for Equity Securities Traded on the Archipelago Exchange January 6, 2006. from William H. Navin, supra, n. 1. OCC is amending Article VI of its By-Laws, ‘‘Clearance of Exchange Transactions,’’ by adding new Section 25, ‘‘Limitation of Liability,’’ which states: (a) Notwithstanding any other provision in the By-Laws and Rules, the Corporation will not be liable for any action taken, or any delay or failure to take any action, under the By-Laws and Rules or otherwise, to fulfill the Corporation’s obligations to its Clearing Members, other than for losses caused directly by the Corporation’s gross negligence, willful misconduct, or violation of federal securities laws for which there is a private right of action. Under no circumstances will the Corporation be liable for the acts, delays, omissions, bankruptcy, or insolvency of any third party, including, without limitation, any bank or other depository, custodian, sub-custodian, clearing or settlement system, data communication service, or other third party, unless the Corporation was grossly negligent, engaged in willful misconduct, or was in violation of federal securities laws for which there is a private right of action, in selecting such third party; and (b) Under no circumstances will the Corporation be liable for any indirect, consequential, incidental, special, punitive or exemplary loss or damage (including, but not limited to, loss of business, loss of profits, trading losses, loss of opportunity and loss of use) however suffered or incurred, regardless of whether the Corporation has been advised of the possibility of such damages or whether such damages otherwise could have been foreseen or prevented. 10 15 U.S.C. 78q–1(b)(3)(F). 11 The Commission notes that OCC’s adoption of a comprehensive gross negligence standard of care and limitation of liability with respect to its clearing members does not affect the regulatory standards (e.g., those set forth in Section 17A of the Act) that apply to OCC or the way in which OCC conducts its clearing agency operations. 9 Specifically, particular Section 17A of the Act and the rules and regulations thereunder.12 It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR– OCC–2003–13) be and hereby is approved. 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 January 4, 2006, the Pacific Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’), through its wholly owned subsidiary, PCX Equities, Inc. (‘‘PCXE’’), filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The PCX filed the proposal pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend its rules governing the Archipelago 12 The Commission notes that the rule change does not alleviate OCC from liability for violation of the Federal securities laws where there exists a private right of action and therefore is not designed to adversely affect OCC’s compliance with the Federal securities laws and private rights of action that exist for violations of the Federal securities laws. 13 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 Exchange (‘‘ArcaEx’’), the equities trading facility of PCXE, to: (1) Amend Commentary .04 to PCXE Rule 7.6 on minimum price variations for quoting and entry of orders in equity securities; (2) delete Commentary .05 to PCXE Rule 7.6; (3) renumber Commentary .06 to PCXE Rule 7.6 and correct a crossreference in that Commentary; and (4) delete Commentary .01 to PCXE Rule 6.16. The text of the proposed rule change is available on the PCX’s Web site (http://www.pacificex.com), at the principal office of the PCX, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange 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. The Exchange 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 the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Commission adopted Regulation NMS on April 6, 2005.5 One of the new rules under Regulation NMS is Rule 612, Minimum Pricing Increment. That rule prohibits a national securities exchange, its members, and quotation vendors (among others) from displaying, ranking, or accepting a bid, offer, order, or indication of interest for any NMS stock that is priced in an increment smaller than $0.01 per share, unless it is priced less than $1.00 per share.6 In the latter case, the exchange, its members, and its quotation vendors may display, rank, or accept a bid, offer, order, or indication of interest in the NMS stock in an increment no smaller than $0.0001 per share.7 The compliance date for Rule 612 is January 31, 2006.8 Currently, PCXE Rule 7.6, Commentary .04 provides that the minimum price variation (‘‘MPV’’) for 5 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). Regulation NMS is comprised of the rules at 17 CFR 642.600–642.612. 6 See 17 CFR 242.612(a). 7 See 17 CFR 242.612(b). 8 See Securities Exchange Act Release No. 52196 (Aug. 2, 2005), 70 FR 45529 (Aug. 8, 2005). E:\FR\FM\13JAN1.SGM 13JAN1

Agencies

[Federal Register Volume 71, Number 9 (Friday, January 13, 2006)]
[Notices]
[Pages 2283-2284]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-252]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53053; File No. SR-OCC-2003-13]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Establish a Comprehensive 
Standard of Care and Limitation of Liability With Respect to Clearing 
Members

January 5, 2006.

I. Introduction

    On November 5, 2003, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on August 18, 2004, amended \1\ proposed rule change SR-OCC-2003-13 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\2\ Notice of the proposal was published in the Federal 
Register on November 23, 2005.\3\ No comment letters were received. For 
the reasons discussed below, the Commission is approving the proposed 
rule change.
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    \1\ Letter from William H. Navin, Executive Vice President, 
General Counsel, and Secretary, OCC (August 17, 2005).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ Securities Exchange Act Release No. 52783 (November 16, 
2005), 70 FR 70910.
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II. Description

    In its 1980 release setting forth standards for registration of 
clearing agencies, the Commission's Division of Market Regulation 
stated that it was ``of the view that clearing agencies should 
undertake to perform their obligations with a high degree of care.'' 
\4\ In its 1983 order registering nine clearing agencies, the 
Commission stated that it did ``not believe sufficient justification 
exists at this time to require a unique federal standard of care for 
registered clearing agencies.'' \5\ The Commission has left to user-
governed clearing agencies the question of how to allocate losses 
associated with, among other things, clearing agency functions. Along 
this line, in its 1986 order approving a proposed rule change of the 
Midwest Securities Trust Company (``MSTC'') to clarify the rights and 
liabilities of MSTC and its participants with respect to certain 
services, the Commission stated:
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    \4\ Securities Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 45167 (June 23, 1980).
    \5\ Securities Exchange Act Release No. 20221 (September 23, 
1983), 48 FR 45167 (October 3, 1983).

    The Act does not specify the standard of care that must be 
exercised by registered clearing agencies and the Commission has 
determined that imposition of a unique federal standard of care for 
registered clearing agencies is not appropriate at this time. 
[citing Securities Exchange Act Release No. 20221, supra note 6] For 
those reasons the Commission believes that the clearing agency 
standard of care and the allocation of rights and responsibilities 
between a clearing agency and its participants applicable to 
clearing agency services generally may be set by the clearing agency 
and its participants. The Commission believes it should review 
clearing agency proposed rule changes in this area on a case-by-case 
basis and balance the need for a high degree of clearing agency care 
with the effect resulting liabilities may have on clearing agency 
operations, costs, and safeguarding of securities and funds.\6\
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    \6\ Securities Exchange Act Release No. 22940 (February 24, 
1986), 51 FR 7169 (February 28, 1986).

Because standards of care represent an allocation of rights and 
liabilities between a clearing agency and its users, which are 
generally sophisticated financial entities, the Commission has 
continued to refrain from establishing a unique federal standard of 
care and has allowed clearing agencies and other self-regulatory 
organizations and their users to establish their own standards of 
care.\7\
---------------------------------------------------------------------------

    \7\ See, e.g., Securities Exchange Act Release Nos. 51669 (May 
9, 2005), 70 FR 25634 (May 13, 2005) [File No. SR-NSCC-2004-09]; 
48201 (July 21, 2003), 68 FR 44128 (July 25, 2003) [File No. SR-
GSCC-2002-10]; 37563 (August 14, 1996), 61 FR 43285 (August 21, 
1996) [SR-PSE-96-21]; and 37421 (July 11, 1996), 61 FR 37513 (July 
18, 1996) [SR-CBOE-96-02].
---------------------------------------------------------------------------

    With this rule change, OCC is establishing a comprehensive gross 
negligence standard of care and limitation of liability with respect to 
its clearing members. In connection with this filing, OCC has made the 
following representations. OCC states in its original filing that since 
its founding in 1973, it has performed its clearing services with an 
exemplary level of care. Its record of fulfilling its commitments to 
its clearing members for over 30 years reflects OCC's commitment to 
serving the best interests of its clearing members. It has 
comprehensive systems and operating procedures in place to ensure that 
its clearing functions are executed with the highest level of accuracy. 
In addition to its own concern for accuracy, it is subject to extensive 
regulatory oversight by the Commission. Furthermore, in its amendment 
to the filing, OCC states that (1) gross negligence is the standard of 
care generally used by other clearing agencies such as the Fixed Income 
Clearing Corporation, (2) the decision to apply a gross negligence 
standard of care to OCC is a conscious allocation of risk between OCC 
and its members, (3) the filing was unanimously approved by OCC's 
directors, a majority of whom are officers of clearing members, and (4) 
the

[[Page 2284]]

proposed rule change in no way will affect the very high level of care 
to which OCC has always held itself and to which it is held through the 
regulatory oversight of the Commission.\8\ As such, OCC believes that a 
gross negligence standard of care is appropriate for OCC.\9\
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    \8\ Letter from William H. Navin, supra, n. 1.
    \9\ Specifically, OCC is amending Article VI of its By-Laws, 
``Clearance of Exchange Transactions,'' by adding new Section 25, 
``Limitation of Liability,'' which states:
    (a) Notwithstanding any other provision in the By-Laws and 
Rules, the Corporation will not be liable for any action taken, or 
any delay or failure to take any action, under the By-Laws and Rules 
or otherwise, to fulfill the Corporation's obligations to its 
Clearing Members, other than for losses caused directly by the 
Corporation's gross negligence, willful misconduct, or violation of 
federal securities laws for which there is a private right of 
action. Under no circumstances will the Corporation be liable for 
the acts, delays, omissions, bankruptcy, or insolvency of any third 
party, including, without limitation, any bank or other depository, 
custodian, sub-custodian, clearing or settlement system, data 
communication service, or other third party, unless the Corporation 
was grossly negligent, engaged in willful misconduct, or was in 
violation of federal securities laws for which there is a private 
right of action, in selecting such third party; and
    (b) Under no circumstances will the Corporation be liable for 
any indirect, consequential, incidental, special, punitive or 
exemplary loss or damage (including, but not limited to, loss of 
business, loss of profits, trading losses, loss of opportunity and 
loss of use) however suffered or incurred, regardless of whether the 
Corporation has been advised of the possibility of such damages or 
whether such damages otherwise could have been foreseen or 
prevented.
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III. Discussion

    Section 19(b) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(F) of the Act requires that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds which are in its custody or control.\10\ The 
Commission believes that OCC's rule change is consistent with this 
Section because it will permit the resources of OCC to be appropriately 
utilized to protect funds and assets.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ The Commission notes that OCC's adoption of a comprehensive 
gross negligence standard of care and limitation of liability with 
respect to its clearing members does not affect the regulatory 
standards (e.g., those set forth in Section 17A of the Act) that 
apply to OCC or the way in which OCC conducts its clearing agency 
operations.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.\12\
---------------------------------------------------------------------------

    \12\ The Commission notes that the rule change does not 
alleviate OCC from liability for violation of the Federal securities 
laws where there exists a private right of action and therefore is 
not designed to adversely affect OCC's compliance with the Federal 
securities laws and private rights of action that exist for 
violations of the Federal securities laws.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2003-13) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-252 Filed 1-12-06; 8:45 am]
BILLING CODE 8010-01-P