Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to the Use of Margin Deposit in the Event of a Clearing Member Liquidation, 29206-29209 [E6-7624]
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Federal Register / Vol. 71, No. 97 / Friday, May 19, 2006 / Notices
associated with the maintenance of
TradeWorks. The Exchange will bear the
remaining cost.
According to the Exchange, this
arrangement will entail a payment by
each Member Organization who elects
to continue to use TradeWorks of
$10,000 for each percentage point of
usage attributable to that Member
Organization, allocated according to
each Member Organization’s usage of
TradeWorks based on usage data for
February 2006. The fee will be billed in
nine monthly installments. The
Exchange submits that seventeen
Member Organizations, representing
approximately 35% of February 2006
usage, have agreed to continue to use
TradeWorks on these terms,
representing a total billing of $358,500.
The Exchange will not permit Member
Organizations to use TradeWorks that
have not agreed in advance to the
foregoing payment as a fee covering the
entire period from the date of this filing
until December 31, 2006.
2. Statutory Basis
The NYSE believes that the proposed
rule change is consistent with Section
6(b) of the Act,7 in general, and furthers
the objectives of Section 6(b)(4) of the
Act,8 in particular, in that it is designed
to assure the equitable allocation of
reasonable dues, fees and other charges
among its members and issuers and
other persons using its facilities.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The NYSE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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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
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 9 and subparagraph (f)(2) of
Rule 19b–4 thereunder,10 since it
establishes or changes a due, fee or
other charge imposed by the Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
7 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
9 15 U.S.C. 78s(b)(3)(A).
10 17 CFR 240.19b–4(f)(2).
8 15
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Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary of appropriate in the public
interest, for the protection of investors,
or otherwise in the furtherance of the
purposes of the Act.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.11
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–7641 Filed 5–18–06; 8:45 am]
BILLING CODE 8010–01–P
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSE–2006–26 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53794; File No. SR–OCC–
2005–23]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of a Proposed Rule Change
Relating to the Use of Margin Deposit
in the Event of a Clearing Member
Liquidation
May 11, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 notice is hereby given that on
December 16, 2004, The Options
Paper Comments
Clearing Corporation (‘‘OCC’’) filed with
• Send paper comments in triplicate
the Securities and Exchange
to Nancy M. Morris, Secretary,
Commission (‘‘Commission’’) the
Securities and Exchange Commission,
proposed rule change as described in
100 F Street, NE., Washington DC
Items I, II, and III below, which items
20549–1090.
have been prepared primarily by OCC.
The Commission is publishing this
All submissions should refer to File
notice to solicit comments on the
Number SR–NYSE–2006–26. This file
proposed rule change from interested
number should be included on the
subject line if e-mail is used. To help the persons.
Commission process and review your
I. Self-Regulatory Organization’s
comments more efficiently, please use
Statement of the Terms of Substance of
only one method. The Commission will the Proposed Rule Change
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
The proposed rule change would have
rules/sro.shtml). Copies of the
two complementary purposes. It would
submission, all subsequent
(1) eliminate certain unnecessary
amendments, all written statements
restrictions on the use of margin in the
with respect to the proposed rule
liquidation of a suspended Clearing
change that are filed with the
Member under Chapter XI of the Rules
Commission, and all written
and (2) ensure that other restrictions on
communications relating to the
the use of margin that are appropriately
proposed rule change between the
imposed in the By-Laws are properly
Commission and any person, other than reflected in Chapter XI of the Rules.
those that may be withheld from the
II. Self-Regulatory Organization’s
public in accordance with the
Statement of the Purpose of, and
provisions of 5 U.S.C. 552, will be
Statutory Basis for, the Proposed Rule
available for inspection and copying in
Change
the Commission’s Public Reference
Section. Copies of such filing also will
In its filing with the Commission,
be available for inspection and copying
OCC included statements concerning
at the principal office of the NYSE. All
the purpose of and basis for the
comments received will be posted
proposed rule change and discussed any
without change; the Commission does
comments it received on the proposed
not edit personal identifying
rule change. The text of these statements
information from submissions. You
may be examined at the places specified
should submit only information that
in Item IV below. OCC has prepared
you wish to make available publicly. All summaries, set forth in sections (A), (B),
submissions should refer to File No.
SR–NYSE–2006–26 and should be
11 17 CFR 200.30–3(a)(12).
submitted on or before June 9, 2006.
1 15 U.S.C. 78s(b)(1).
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Federal Register / Vol. 71, No. 97 / Friday, May 19, 2006 / Notices
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and (C) below, of the most significant
aspects of such statements.2
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Provisions in OCC’s By-Laws relating
to the potential use of securities and
other margin assets in the event of a
Clearing Member’s liquidation currently
restrict the use of such assets in ways
not required under applicable laws and
regulations. In addition, certain
provisions of OCC’s Rules applicable to
Clearing Member liquidations do not
fully or clearly reflect limitations
imposed by the By-Laws.
OCC is proposing to amend Chapter
XI of the Rules to more precisely reflect
appropriate limitations on the use of
Clearing Member margin deposits and is
proposing to amend provisions of the
By-Laws to allow OCC to make use of
those margin deposits to the fullest
extent consistent with (i) applicable
customer protection provisions and (ii)
the ability of OCC and Clearing Member
systems to identify margin assets subject
to those provisions.
Article VI, Section 3 of the By-Laws
sets out a number of different types of
accounts that a Clearing Member may
establish and maintain on OCC’s books.
These accounts include firm accounts,
separate market-maker’s accounts,
combined market-makers’ accounts,
customers’ accounts, and others. For
each of these account types, Section 3
provides that OCC shall have a lien on
property in the account and specifies
the extent of the obligations secured by
the lien. For example, in the case of the
firm lien account, Section 3(a) of Article
VI states that ‘‘the Corporation shall
have a lien on all positions and on all
other securities, margin and other funds
in such account as security for all of the
Clearing Member’s obligations to the
Corporation * * *.’’ This language
permits all of the Clearing Member’s
assets on deposit with OCC with respect
to the firm account to be applied to any
obligation of the Clearing Member to
OCC regardless of whether that
obligation arises from the firm account
or any other account. This is
appropriate in that, generally speaking,
the Clearing Member may deposit with
respect to the firm account only those
assets that it is permitted under
applicable law to treat as its own. Such
assets include all cash not required by
Rule 15c3–33 to be deposited in a
special reserve bank account for the
2 The Commission has modified parts of these
statements.
3 17 CFR 240.15c3–3.
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benefit of customers and any securities
that belong to the Clearing Member and
not to its customers as that term is
defined in Rules 15c2–1 and 8c–1
(‘‘hypothecation rules’’).4
The lien language applicable to assets
in other types of accounts, however,
restricts the application of margin assets
to obligations of the Clearing Member
arising from that particular account. For
example, in the case of a combined
market-makers’ account other than a
proprietary combined market-makers’
account, Section 3(c) of Article VI states
that ‘‘the Corporation shall have a lien
on all long positions, securities, margin
and other funds in such combined
Market-Maker’s account with the
Clearing Member as security for the
Clearing Member’s obligations to the
Corporation in respect of all Exchange
transactions effected through such
account, short positions maintained in
such account, and exercise notices
assigned to such account * * *.’’ Under
this language, OCC’s lien on margin
assets deposited with respect to a
combined market-makers’ account does
not secure any obligations of the
Clearing Member other than those
arising from this account.5
These limitations on the use of assets
in an account to obligations arising from
the same account were adopted in order
to avoid violation by Clearing Members
of the hypothecation rules cited above.6
The rules containing these limitations,
which rules are substantially identical
to one another, provide in pertinent part
that a broker or dealer may not permit
securities carried for the account of any
customer to be commingled with
securities ‘‘carried for any person other
than a bona fide customer under a lien
for a loan made to such broker or
dealer.’’7 Although it is not at all clear
4 17
CFR 240.15c2–1 and 240.8c-1.
some cases, however, multiple accounts of
the same account type are treated as a single
account as provided in Interpretation .02 following
Article VI, Section 3 of the By-Laws. Thus, for
example, if a clearing member maintains more than
one combined market makers’ account for
associated market makers, those accounts would be
treated as a single account for liquidation purposes.
Similarly, multiple securities customers’ accounts
would be treated as a single securities customers’
account for liquidation purposes.
6 The limitation is actually more restrictive than
would be required under the hypothecation rules
because OCC could lawfully apply assets in the
account to obligations arising from the customers’
account and any other accounts in which positions
of securities customers as defined in the
hypothecation rules are carried. Similarly, assets in
the public customers’ account could be applied to
obligations arising from a market-maker account. As
a matter of policy, however, OCC has maintained
the separation continued here.
7 17 CFR 240.15c2–1(a)(2) and 240.8c–1(a)(2). The
term customer is defined in paragraph (b)(1) of
these rules not to include partners, officers, or
5 In
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29207
that this language should apply to
OCC’s lien, which is not a ‘‘lien for a
loan’’ in the ordinary sense, OCC has
historically taken the conservative view
that it does apply and does not propose
now to do otherwise.
Nevertheless, it is clear that the
hypothecation rules apply only to
‘‘securities carried for the account of
any customer.’’ Assets other than
securities are not subject to the rule.
Thus, a Clearing Member is not required
to segregate cash received by a Clearing
Member from any securities customer
from other cash deposited by the
Clearing Member with OCC as margin.
Subject to the requirement to fund its
special reserve bank account under Rule
15c3–3(e) and to fund a special reserve
bank account for any proprietary
account of an introducing broker dealer
(‘‘PAIB’’) account that the broker-dealer
has agreed to maintain, a broker-dealer
may treat cash received from securities
customers as its own. Therefore, a
Clearing Member is permitted to deposit
cash (other than cash received from
commodity customers, which is
required to be segregated under
provisions of the Commodity Exchange
Act [’’CEA’’]), as margin for any of its
accounts at OCC without regard to the
source of the cash. Accordingly, the lien
language applicable to combined
market-makers’ accounts and certain
other account types is overly restrictive
as applied to cash and any other nonsecurities assets that might be deposited
as margin in an account.8 OCC’s lien
could lawfully be applied to such nonsecurities assets to secure any obligation
of the Clearing Member to the same
extent as if the cash had been deposited
with respect to the Clearing Member’s
firm lien account.
It is also true that when securities
other than customer securities are
deposited with OCC as margin with
respect to a customer account (other
than a commodity customer account
where securities must be segregated
pursuant to provisions of the CEA),
directors of the broker-dealer or a participant in a
joint account with a broker-dealer. Unlike Rule
15c3–3, however, the hypothecation rules do not
exclude broker-dealers from the definition of
customer. Accordingly, market-makers that do not
have any of these specified relationships with their
clearing broker must be treated as customers for
purposes of the hypothecation rules.
8 At present, the only other non-securities assets
that may be deposited as margin are letters of credit
(‘‘LOCs’’). LOCs are subject to special OCC rules in
that an LOC may be secured by customer securities
pledged by the broker-dealer to the issuer of the
LOC. In such a situation, the LOC would be subject
to the restrictions applicable to the securities. The
broker-dealer may comply with those restrictions
under OCC’s Rules by designating the LOC as a
‘‘restricted’’ LOC and by specifying which account
type is secured by the LOC.
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those securities would not for that
reason alone have to be treated as
securities carried for the account of any
customer, and OCC’s lien could lawfully
apply. However, there are no systems in
place that allow OCC to distinguish
between customer and non-customer
securities when they are deposited as
margin for a customer account,
including a market-maker account.
Accordingly, OCC will continue to treat
all securities deposited as margin for
any securities account other than a
proprietary account as if the securities
were customer securities for purposes of
the hypothecation rules.
In order to address the discrepancies
described above, OCC is proposing to
amend Article I, Section 1 of the ByLaws to define two different types of
liens: a ‘‘general lien’’ and a ‘‘restricted
lien.’’ Assets subject to a general lien
would serve as security for all
obligations of the Clearing Member to
OCC regardless of the origin or nature of
those obligations. The proposed rule
change would also define a ‘‘general
lien account’’ as one in which OCC has
a general lien over all assets in the
account. Thus, the firm account and any
other proprietary account, such as a
proprietary market-maker’s account,
would be a general lien account, and all
general lien accounts would be treated
as a single firm lien account in a
liquidation of the Clearing Member.
This is precisely the same result as
under the present rules.
The definition of a restricted lien
would provide that assets in an account
that are specified as subject to a
restricted lien serve as security only for
obligations arising from that particular
account or from a specified group of
accounts to which that account
belongs.9 A restricted lien account
would be defined as an account in
which specified assets are subject to a
restricted lien. All accounts other than
the various types of proprietary
accounts would be restricted lien
accounts. However, not all assets in
those accounts would be subject to a
restricted lien. Cash and any other nonsecurities assets in a restricted lien
account, because they are not subject to
the restrictions of the hypothecation
rules, would be subject to a general lien.
However, an exception would be made
for the securities customers’ account
9 The reference to groups of accounts is necessary
because, for example, a clearing member may have
multiple combined market makers’ accounts that
would be liquidated as if they were a single
account. The same would be true if a clearing
member had more than one securities customers’
account. These account groupings are addressed in
existing Interpretation .02 following Article VI,
Section 3 of the By-Laws.
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and the customer lien account where all
assets, including cash, would be subject
only to a restricted lien. The reason for
this exception is that, although these
non-securities assets are not subject to
the hypothecation rules, the provisions
of Rule 15c3–3(e) and in particular the
reserve formula used in calculating the
amount of funds a Clearing Member is
required to deposit in the special
reserve bank account for the exclusive
benefit of customers provide a debit
(i.e., a reduction in the required deposit)
reflecting ‘‘[m]argin required and on
deposit with [OCC] for all option
contracts written or purchased in
customer accounts.’’ Given this debit in
the reserve formula, it would appear to
be inconsistent to use funds in the
account as collateral for obligations
other than those arising in such
accounts. This limitation is reflected in
the proposed rule change.
In order to eliminate unnecessary
restrictions on the use of non-securities
assets in certain accounts as described
above, OCC proposes to modify the lien
language appearing in the following
paragraphs of Article VI, Section 3:
paragraph (a), to the extent applicable to
firm non-lien accounts; paragraph (b) to
the extent applicable to separate marketmaker accounts other than proprietary
market-maker accounts; paragraph (c),
to the extent applicable to combined
market-makers’ accounts other than
proprietary combined market-makers’
accounts; and paragraph (h) applicable
to JBO Participants’ accounts. The
modification necessary in each case is to
provide that margin assets deposited
with respect to the applicable account
and consisting of cash and other nonsecurities collateral may be applied to
any obligation of the Clearing Member
rather than only to obligations arising
from that account. This is accomplished
by subjecting securities assets in the
accounts to a restricted lien while nonsecurities assets in certain of the
account are subject to a general lien.
Other changes in Article VI, Section 3
are non-substantive changes intended to
make use of the newly defined terms, to
improve consistency, to eliminate
repetition, and to clarify ambiguities.10
In order to conform to the changes
made in provisions of Article VI,
Section 3(a) relating to firm non-lien
accounts and in Section 3(e) relating to
the securities customers’ account, OCC
is proposing to delete the specific lien
language applicable to unsegregated
long positions currently set forth in Rule
611. The extent of these liens would be
10 No changes of substance are proposed to be
made with respect to futures accounts subject to
segregation requirements under the CEA.
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set forth in the cited provisions of
Article VI, Section 3.
Notwithstanding the limitations of the
existing lien language described above
applicable to accounts other than
proprietary accounts, these limitations
are not fully reflected in the provisions
of OCC’s Rule 1104(a), which governs
the creation of a liquidating settlement
account and payments from that
account in a Clearing Member
liquidation. Rule 1104(a) presently
provides, in effect, that proceeds from
restricted letters of credit,11
unsegregated long positions, and
variation payments resulting from
positions in security futures in a public
customers’ account, may not be applied
to obligations other than those arising
from the public customers’ account. It
does not similarly restrict the use of
proceeds of securities deposited directly
as margin for that account even though
the application of such securities to
obligations arising out of other accounts
would arguably be in violation of the
hypothecation rules and even though
such use would be inconsistent with
OCC’s restricted lien on those securities.
In the event of a Clearing Member
liquidation prior to the approval of this
rule change, OCC would observe the
limitations of the hypothecation rules
and the lien language as it presently
exists in OCC’s By-Laws
notwithstanding that those limitations
are not fully reflected in Rule 1104(a).
Those limitations are fully consistent
with OCC’s risk management system in
that OCC has never set margin or
clearing fund requirements with the
expectation that it would have excess
collateral in one account that could be
applied against obligations arising in
other accounts. OCC determines its risk
margin requirements on each Clearing
Member account independently.
Nevertheless, if in liquidating any
Clearing Member account a shortfall
occurred, it would obviously be in the
interest of OCC, its Clearing Members,
and the integrity of the clearing system
if OCC were able to apply the margin
assets that it holds to the fullest extent
practicable without violating applicable
law. In addition, the intended
restrictions on the use of proceeds of
positions and securities in the securities
customers’ account as well as in marketmaker accounts and other restricted lien
accounts as OCC is now proposing to
11 OCC is proposing to amend the definition of
restricted letter of credit in Rule 101 in order to
make it more generic. In current practice, restricted
letters of credit are used not only for the securities
customers’ account but may also be used in a
segregated futures account. The letter of credit must
indicate on its face the purpose or purposes to
which it may be applied.
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refer to them generically should be
clearly stated. By making use of the
newly defined terms general lien and
restricted lien and by relying on the
provisions of Article VI, Section 3 as
proposed to be amended, only relatively
minor amendments to the provisions of
Rule 1104(a) are required to effectuate
the dual purposes of this proposed rule
change. Other proposed changes in Rule
1104 are intended for clarification only
and are not substantive.
OCC believes that the proposed rule
change is consistent with the purposes
and requirements of Section 17A of the
Act because it will promote the prompt
and accurate clearance and settlement of
securities transactions, remove
impediments to the mechanisms of a
national system for the prompt and
accurate clearance and settlement of
securities transactions, and assure the
safeguarding of securities and funds in
the custody or control of OCC by
clarifying limitations on the use of
certain customer property in the event
of a Clearing Member insolvency while
protecting the clearing system by
permitting broader use of other
collateral deposited by Clearing
Members.
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.
wwhite on PROD1PC61 with NOTICES
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 proposed rule change, and none
have been received.
III. 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 up to
ninety days of such date 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 the proposed
rule change or
(b) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
VI. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
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Jkt 208001
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 (https://www.sec.gov/
rules/sro.shtml) or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–OCC–2005–23 on the
subject line.
29209
DEPARTMENT OF TRANSPORTATION
Office of the Secretary
Proposed Agency Information
Collection Activities; Comment
Request
Federal Railroad
Administration, DOT.
ACTION: Notice and request for
comments.
AGENCY:
SUMMARY: In compliance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3501 et seq.), this notice
Paper Comments
announces that the Information
• Send paper comments in triplicate
Collection Requirements (ICRs)
to Nancy M. Morris, Secretary,
abstracted below have been forwarded
Securities and Exchange Commission,
to the Office of Management and Budget
100 F Street, NE., Washington, DC
(OMB) for review and comment. The
20549–1090.
ICRs describe the nature of the
All submissions should refer to File
information collection and its expected
Number SR–OCC–2005–23. This file
burden. The Federal Register notice
number should be included on the
with a 60-day comment period soliciting
subject line if e-mail is used. To help the comments on the following collections
Commission process and review your
of information was published on March
comments more efficiently, please use
15, 2006 (71 FR 13452)
only one method. The Commission will DATES: Comments must be submitted on
post all comments on the Commission’s or before June 19, 2006.
Internet Web site (https://www.sec.gov/
FOR FURTHER INFORMATION CONTACT: Mr.
rules/sro.shtml). Copies of the
Robert Brogan, Office of Planning and
submission, all subsequent
Evaluation Division, RRS–21, Federal
amendments, all written statements
Railroad Administration, 1120 Vermont
with respect to the proposed rule
Ave., NW., Mail Stop 25, Washington,
change that are filed with the
DC 20590 (telephone: (202) 493–6292)
Commission, and all written
or Victor Angelo, Office of Support
communications relating to the
Systems, RAD–43, Federal Railroad
proposed rule change between the
Administration, 1120 Vermont Ave.,
Commission and any person, other than NW., Mail Stop 35, Washington, DC
those that may be withheld from the
20590 (telephone: (202) 493–6470).
public in accordance with the
(These telephone numbers are not tollprovisions of 5 U.S.C. 552, will be
free.)
available for inspection and copying in
SUPPLEMENTARY INFORMATION: The
the Commission’s Public Reference
Paperwork Reduction Act of 1995
Section, 100 F Street, NE., Washington,
(PRA), Public Law No. 104–13, section
DC 20549. Copies of such filing also will
2, 109 Stat. 163 (1995) (codified as
be available for inspection and copying
revised at 44 U.S.C. 3501–3520), and its
at the principal office of OCC and on
implementing regulations, 5 CFR part
OCC’s Web site at https://
1320, require Federal agencies to issue
www.optionsclearing.com.
two notices seeking public comment on
All comments received will be posted
information collection activities before
without change; the Commission does
OMB may approve paperwork packages.
not edit personal identifying
44 U.S.C. 3506, 3507; 5 CFR 1320.5,
information from submissions. You
1320.8(d)(1), 1320.12. On March 15,
should submit only information that
2006, FRA published a 60-day notice in
you wish to make available publicly. All
the Federal Register soliciting comment
submissions should refer to File
on ICRs that the agency was seeking
Number SR–OCC–2005–23 and should
OMB approval. 71 FR 13452. FRA
be submitted on or before June 9, 2006.
received no comments after issuing this
For the Commission by the Division of
notice. Accordingly, DOT announces
Market Regulation, pursuant to delegated
that these information collection
authority.12
activities have been re-evaluated and
Jill M. Peterson,
certified under 5 CFR 1320.5(a) and
Assistant Secretary.
forwarded to OMB for review and
[FR Doc. E6–7624 Filed 5–18–06; 8:45 am]
approval pursuant to 5 CFR 1320.12(c).
Before OMB decides whether to
BILLING CODE 8010–01–P
approve these proposed collections of
12 17 CFR 200.30–3(a)(12).
information, it must provide 30 days for
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]]>Agencies
[Federal Register Volume 71, Number 97 (Friday, May 19, 2006)]
[Notices]
[Pages 29206-29209]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-7624]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53794; File No. SR-OCC-2005-23]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of a Proposed Rule Change Relating to the Use of
Margin Deposit in the Event of a Clearing Member Liquidation
May 11, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 16, 2004, 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would have two complementary purposes. It
would (1) eliminate certain unnecessary restrictions on the use of
margin in the liquidation of a suspended Clearing Member under Chapter
XI of the Rules and (2) ensure that other restrictions on the use of
margin that are appropriately imposed in the By-Laws are properly
reflected in Chapter XI of the Rules.
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),
[[Page 29207]]
and (C) below, of the most significant aspects of such statements.\2\
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\2\ The Commission has modified parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Provisions in OCC's By-Laws relating to the potential use of
securities and other margin assets in the event of a Clearing Member's
liquidation currently restrict the use of such assets in ways not
required under applicable laws and regulations. In addition, certain
provisions of OCC's Rules applicable to Clearing Member liquidations do
not fully or clearly reflect limitations imposed by the By-Laws.
OCC is proposing to amend Chapter XI of the Rules to more precisely
reflect appropriate limitations on the use of Clearing Member margin
deposits and is proposing to amend provisions of the By-Laws to allow
OCC to make use of those margin deposits to the fullest extent
consistent with (i) applicable customer protection provisions and (ii)
the ability of OCC and Clearing Member systems to identify margin
assets subject to those provisions.
Article VI, Section 3 of the By-Laws sets out a number of different
types of accounts that a Clearing Member may establish and maintain on
OCC's books. These accounts include firm accounts, separate market-
maker's accounts, combined market-makers' accounts, customers'
accounts, and others. For each of these account types, Section 3
provides that OCC shall have a lien on property in the account and
specifies the extent of the obligations secured by the lien. For
example, in the case of the firm lien account, Section 3(a) of Article
VI states that ``the Corporation shall have a lien on all positions and
on all other securities, margin and other funds in such account as
security for all of the Clearing Member's obligations to the
Corporation * * *.'' This language permits all of the Clearing Member's
assets on deposit with OCC with respect to the firm account to be
applied to any obligation of the Clearing Member to OCC regardless of
whether that obligation arises from the firm account or any other
account. This is appropriate in that, generally speaking, the Clearing
Member may deposit with respect to the firm account only those assets
that it is permitted under applicable law to treat as its own. Such
assets include all cash not required by Rule 15c3-3\3\ to be deposited
in a special reserve bank account for the benefit of customers and any
securities that belong to the Clearing Member and not to its customers
as that term is defined in Rules 15c2-1 and 8c-1 (``hypothecation
rules'').\4\
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\3\ 17 CFR 240.15c3-3.
\4\ 17 CFR 240.15c2-1 and 240.8c-1.
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The lien language applicable to assets in other types of accounts,
however, restricts the application of margin assets to obligations of
the Clearing Member arising from that particular account. For example,
in the case of a combined market-makers' account other than a
proprietary combined market-makers' account, Section 3(c) of Article VI
states that ``the Corporation shall have a lien on all long positions,
securities, margin and other funds in such combined Market-Maker's
account with the Clearing Member as security for the Clearing Member's
obligations to the Corporation in respect of all Exchange transactions
effected through such account, short positions maintained in such
account, and exercise notices assigned to such account * * *.'' Under
this language, OCC's lien on margin assets deposited with respect to a
combined market-makers' account does not secure any obligations of the
Clearing Member other than those arising from this account.\5\
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\5\ In some cases, however, multiple accounts of the same
account type are treated as a single account as provided in
Interpretation .02 following Article VI, Section 3 of the By-Laws.
Thus, for example, if a clearing member maintains more than one
combined market makers' account for associated market makers, those
accounts would be treated as a single account for liquidation
purposes. Similarly, multiple securities customers' accounts would
be treated as a single securities customers' account for liquidation
purposes.
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These limitations on the use of assets in an account to obligations
arising from the same account were adopted in order to avoid violation
by Clearing Members of the hypothecation rules cited above.\6\ The
rules containing these limitations, which rules are substantially
identical to one another, provide in pertinent part that a broker or
dealer may not permit securities carried for the account of any
customer to be commingled with securities ``carried for any person
other than a bona fide customer under a lien for a loan made to such
broker or dealer.''\7\ Although it is not at all clear that this
language should apply to OCC's lien, which is not a ``lien for a loan''
in the ordinary sense, OCC has historically taken the conservative view
that it does apply and does not propose now to do otherwise.
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\6\ The limitation is actually more restrictive than would be
required under the hypothecation rules because OCC could lawfully
apply assets in the account to obligations arising from the
customers' account and any other accounts in which positions of
securities customers as defined in the hypothecation rules are
carried. Similarly, assets in the public customers' account could be
applied to obligations arising from a market-maker account. As a
matter of policy, however, OCC has maintained the separation
continued here.
\7\ 17 CFR 240.15c2-1(a)(2) and 240.8c-1(a)(2). The term
customer is defined in paragraph (b)(1) of these rules not to
include partners, officers, or directors of the broker-dealer or a
participant in a joint account with a broker-dealer. Unlike Rule
15c3-3, however, the hypothecation rules do not exclude broker-
dealers from the definition of customer. Accordingly, market-makers
that do not have any of these specified relationships with their
clearing broker must be treated as customers for purposes of the
hypothecation rules.
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Nevertheless, it is clear that the hypothecation rules apply only
to ``securities carried for the account of any customer.'' Assets other
than securities are not subject to the rule. Thus, a Clearing Member is
not required to segregate cash received by a Clearing Member from any
securities customer from other cash deposited by the Clearing Member
with OCC as margin. Subject to the requirement to fund its special
reserve bank account under Rule 15c3-3(e) and to fund a special reserve
bank account for any proprietary account of an introducing broker
dealer (``PAIB'') account that the broker-dealer has agreed to
maintain, a broker-dealer may treat cash received from securities
customers as its own. Therefore, a Clearing Member is permitted to
deposit cash (other than cash received from commodity customers, which
is required to be segregated under provisions of the Commodity Exchange
Act [''CEA'']), as margin for any of its accounts at OCC without regard
to the source of the cash. Accordingly, the lien language applicable to
combined market-makers' accounts and certain other account types is
overly restrictive as applied to cash and any other non-securities
assets that might be deposited as margin in an account.\8\ OCC's lien
could lawfully be applied to such non-securities assets to secure any
obligation of the Clearing Member to the same extent as if the cash had
been deposited with respect to the Clearing Member's firm lien account.
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\8\ At present, the only other non-securities assets that may be
deposited as margin are letters of credit (``LOCs''). LOCs are
subject to special OCC rules in that an LOC may be secured by
customer securities pledged by the broker-dealer to the issuer of
the LOC. In such a situation, the LOC would be subject to the
restrictions applicable to the securities. The broker-dealer may
comply with those restrictions under OCC's Rules by designating the
LOC as a ``restricted'' LOC and by specifying which account type is
secured by the LOC.
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It is also true that when securities other than customer securities
are deposited with OCC as margin with respect to a customer account
(other than a commodity customer account where securities must be
segregated pursuant to provisions of the CEA),
[[Page 29208]]
those securities would not for that reason alone have to be treated as
securities carried for the account of any customer, and OCC's lien
could lawfully apply. However, there are no systems in place that allow
OCC to distinguish between customer and non-customer securities when
they are deposited as margin for a customer account, including a
market-maker account. Accordingly, OCC will continue to treat all
securities deposited as margin for any securities account other than a
proprietary account as if the securities were customer securities for
purposes of the hypothecation rules.
In order to address the discrepancies described above, OCC is
proposing to amend Article I, Section 1 of the By-Laws to define two
different types of liens: a ``general lien'' and a ``restricted lien.''
Assets subject to a general lien would serve as security for all
obligations of the Clearing Member to OCC regardless of the origin or
nature of those obligations. The proposed rule change would also define
a ``general lien account'' as one in which OCC has a general lien over
all assets in the account. Thus, the firm account and any other
proprietary account, such as a proprietary market-maker's account,
would be a general lien account, and all general lien accounts would be
treated as a single firm lien account in a liquidation of the Clearing
Member. This is precisely the same result as under the present rules.
The definition of a restricted lien would provide that assets in an
account that are specified as subject to a restricted lien serve as
security only for obligations arising from that particular account or
from a specified group of accounts to which that account belongs.\9\ A
restricted lien account would be defined as an account in which
specified assets are subject to a restricted lien. All accounts other
than the various types of proprietary accounts would be restricted lien
accounts. However, not all assets in those accounts would be subject to
a restricted lien. Cash and any other non-securities assets in a
restricted lien account, because they are not subject to the
restrictions of the hypothecation rules, would be subject to a general
lien. However, an exception would be made for the securities customers'
account and the customer lien account where all assets, including cash,
would be subject only to a restricted lien. The reason for this
exception is that, although these non-securities assets are not subject
to the hypothecation rules, the provisions of Rule 15c3-3(e) and in
particular the reserve formula used in calculating the amount of funds
a Clearing Member is required to deposit in the special reserve bank
account for the exclusive benefit of customers provide a debit (i.e., a
reduction in the required deposit) reflecting ``[m]argin required and
on deposit with [OCC] for all option contracts written or purchased in
customer accounts.'' Given this debit in the reserve formula, it would
appear to be inconsistent to use funds in the account as collateral for
obligations other than those arising in such accounts. This limitation
is reflected in the proposed rule change.
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\9\ The reference to groups of accounts is necessary because,
for example, a clearing member may have multiple combined market
makers' accounts that would be liquidated as if they were a single
account. The same would be true if a clearing member had more than
one securities customers' account. These account groupings are
addressed in existing Interpretation .02 following Article VI,
Section 3 of the By-Laws.
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In order to eliminate unnecessary restrictions on the use of non-
securities assets in certain accounts as described above, OCC proposes
to modify the lien language appearing in the following paragraphs of
Article VI, Section 3: paragraph (a), to the extent applicable to firm
non-lien accounts; paragraph (b) to the extent applicable to separate
market-maker accounts other than proprietary market-maker accounts;
paragraph (c), to the extent applicable to combined market-makers'
accounts other than proprietary combined market-makers' accounts; and
paragraph (h) applicable to JBO Participants' accounts. The
modification necessary in each case is to provide that margin assets
deposited with respect to the applicable account and consisting of cash
and other non-securities collateral may be applied to any obligation of
the Clearing Member rather than only to obligations arising from that
account. This is accomplished by subjecting securities assets in the
accounts to a restricted lien while non-securities assets in certain of
the account are subject to a general lien. Other changes in Article VI,
Section 3 are non-substantive changes intended to make use of the newly
defined terms, to improve consistency, to eliminate repetition, and to
clarify ambiguities.\10\
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\10\ No changes of substance are proposed to be made with
respect to futures accounts subject to segregation requirements
under the CEA.
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In order to conform to the changes made in provisions of Article
VI, Section 3(a) relating to firm non-lien accounts and in Section 3(e)
relating to the securities customers' account, OCC is proposing to
delete the specific lien language applicable to unsegregated long
positions currently set forth in Rule 611. The extent of these liens
would be set forth in the cited provisions of Article VI, Section 3.
Notwithstanding the limitations of the existing lien language
described above applicable to accounts other than proprietary accounts,
these limitations are not fully reflected in the provisions of OCC's
Rule 1104(a), which governs the creation of a liquidating settlement
account and payments from that account in a Clearing Member
liquidation. Rule 1104(a) presently provides, in effect, that proceeds
from restricted letters of credit,\11\ unsegregated long positions, and
variation payments resulting from positions in security futures in a
public customers' account, may not be applied to obligations other than
those arising from the public customers' account. It does not similarly
restrict the use of proceeds of securities deposited directly as margin
for that account even though the application of such securities to
obligations arising out of other accounts would arguably be in
violation of the hypothecation rules and even though such use would be
inconsistent with OCC's restricted lien on those securities. In the
event of a Clearing Member liquidation prior to the approval of this
rule change, OCC would observe the limitations of the hypothecation
rules and the lien language as it presently exists in OCC's By-Laws
notwithstanding that those limitations are not fully reflected in Rule
1104(a). Those limitations are fully consistent with OCC's risk
management system in that OCC has never set margin or clearing fund
requirements with the expectation that it would have excess collateral
in one account that could be applied against obligations arising in
other accounts. OCC determines its risk margin requirements on each
Clearing Member account independently.
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\11\ OCC is proposing to amend the definition of restricted
letter of credit in Rule 101 in order to make it more generic. In
current practice, restricted letters of credit are used not only for
the securities customers' account but may also be used in a
segregated futures account. The letter of credit must indicate on
its face the purpose or purposes to which it may be applied.
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Nevertheless, if in liquidating any Clearing Member account a
shortfall occurred, it would obviously be in the interest of OCC, its
Clearing Members, and the integrity of the clearing system if OCC were
able to apply the margin assets that it holds to the fullest extent
practicable without violating applicable law. In addition, the intended
restrictions on the use of proceeds of positions and securities in the
securities customers' account as well as in market-maker accounts and
other restricted lien accounts as OCC is now proposing to
[[Page 29209]]
refer to them generically should be clearly stated. By making use of
the newly defined terms general lien and restricted lien and by relying
on the provisions of Article VI, Section 3 as proposed to be amended,
only relatively minor amendments to the provisions of Rule 1104(a) are
required to effectuate the dual purposes of this proposed rule change.
Other proposed changes in Rule 1104 are intended for clarification only
and are not substantive.
OCC believes that the proposed rule change is consistent with the
purposes and requirements of Section 17A of the Act because it will
promote the prompt and accurate clearance and settlement of securities
transactions, remove impediments to the mechanisms of a national system
for the prompt and accurate clearance and settlement of securities
transactions, and assure the safeguarding of securities and funds in
the custody or control of OCC by clarifying limitations on the use of
certain customer property in the event of a Clearing Member insolvency
while protecting the clearing system by permitting broader use of other
collateral deposited by Clearing Members.
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.
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 proposed rule change, and none have been received.
III. 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 up to ninety days of such date 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 the proposed rule change or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
VI. 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 (https://
www.sec.gov/rules/sro.shtml) or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-OCC-2005-23 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2005-23. This file
number should be included on the subject line if e-mail 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 (https://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 inspection and
copying in the Commission's Public Reference Section, 100 F Street,
NE., Washington, DC 20549. 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 https://www.optionsclearing.com.
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-2005-23
and should be submitted on or before June 9, 2006.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-7624 Filed 5-18-06; 8:45 am]
BILLING CODE 8010-01-P
