Self-Regulatory Organizations; the Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Cleared Contracts Carried in a Proprietary Account, 73401-73404 [E7-24984]
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Federal Register / Vol. 72, No. 247 / Thursday, December 27, 2007 / Notices
The Commission further believes that
the proposal is consistent with section
11A(a)(1)(C)(iii) of the Act,24 which sets
forth Congress’ finding that it is in the
public interest and appropriate for the
protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for and
transactions in securities. Quotation and
last-sale information for the Notes will
be widely disseminated pursuant to the
CTA Plan. Moreover, the Index value
will be calculated and disseminated at
least every 15 seconds on a price return
basis from 9:30 a.m. to 4 p.m. Eastern
time by the Chicago Mercantile
Exchange. In addition, Alerian will
announce any changes to the Index on
its publicly available Web site. In sum,
the Commission believes that the
proposal is reasonably designed to
facilitate access to and provide fair
disclosure of information that could
assist investors in properly valuing the
Notes.
The Commission finds that the
Exchange’s proposed rules and
procedures for trading of the Notes are
consistent with the Act. The Notes will
trade as equity securities, thus rendering
trading in the Notes subject to the
Exchange’s existing rules governing the
trading of equity securities.
In support of this proposal, the
Exchange has made the following
representations:
1. The Exchange would utilize its
existing surveillance procedures
applicable to derivative products to
monitor trading in the Notes. These
procedures are adequate to properly
monitor Exchange trading of the Notes
in all trading sessions and to deter and
detect violations of Exchange rules. The
Exchange may obtain information via
the ISG from other exchanges that are
members or affiliates of the ISG.
2. If the Index value applicable to a
series of Notes is not being calculated
and disseminated as required, the
Exchange may halt trading during the
day in which the interruption to the
calculation or dissemination of the
Index value occurs. If the interruption to
the calculation and dissemination of the
Index value persists past the trading day
in which it occurred, the Exchange
would halt trading no later than the
beginning of the trading day following
the interruption.
3. Prior to the commencement of
trading, the Exchange will inform its
Growth Funds, none of which met the trading
volume requirement of the generic listing criteria
for NYSE).
24 15 U.S.C. 78k–1(a)(1)(C)(iii).
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ETP Holders in an Information Bulletin
of the special characteristics and risks
associated with trading the Notes.
This order is conditioned on the
Exchange’s adherence to the foregoing
representations.
The Commission finds good cause for
approving this proposal before the
thirtieth day after the publication of
notice thereof in the Federal Register.
The Commission notes that it has
previously approved exchange rules that
contemplate the listing and trading of
derivative securities products based on
indices that were composed of stocks
that did not meet certain generic listing
criteria by similar amounts.25 Although
the Notes do not meet the initial
‘‘generic’’ listing requirement of NYSE
Arca Equities Rule 5.2(j)(6) and
therefore cannot be listed pursuant to
Rule 19b–4(e) under the Act, the
Commission believes that the Notes are
substantially similar to the other equity
index-linked securities trading on the
Exchange and will otherwise comply
with all other ‘‘generic’’ listing
requirements applicable to Equity
Index-Linked Securities under NYSE
Arca Equities Rule 5.2(j)(6)(B)(I)(1).26
The listing and trading of the Notes do
not appear to present any new or
significant regulatory concerns.
Therefore, the Commission believes that
accelerating approval of this proposal
would allow the Notes to trade on the
Exchange without undue delay and
should generate additional competition
in the market for such products.
V. Conclusion
IT IS THEREFORE ORDERED,
pursuant to section 19(b)(2) of the Act,27
that the proposed rule change (SR–
NYSEArca–2007–119) as modified by
Amendment No. 1 thereto, be and it
hereby is, approved on an accelerated
basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–24990 Filed 12–26–07; 8:45 am]
BILLING CODE 8011–01–P
25 See
28 17
PO 00000
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
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[Release No. 34–56991; File No. SR–OCC–
2007–15]
Self-Regulatory Organizations; the
Options Clearing Corporation; Notice
of Filing and Immediate Effectiveness
of a Proposed Rule Change Relating to
Cleared Contracts Carried in a
Proprietary Account
December 19, 2007.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 notice is hereby given that on
October 23, 2007, 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. OCC filed
the proposed rule change pursuant to
section 19(b)(3)(A)(i) of the Act 2 and
Rule 19b–4(f)(1) 3 thereunder so that the
proposal was effective upon filing with
the Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The proposed rule change would
clarify that existing provisions of OCC’s
By-laws and Rules constitute a ‘‘crossmargining or similar arrangement’’ for
purposes of the United States
Bankruptcy Code with respect to cleared
contracts carried in any proprietary
account at OCC to the extent that
commodity contracts and securities
contracts are permitted to be carried in
such account.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of such statements.4
U.S.C. 78s(b)(1).
U.S.C. 78s–1(b)(3)(A)(i).
3 17 CFR 240.19b–4(f)(1).
4 The Commission has modified parts of these
statements.
2 15
26 Id.
27 15
SECURITIES AND EXCHANGE
COMMISSION
1 15
supra note 23.
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(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The purpose of the proposed rule
change is to add Interpretation and
Policy .02 to section 3 of Article VI of
OCC’s By-laws to clarify that OCC’s
existing By-laws and Rules constitute ‘‘a
cross-margining agreement or similar
arrangement’’ for purposes of the United
States Bankruptcy Code with respect to
cleared contracts carried in any
proprietary account at OCC to the extent
that commodity futures and futures
options (collectively ‘‘commodity
contracts’’) are permitted to be carried
in such account along with securities
options and other securities
(collectively ‘‘securities contracts’’).5
Where such positions are permitted to
be so commingled, margin is calculated
under Chapter VI of OCC’s Rules based
on the net risk of all such cleared
contracts whether they are securities
contracts or commodity contracts.
‘‘Proprietary accounts’’ within the scope
of Interpretation and Policy .02 include
(i) a firm account, (ii) a separate marketmaker’s account for which the marketmaker is a clearing member or a
proprietary market-maker trading for his
own account, (iii) a combined marketmaker’s account confined to the
exchange transactions of market-makers
who are clearing members or
proprietary market-makers trading for
their own accounts, (iv) an OCC
proprietary X–M account, or (v) a
proprietary futures professional
account. Under OCC’s By-laws, all such
proprietary accounts must be confined
to the transactions of the clearing
member itself and of such other persons
as are not required to be treated as
‘‘customers’’ of the clearing member
either under the definition in
Commodity Futures Trading
Commission (‘‘CFTC’’) Regulation
1.3(k) 6 or under Commission Rules 8c–
1,7 15c2–1,8 or 15c3–3,9 or Commission
staff interpretations or no-action letters
thereunder.10
5 Security futures carried in a proprietary account
would be considered to be both securities contracts
and commodity contracts for purposes of this rule
filing.
6 17 CFR 1.3(k).
7 17 CFR 240.8c–1.
8 17 CFR 240.15c2–1.
9 17 CFR 240.15c3–3.
10 Article VI, Section 3(a) of OCC’s By-laws
provides that a ‘‘firm account * * * shall be
confined to (i) the Exchange transactions in cleared
securities other than security futures of such
Clearing Member’s non-customers [which is defined
in terms of rules under the Securities Exchange Act
of 1934], (ii) the Exchange transactions in (x)
futures other than security futures and (y) futures
options of persons whose transactions are not
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Section 4d of the Commodity
Exchange Act (‘‘CEA’’) 11 and CFTC
regulations thereunder require that
futures and futures options traded on a
‘‘designated contract market’’ and
carried for the account of a ‘‘customer’’
as defined in CFTC Regulation 1.3(k)
must be segregated by the carrying
futures commission merchant (‘‘FCM’’)
from funds or positions that are
‘‘proprietary’’ to the carrying FCM.
Although Section 4d and the CFTC
regulations permit the property of
separate customers of the same FCM to
be commingled at the clearinghouse in
segregated customer accounts, CFTC
Regulation 1.22 provides that
‘‘[c]ustomer funds shall not be used to
carry trades or positions of the same
commodity and/or option customer
other than in commodities or
commodity options traded through the
facilities of a [CFTC-designated]
contract market.’’ 12 Accordingly, OCC
carries trades and positions of
commodity customers in separate
segregated funds accounts in
compliance with the CFTC’s regulations
and except in accordance with specific
cross-margining orders of the CFTC does
not commingle these funds with the
funds of securities options customers.
However, Section 4d and the cited
regulations do not apply to accounts
that are ‘‘proprietary’’ within the
required to be treated as the transactions of futures
customers, and (iii) the Exchange transactions in
security futures of persons whose transactions are
not required to be treated as the transactions either
of securities customers or of futures customers.’’
The term ‘‘futures customer’’ is defined in Article
I of OCC’s By-Laws as ‘‘a person whose positions
are carried by a futures commission merchant
* * * in a futures account required to be segregated
under Section 4d of the Commodity Exchange Act
and regulations of the Commodity Futures Trading
Commission thereunder.’’ Article VI, Section 3(c)
provides that a proprietary combined marketmakers’ account is confined to transactions of
‘‘proprietary Market-Makers,’’ which is defined to
include ‘‘any participant, as such, in an account
that is not required to be segregated under Section
4d of the Commodity Exchange Act.’’ A ‘‘separate
Market-Maker’s account’’ under Section 3(b) is
similarly limited to a ‘‘proprietary Market-Maker.’’
An ‘‘OCC Proprietary X–M account (together with
the corresponding proprietary X–M account at a
participating futures clearing organization)’’ is
defined in the applicable cross-margining
agreements to be an account of a person whose
account is a ‘‘proprietary account’’ within the
meaning of Section 1.3(y) of CFTC regulations.
Finally, a ‘‘proprietary futures professional
account’’ is defined in Article I of the By-laws to
be an account of a futures professional that is not
a futures customer. Accordingly, all of these
accounts are defined in terms that exclude any
person whose property is required to be segregated
under Section 4d of the CEA. Moreover, a futures
commission merchant is itself obligated to carry the
positions of futures customers in CFTC segregated
accounts and would be in violation of that
obligation by carrying them in any account at OCC
that is not such an account.
11 7 U.S.C. 6d.
12 17 CFR 1.22.
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meaning of CFTC Regulation 1.3(y).13
There is no prohibition against
commingling of proprietary funds of an
FCM relating to its futures activities
with other proprietary funds of the same
FCM at the clearinghouse level.
Accordingly, a clearing member may
maintain both securities contracts and
commodity contracts in any proprietary
account to the extent that such
inclusion is otherwise consistent with
the purposes of the account. The result
is that clearing level margin
requirements applicable to any such
proprietary account are determined
under OCC Rule 601 based upon the net
liquidating value of all positions carried
in the account. Therefore, the margin
that would otherwise be required on
positions in securities contracts may be
reduced by offsetting positions in
commodity contracts and vice versa.
Section 561(b)(2)(A) of the United
States Bankruptcy Code (‘‘Code’’) 14
contains certain prohibitions against the
offset by a party of obligations to a
‘‘debtor’’ (i.e., a person subject to a
bankruptcy proceeding under the Code)
arising under or in connection with a
commodity contract as defined under
section 761(4) of the Code 15 against any
claim arising under or in connection
with other instruments including
securities contracts ‘‘except to the extent
that the party has positive net equity in
its commodity accounts at the debtor.’’
Section 561(b)(2)(B) of the Code
contains a similar prohibition against
such offsets applicable to ‘‘another
commodity broker’’ having an obligation
to the debtor arising under or in
connection with a commodity contract
entered into on behalf of a ‘‘customer of
the debtor.’’ 16 The legislative history of
these provisions states, ‘‘Subsections
561(b)(2)(A) and (b)(2)(B) limit the
depletion of assets available for
distribution to customers of commodity
brokers.’’ 17
OCC recently adopted a ‘‘close-out
netting’’ rule, set forth in section 27 of
Article VI of OCC’s By-laws.18 Section
27 is intended to allow clearing
members to calculate their credit
exposure to OCC on a net basis for
balance sheet and regulatory capital
purposes to the extent consistent with
13 17
CFR 1.3(y).
U.S.C. 561(b)(2)(A).
15 11 U.S.C. 761(4). This very broad ‘‘commodity
contracts’’ definition should include commodity
futures and futures options and may include
security futures as well.
16 11 U.S.C. 561(b)(2)(B).
17 H.R. Rep. No. 109–31, part 1 at 132 (April 8,
2005).
18 Securities Exchange Act Release No. 56069
(July 13, 2007), 72 FR 39869 (July 20, 2007) (File
No. SR–OCC–2006–19).
14 11
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customer protection rules under the Act
and the CEA. Paragraph (d) of section 27
effectively permits netting of assets and
liabilities within proprietary accounts
without limitation as to whether the
assets and liabilities in the account arise
from securities contracts or commodity
contracts. Absent an applicable
exception, the prohibition in section
561(b)(2)(A) could be interpreted to
limit such netting and make it
unenforceable to the extent that there
are both securities contracts and
commodity contracts in such
accounts.19 However, an exception to
the prohibition in section 561(b)(2)(A)
and section 561(b)(2)(B) was created for
cross-margining arrangements, and that
exception is applicable to the close-out
netting provided for in section 27 of
Article VI of OCC’s By-laws insofar as
such netting permits the offset of
commodity contracts against securities
contracts in proprietary accounts.
Section 561(b)(3)(A) of the Code
provides that ‘‘no provision of [Section
561(b)(2)(A) or (B)] shall prohibit the
offset of claims and obligations that
arise under a cross-margining agreement
or similar arrangement that has been
submitted to the [CFTC] under
paragraph (1) or (2) of section 5c(c) of
the [CEA] and has not been abrogated or
rendered ineffective by the [CFTC].’’ All
of OCC’s By-laws and Rules have been
submitted under Paragraph (1) or (2) of
section 5c(c) of the CEA, and none has
been abrogated or rendered ineffective
by the CFTC. As commonly understood,
a ‘‘cross-margining agreement’’ includes
an arrangement under which
commodity contracts and securities
contracts are margined together as a
single portfolio.20 This is precisely what
19 Section 561(b)(2)(B) should not apply to closeout netting in the event of an insolvency of OCC.
Section 561(b)(2)(B) would appear to provide in
effect that a clearing member may not net an
obligation to OCC arising from a commodity
contract entered into on behalf of a ‘‘customer of
the debtor’’ against amounts owed by OCC to the
clearing member arising under a securities contract
or other contracts other than commodity contracts.
Because OCC would be the debtor, the term
‘‘customer of the debtor’’ would appear to refer to
a customer of OCC. OCC does not believe that a
clearing member would likely be deemed to have
entered into any commodity contract on behalf of
any party that would also be deemed to be a
customer of OCC for purposes of this provision, and
we therefore believe that Section 561(b)(2)(B)
should not be interpreted as limiting the
enforceability of any provisions of Section 27 of
Article VI of OCC’s By-laws. In any event, however,
Section 561(b)(2)(B) would be overridden by the
exception in Section 561(b)(3)(A) as set forth in the
proposed Interpretation and Policy.
20 Securities Exchange Act Release No. 26153
(October 3, 1988), 53 FR 39561 (October 3, 1988)
(File No. SR–OCC–86–17) approving the first crossmargining program between OCC and its
commodity clearing affiliate, The Intermarket
Clearing Corporation (‘‘ICC’’). CFTC approval of
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takes place under OCC By-laws and
Rules and its Rule 601 in particular in
all proprietary accounts to the extent
that they contain both securities
contracts and commodity contracts.
The original cross-margining program,
which was initiated between OCC and
ICC in 1988, was limited to proprietary
accounts.21 In connection with its
approval, the Commission stated that ‘‘it
appears that no statutory, Commission
or CFTC rule changes are required to
implement a cross-margining system for
proprietary accounts.’’ OCC rule
changes were necessary in 1988 in order
to implement proprietary crossmargining because OCC and ICC were
separate clearing organizations and
needed to have special arrangements
between them in order to combine
securities contracts cleared by OCC and
commodity contracts cleared by ICC for
margin purposes. However, when OCC
itself registered as a derivatives clearing
organization under the CEA, crossmargining in proprietary accounts was
an automatic consequence of that dual
registration. Of course, a rule filing was
necessary in order to combine customer
positions in security contracts and
commodity contracts for margin
purposes even where OCC clears both
the commodity contracts and the
securities contracts. Accordingly, OCC
submitted appropriate rule filings to
both the Commission and the CFTC and
received the necessary approval to
create an internal cross-margining
program for non-proprietary market
professionals.22 In the case of
proprietary cross-margining, however,
no such approval is required, and this
rule filing is being submitted simply in
order to clarify OCC’s interpretation of
its existing rules.
Since its approval of the first crossmargining program in 1988,23 the
Commission has repeatedly expressed
its support for such programs and has
found that they are consistent with the
Act and in particular with section 17A
of the Act. Indeed, there has been wide
support for cross-margining systems
over many years. For example, the
Report of the Presidential Task Force on
Market Mechanisms (‘‘Brady Report’’)
noted that the absence of an effective
cross-margining system for futures and
securities options markets contributed
that cross-margining program was memorialized in
a letter from Jean A. Webb, Secretary, to George S.
Hender, President, ICC (June 1, 1988).
21 Securities Exchange Act Release No. 26153.
22 The proposed rule change adopted By-Law
Article VI, Section 25. Securities Exchange Act
Release No. 50509 (Oct. 8, 2004), 69 FR 61289
(October 15, 2004) (File No. SR–OCC–2004–10) and
CFTC order issued November 5, 2004.
23 Securities Exchange Act Release No. 26153.
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to payment strains in October 1987.
Accordingly, the Brady Report
recommended that cross-margining be
allowed in order to permit market
participants with an investment in
futures to receive credit for a hedged
investment in stocks or options.24 The
President’s Working Group on Financial
Markets in its Interim Report concurred
recommending that the Commission and
CFTC not only approve the OCC/ICC
cross-margining program but facilitate
cross-margining among other clearing
agencies.25
The Commission has previously
found that cross-margining programs are
consistent with clearing agency
responsibilities under section 17A of the
Act. In so finding, the Commission
noted that cross-margining programs
reduce the risk that a clearing member
would become insolvent in a distressed
market and the corresponding risk that
one insolvency could lead to multiple
insolvencies in a ripple effect and that
they therefore enhance the security of
the clearing system.26
The proposed rule change is not
inconsistent with the rules of OCC
including any rule proposed to be
amended.
(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
The foregoing rule change has become
effective pursuant to section
19(b)(3)(A)(i) of the Act 27 and Rule 19b–
4(f)(1) 28 promulgated thereunder
because the proposal constitutes an
interpretation with respect to the
meaning, administration, or
enforcement of an existing rule of
24 Brady
Report at 66 (January 1988).
Report of the President’s Working
Group on Financial Markets, Appendix D at 11
(May 1988).
26 Securities Exchange Act Release No. 32708
(August 2, 1993) 58 FR 42586 (August 10, 1993)
(File No. SR–OCC–93–13).
27 15 U.S.C. 78s(b)(3)(A)(i).
28 17 CFR 240.19b–4(f)(1).
25 Interim
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OCC.29 At any time within sixty days of
the filing of the proposed rule change,
the Commission may summarily
abrogate such rule change if it appears
to the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
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–2007–15 and should
be submitted on or before January 17,
2008.
IV. Solicitation of Comments
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.30
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–24984 Filed 12–26–07; 8:45 am]
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–OCC–2007–15 on the
subject line.
mstockstill on PROD1PC66 with NOTICES
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–2007–15. 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
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of OCC. All
comments received will be posted
29 The Commission neither makes any findings
nor expresses any opinion with respect to OCC’s
representations and interpretations regarding the
application of the Bankruptcy Code.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56998; File No. SR–Amex–
2007–104]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Order Granting
Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1 Thereto, To List and
Trade Shares of Eleven Funds of the
ProShares Trust
December 19, 2007.
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
September 18, 2007, the American Stock
Exchange LLC (‘‘Amex’’ or ‘‘Exchange’’)
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 substantially prepared by the
Exchange. On December 18, 2007, Amex
filed Amendment No. 1 to the proposed
rule change. The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as amended, from interested persons
and is approving the proposed rule
change, as modified by Amendment No.
1, on an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade shares (‘‘Shares’’) of 11 funds
(‘‘Funds’’) of the ProShares Trust
(‘‘Trust’’) based on a domestic stock
index and several fixed income indexes.
The text of the proposed rule change
is available at https://www.amex.com, at
30 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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the Exchange 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,
Amex 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 III below. Amex 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list under
amended Rule 1000A–AEMI, shares of
10 new funds of the Trust that are
designated as Short Funds or UltraShort
Funds, and one new fund designated as
an Ultra Fund. Amex Rules 1000A–
AEMI and Rule 1001A through 1005A
provide standards for the listing of
Index Fund Shares, which are securities
issued by an open-end management
investment company for exchange
trading. These securities are registered
under the Investment Company Act of
1940 (‘‘1940 Act’’) as well as the Act.
Index Fund Shares are defined in Rule
1000A–AEMI(b)(1) as securities based
on a portfolio of stocks or fixed income
securities that seek to provide
investment results that correspond
generally to the price and yield of a
specified foreign or domestic stock
index or fixed income securities index.
Rule 1000A–AEMI(b)(2) permits the
Exchange to list and trade Index Fund
Shares that seek to provide investment
results that exceed the performance of
an underlying securities index by a
specified multiple, or that seek to
provide investment results that
correspond to a specified multiple of the
inverse or opposite of the index’s
performance. The Commission has
recently approved the listing and
trading of certain Ultra Funds, Short
Funds and UltraShort Funds based on a
variety of underlying indexes.3
3 See Securities Exchange Act Release No. 52553
(October 3, 2005), 70 FR 59100 (October 11, 2005)
(SR–Amex–2004–62)(’’Original Order’’); see also
Securities Exchange Act Release Nos. 54040 (June
23, 2006), 71 FR 37669 (June 30, 2006) (SR–Amex
2006–41); 55117 (January 17, 2007), 72 FR 3442
(January 25, 2007) (SR–Amex–2006–101).
E:\FR\FM\27DEN1.SGM
27DEN1
]]>Agencies
[Federal Register Volume 72, Number 247 (Thursday, December 27, 2007)]
[Notices]
[Pages 73401-73404]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24984]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56991; File No. SR-OCC-2007-15]
Self-Regulatory Organizations; the Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Cleared Contracts Carried in a Proprietary Account
December 19, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 23, 2007, 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. OCC filed the proposed rule change pursuant to
section 19(b)(3)(A)(i) of the Act \2\ and Rule 19b-4(f)(1) \3\
thereunder so that the proposal was effective upon filing with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78s-1(b)(3)(A)(i).
\3\ 17 CFR 240.19b-4(f)(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 clarify that existing provisions of
OCC's By-laws and Rules constitute a ``cross-margining or similar
arrangement'' for purposes of the United States Bankruptcy Code with
respect to cleared contracts carried in any proprietary account at OCC
to the extent that commodity contracts and securities contracts are
permitted to be carried in such account.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\4\
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\4\ The Commission has modified parts of these statements.
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[[Page 73402]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to add Interpretation
and Policy .02 to section 3 of Article VI of OCC's By-laws to clarify
that OCC's existing By-laws and Rules constitute ``a cross-margining
agreement or similar arrangement'' for purposes of the United States
Bankruptcy Code with respect to cleared contracts carried in any
proprietary account at OCC to the extent that commodity futures and
futures options (collectively ``commodity contracts'') are permitted to
be carried in such account along with securities options and other
securities (collectively ``securities contracts'').\5\ Where such
positions are permitted to be so commingled, margin is calculated under
Chapter VI of OCC's Rules based on the net risk of all such cleared
contracts whether they are securities contracts or commodity contracts.
``Proprietary accounts'' within the scope of Interpretation and Policy
.02 include (i) a firm account, (ii) a separate market-maker's account
for which the market-maker is a clearing member or a proprietary
market-maker trading for his own account, (iii) a combined market-
maker's account confined to the exchange transactions of market-makers
who are clearing members or proprietary market-makers trading for their
own accounts, (iv) an OCC proprietary X-M account, or (v) a proprietary
futures professional account. Under OCC's By-laws, all such proprietary
accounts must be confined to the transactions of the clearing member
itself and of such other persons as are not required to be treated as
``customers'' of the clearing member either under the definition in
Commodity Futures Trading Commission (``CFTC'') Regulation 1.3(k) \6\
or under Commission Rules 8c-1,\7\ 15c2-1,\8\ or 15c3-3,\9\ or
Commission staff interpretations or no-action letters thereunder.\10\
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\5\ Security futures carried in a proprietary account would be
considered to be both securities contracts and commodity contracts
for purposes of this rule filing.
\6\ 17 CFR 1.3(k).
\7\ 17 CFR 240.8c-1.
\8\ 17 CFR 240.15c2-1.
\9\ 17 CFR 240.15c3-3.
\10\ Article VI, Section 3(a) of OCC's By-laws provides that a
``firm account * * * shall be confined to (i) the Exchange
transactions in cleared securities other than security futures of
such Clearing Member's non-customers [which is defined in terms of
rules under the Securities Exchange Act of 1934], (ii) the Exchange
transactions in (x) futures other than security futures and (y)
futures options of persons whose transactions are not required to be
treated as the transactions of futures customers, and (iii) the
Exchange transactions in security futures of persons whose
transactions are not required to be treated as the transactions
either of securities customers or of futures customers.'' The term
``futures customer'' is defined in Article I of OCC's By-Laws as ``a
person whose positions are carried by a futures commission merchant
* * * in a futures account required to be segregated under Section
4d of the Commodity Exchange Act and regulations of the Commodity
Futures Trading Commission thereunder.'' Article VI, Section 3(c)
provides that a proprietary combined market-makers' account is
confined to transactions of ``proprietary Market-Makers,'' which is
defined to include ``any participant, as such, in an account that is
not required to be segregated under Section 4d of the Commodity
Exchange Act.'' A ``separate Market-Maker's account'' under Section
3(b) is similarly limited to a ``proprietary Market-Maker.'' An
``OCC Proprietary X-M account (together with the corresponding
proprietary X-M account at a participating futures clearing
organization)'' is defined in the applicable cross-margining
agreements to be an account of a person whose account is a
``proprietary account'' within the meaning of Section 1.3(y) of CFTC
regulations. Finally, a ``proprietary futures professional account''
is defined in Article I of the By-laws to be an account of a futures
professional that is not a futures customer. Accordingly, all of
these accounts are defined in terms that exclude any person whose
property is required to be segregated under Section 4d of the CEA.
Moreover, a futures commission merchant is itself obligated to carry
the positions of futures customers in CFTC segregated accounts and
would be in violation of that obligation by carrying them in any
account at OCC that is not such an account.
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Section 4d of the Commodity Exchange Act (``CEA'') \11\ and CFTC
regulations thereunder require that futures and futures options traded
on a ``designated contract market'' and carried for the account of a
``customer'' as defined in CFTC Regulation 1.3(k) must be segregated by
the carrying futures commission merchant (``FCM'') from funds or
positions that are ``proprietary'' to the carrying FCM. Although
Section 4d and the CFTC regulations permit the property of separate
customers of the same FCM to be commingled at the clearinghouse in
segregated customer accounts, CFTC Regulation 1.22 provides that
``[c]ustomer funds shall not be used to carry trades or positions of
the same commodity and/or option customer other than in commodities or
commodity options traded through the facilities of a [CFTC-designated]
contract market.'' \12\ Accordingly, OCC carries trades and positions
of commodity customers in separate segregated funds accounts in
compliance with the CFTC's regulations and except in accordance with
specific cross-margining orders of the CFTC does not commingle these
funds with the funds of securities options customers.
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\11\ 7 U.S.C. 6d.
\12\ 17 CFR 1.22.
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However, Section 4d and the cited regulations do not apply to
accounts that are ``proprietary'' within the meaning of CFTC Regulation
1.3(y).\13\ There is no prohibition against commingling of proprietary
funds of an FCM relating to its futures activities with other
proprietary funds of the same FCM at the clearinghouse level.
Accordingly, a clearing member may maintain both securities contracts
and commodity contracts in any proprietary account to the extent that
such inclusion is otherwise consistent with the purposes of the
account. The result is that clearing level margin requirements
applicable to any such proprietary account are determined under OCC
Rule 601 based upon the net liquidating value of all positions carried
in the account. Therefore, the margin that would otherwise be required
on positions in securities contracts may be reduced by offsetting
positions in commodity contracts and vice versa.
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\13\ 17 CFR 1.3(y).
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Section 561(b)(2)(A) of the United States Bankruptcy Code
(``Code'') \14\ contains certain prohibitions against the offset by a
party of obligations to a ``debtor'' (i.e., a person subject to a
bankruptcy proceeding under the Code) arising under or in connection
with a commodity contract as defined under section 761(4) of the Code
\15\ against any claim arising under or in connection with other
instruments including securities contracts ``except to the extent that
the party has positive net equity in its commodity accounts at the
debtor.'' Section 561(b)(2)(B) of the Code contains a similar
prohibition against such offsets applicable to ``another commodity
broker'' having an obligation to the debtor arising under or in
connection with a commodity contract entered into on behalf of a
``customer of the debtor.'' \16\ The legislative history of these
provisions states, ``Subsections 561(b)(2)(A) and (b)(2)(B) limit the
depletion of assets available for distribution to customers of
commodity brokers.'' \17\
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\14\ 11 U.S.C. 561(b)(2)(A).
\15\ 11 U.S.C. 761(4). This very broad ``commodity contracts''
definition should include commodity futures and futures options and
may include security futures as well.
\16\ 11 U.S.C. 561(b)(2)(B).
\17\ H.R. Rep. No. 109-31, part 1 at 132 (April 8, 2005).
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OCC recently adopted a ``close-out netting'' rule, set forth in
section 27 of Article VI of OCC's By-laws.\18\ Section 27 is intended
to allow clearing members to calculate their credit exposure to OCC on
a net basis for balance sheet and regulatory capital purposes to the
extent consistent with
[[Page 73403]]
customer protection rules under the Act and the CEA. Paragraph (d) of
section 27 effectively permits netting of assets and liabilities within
proprietary accounts without limitation as to whether the assets and
liabilities in the account arise from securities contracts or commodity
contracts. Absent an applicable exception, the prohibition in section
561(b)(2)(A) could be interpreted to limit such netting and make it
unenforceable to the extent that there are both securities contracts
and commodity contracts in such accounts.\19\ However, an exception to
the prohibition in section 561(b)(2)(A) and section 561(b)(2)(B) was
created for cross-margining arrangements, and that exception is
applicable to the close-out netting provided for in section 27 of
Article VI of OCC's By-laws insofar as such netting permits the offset
of commodity contracts against securities contracts in proprietary
accounts.
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\18\ Securities Exchange Act Release No. 56069 (July 13, 2007),
72 FR 39869 (July 20, 2007) (File No. SR-OCC-2006-19).
\19\ Section 561(b)(2)(B) should not apply to close-out netting
in the event of an insolvency of OCC. Section 561(b)(2)(B) would
appear to provide in effect that a clearing member may not net an
obligation to OCC arising from a commodity contract entered into on
behalf of a ``customer of the debtor'' against amounts owed by OCC
to the clearing member arising under a securities contract or other
contracts other than commodity contracts. Because OCC would be the
debtor, the term ``customer of the debtor'' would appear to refer to
a customer of OCC. OCC does not believe that a clearing member would
likely be deemed to have entered into any commodity contract on
behalf of any party that would also be deemed to be a customer of
OCC for purposes of this provision, and we therefore believe that
Section 561(b)(2)(B) should not be interpreted as limiting the
enforceability of any provisions of Section 27 of Article VI of
OCC's By-laws. In any event, however, Section 561(b)(2)(B) would be
overridden by the exception in Section 561(b)(3)(A) as set forth in
the proposed Interpretation and Policy.
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Section 561(b)(3)(A) of the Code provides that ``no provision of
[Section 561(b)(2)(A) or (B)] shall prohibit the offset of claims and
obligations that arise under a cross-margining agreement or similar
arrangement that has been submitted to the [CFTC] under paragraph (1)
or (2) of section 5c(c) of the [CEA] and has not been abrogated or
rendered ineffective by the [CFTC].'' All of OCC's By-laws and Rules
have been submitted under Paragraph (1) or (2) of section 5c(c) of the
CEA, and none has been abrogated or rendered ineffective by the CFTC.
As commonly understood, a ``cross-margining agreement'' includes an
arrangement under which commodity contracts and securities contracts
are margined together as a single portfolio.\20\ This is precisely what
takes place under OCC By-laws and Rules and its Rule 601 in particular
in all proprietary accounts to the extent that they contain both
securities contracts and commodity contracts.
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\20\ Securities Exchange Act Release No. 26153 (October 3,
1988), 53 FR 39561 (October 3, 1988) (File No. SR-OCC-86-17)
approving the first cross-margining program between OCC and its
commodity clearing affiliate, The Intermarket Clearing Corporation
(``ICC''). CFTC approval of that cross-margining program was
memorialized in a letter from Jean A. Webb, Secretary, to George S.
Hender, President, ICC (June 1, 1988).
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The original cross-margining program, which was initiated between
OCC and ICC in 1988, was limited to proprietary accounts.\21\ In
connection with its approval, the Commission stated that ``it appears
that no statutory, Commission or CFTC rule changes are required to
implement a cross-margining system for proprietary accounts.'' OCC rule
changes were necessary in 1988 in order to implement proprietary cross-
margining because OCC and ICC were separate clearing organizations and
needed to have special arrangements between them in order to combine
securities contracts cleared by OCC and commodity contracts cleared by
ICC for margin purposes. However, when OCC itself registered as a
derivatives clearing organization under the CEA, cross-margining in
proprietary accounts was an automatic consequence of that dual
registration. Of course, a rule filing was necessary in order to
combine customer positions in security contracts and commodity
contracts for margin purposes even where OCC clears both the commodity
contracts and the securities contracts. Accordingly, OCC submitted
appropriate rule filings to both the Commission and the CFTC and
received the necessary approval to create an internal cross-margining
program for non-proprietary market professionals.\22\ In the case of
proprietary cross-margining, however, no such approval is required, and
this rule filing is being submitted simply in order to clarify OCC's
interpretation of its existing rules.
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\21\ Securities Exchange Act Release No. 26153.
\22\ The proposed rule change adopted By-Law Article VI, Section
25. Securities Exchange Act Release No. 50509 (Oct. 8, 2004), 69 FR
61289 (October 15, 2004) (File No. SR-OCC-2004-10) and CFTC order
issued November 5, 2004.
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Since its approval of the first cross-margining program in
1988,\23\ the Commission has repeatedly expressed its support for such
programs and has found that they are consistent with the Act and in
particular with section 17A of the Act. Indeed, there has been wide
support for cross-margining systems over many years. For example, the
Report of the Presidential Task Force on Market Mechanisms (``Brady
Report'') noted that the absence of an effective cross-margining system
for futures and securities options markets contributed to payment
strains in October 1987. Accordingly, the Brady Report recommended that
cross-margining be allowed in order to permit market participants with
an investment in futures to receive credit for a hedged investment in
stocks or options.\24\ The President's Working Group on Financial
Markets in its Interim Report concurred recommending that the
Commission and CFTC not only approve the OCC/ICC cross-margining
program but facilitate cross-margining among other clearing
agencies.\25\
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\23\ Securities Exchange Act Release No. 26153.
\24\ Brady Report at 66 (January 1988).
\25\ Interim Report of the President's Working Group on
Financial Markets, Appendix D at 11 (May 1988).
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The Commission has previously found that cross-margining programs
are consistent with clearing agency responsibilities under section 17A
of the Act. In so finding, the Commission noted that cross-margining
programs reduce the risk that a clearing member would become insolvent
in a distressed market and the corresponding risk that one insolvency
could lead to multiple insolvencies in a ripple effect and that they
therefore enhance the security of the clearing system.\26\
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\26\ Securities Exchange Act Release No. 32708 (August 2, 1993)
58 FR 42586 (August 10, 1993) (File No. SR-OCC-93-13).
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The proposed rule change is not inconsistent with the rules of OCC
including any rule proposed to be amended.
(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
The foregoing rule change has become effective pursuant to section
19(b)(3)(A)(i) of the Act \27\ and Rule 19b-4(f)(1) \28\ promulgated
thereunder because the proposal constitutes an interpretation with
respect to the meaning, administration, or enforcement of an existing
rule of
[[Page 73404]]
OCC.\29\ At any time within sixty days of the filing of the proposed
rule change, the Commission may summarily abrogate such rule change if
it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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\27\ 15 U.S.C. 78s(b)(3)(A)(i).
\28\ 17 CFR 240.19b-4(f)(1).
\29\ The Commission neither makes any findings nor expresses any
opinion with respect to OCC's representations and interpretations
regarding the application of the Bankruptcy Code.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the 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-2007-15 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-2007-15. 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 Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of OCC. 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-2007-15 and should be
submitted on or before January 17, 2008.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-24984 Filed 12-26-07; 8:45 am]
BILLING CODE 8011-01-P
