Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Revise the Minimum Eligibility Criteria for Common Stock Loaned Through Stock Loan Programs and Deposited as Margin Collateral, 61182-61183 [E9-28023]

Download as PDF 61182 Federal Register / Vol. 74, No. 224 / Monday, November 23, 2009 / Notices added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Dated: November 18, 2009. Florence E. Harmon, Deputy Secretary. [FR Doc. E9–28125 Filed 11–19–09; 11:15 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61006; File No. SR–OCC– 2009–15] Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change To Revise the Minimum Eligibility Criteria for Common Stock Loaned Through Stock Loan Programs and Deposited as Margin Collateral November 16, 2009. jlentini on DSKJ8SOYB1PROD with NOTICES I. Introduction On August 28, 2009, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–OCC–2009–15 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’).1 The proposed rule change was published for comment in the Federal Register on October 6, 2009.2 No comment letters were received on the proposal. This order approves the proposal. II. Description The proposed rule change revises minimum eligibility criteria applicable to common stock loaned through OCC’s Stock Loan Programs and deposited as margin collateral. OCC’s clearing services involve common stock 3 in several ways. Stocks are: (i) Underlying securities for exchange-traded equity option contracts; (ii) constituent securities of stock indexes that underlie stock index options or of indexes on which underlying ETFs are based; (iii) constituent securities of ETFs that although are not underlying securities are based on indexes that underlie index options (‘‘Index Option Related ETFs’’); (iv) the subject of stock loan or borrow transactions cleared pursuant to OCC’s Stock Loan Programs; and (v) deposited 1 15 U.S.C. 78s(b)(1). Exchange Act Release No. 60743 (September 29, 2009), 74 FR 51348. 3 The term ‘‘common stock’’ or ‘‘stock’’ is broadly used in this rule change to refer to different types of equity securities including ETFs but not preferred stock. 2 Securities VerDate Nov<24>2008 16:37 Nov 20, 2009 Jkt 220001 with OCC as margin collateral. Rationalizing the interrelationship among the criteria applied to stocks for these various purposes will maximize the potential for offsets and reduce risk in the clearing system. Under OCC’s Stock Loan Programs, only loans of stocks that are either underlying securities for options or futures or ETFs based on a stock index underlying an index option contract are eligible for clearance through OCC (collectively, ‘‘Options-Related Stocks’’). OCC restricted stock loan activity to limit its risk to loans supporting short sales that might be serving as hedges for options transactions or helping to add liquidity to the options markets. At the time this criterion was implemented in 2002, OCC managed the risk of stock loan transactions for most clearing members on a credit basis—that is OCC did not collect margin on such transactions. As noted above, OCC now requires margin on all stock loan transactions thus reducing the risk associated with this activity. Accordingly, OCC believes that it is no longer necessary or appropriate to limit stock loan transactions to OptionsRelated Stocks. In connection with the foregoing change, OCC is supplementing its existing criteria for stock eligible for the Stock Loan Programs by requiring that in order to qualify as an ‘‘Eligible Stock’’ for purposes of the Stock Loan Programs a stock must be a ‘‘covered security’’ as defined in Section 18(b)(1) of the Securities Act of 1933.4 By agreement with the options exchanges, OCC already requires that all underlying stocks meet this criterion, and OCC believes that it is an appropriate minimum assurance of quality. In addition, OCC is imposing a $3 minimum share price requirement that is applicable only to stocks other than Options-Related Stocks.5 OCC, however, retains the ability to waive the $3 minimum price where specified other factors suggest that the stock is nevertheless suitable for inclusion in the Stock Loan Programs. 4 ‘‘Covered securities’’ are securities that are authorized for listing on the New York Stock Exchange, the American Stock Exchange (now known as NYSE Amex LLC), the National Market System of the Nasdaq Stock Market (collectively, ‘‘Exchanges’’), or any other national securities exchange, or tiers thereof, that the Commission determines are substantially similar to the listing standards applicable to securities on the Exchanges. 15 U.S.C. 77r(b)(1). 5 This minimum price requirement corresponds to the minimum price standard contained in the criteria used by the options exchanges for initial selection of underlying securities that are also ‘‘covered securities.’’ PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 Common Stock as Collateral Under current OCC Rule 604(b)(4), clearing members can deposit common stocks that meet the following criteria: Minimum price of $3 per share and traded on a national securities exchange or traded in the Nasdaq Global Market or the Nasdaq Capital Market. The aggregate value of margin attributed to a single stock cannot exceed 10% of a clearing member’s total margin requirement. Stocks are haircut by 30% for margin valuation purposes. Stocks that have been suspended from trading by or are subject to special margin requirements under the rules of a listing market because of volatility, lack of liquidity, or similar characteristics are not eligible for deposit as margin. Under the approved but not yet implemented Collateral in Margins program, any common stock that meets the above criteria except the minimum price requirement and that is deliverable upon exercise or maturity of a cleared contract (i.e., is an underlying security), as well as index option related ETFs, will be afforded collateral value as determined by STANS. Moreover, the margin concentration requirement will be inapplicable to such deposits. Thus, upon implementation of the Collateral in Margins proposal, the minimum price requirement and margin concentration requirement will be eliminated for common stocks that are underlying securities or index option related ETFs. The minimum price requirement is being eliminated for these securities in order to provide a greater opportunity for members to hedge their equity options positions with pledges of the underlying securities. This decision also reflects OCC’s judgment that the minimum price requirement is less important in the current environment where OCC is able to closely monitor collateral in the form of common stock and to apply the sophisticated risk management technique incorporated in STANS in order to determine the appropriate value to assign to such collateral. The concentration test requirement is being eliminated because STANS contains its own built-in functionality that adequately handles concentrated options and collateral holdings. In anticipation of the implementation of the Collateral in Margins program, and effective with such implementation, OCC further amends Rule 604(b)(4)(i) as follows: (1) Replace the requirement of listing on a national securities exchange or specific Nasdaq markets with the requirement that all common stocks E:\FR\FM\23NON1.SGM 23NON1 jlentini on DSKJ8SOYB1PROD with NOTICES Federal Register / Vol. 74, No. 224 / Monday, November 23, 2009 / Notices deposited as margin must be ‘‘covered securities’’ as described above; (2) Provide that the $3 minimum share price requirement will apply to deposits of common stocks that are not Options Related Stocks; (3) Permit OCC to waive the $3 minimum share price if it determines that other factors, including trading volume, the number of shareholders, the number of outstanding shares, and current bid/ask spreads warrant such action; and (4) Delete Interpretation and Policy .13, adopted in SR–OCC–2009–08, which made the 10% concentration test inapplicable to certain ETFs because the 10% test will be eliminated for all stocks (including ETFs) when Collateral in Margins is implemented. In addition, OCC is amending Rule 1001 to provide that the determination of ‘‘average aggregate daily margin requirement’’ and ‘‘daily margin requirement’’ are performed without reference to any deposits of securities (e.g., common stocks including fund shares) that were valued within STANS pursuant to Rule 601. This change ensures that contributions to the clearing fund will be determined without taking into account any reduction in margin requirements resulting from valuing deposits of such securities under STANS. Other proposed changes to Rule 1001 are conforming or clarifying in nature. The changes proposed in this rule filing more closely align both the stock collateral and stock loan eligibility criteria with the criteria for selection of underlying equity securities. While some differences still exist, OCC believes that the discretionary authority provides OCC with sufficient flexibility to treat equity options, stock loan transactions, and stock collateral in a consistent manner when appropriate. For example, the $3 minimum price requirement is similar or identical to requirements contained in the equity options listing criteria of the options exchanges. In addition, the factors that OCC will consider in determining whether an exception to the $3 minimum may be granted are consistent with those reflected in such criteria. These factors are widely regarded as among the most relevant in determining whether a stock is liquid. STANS’s functionality permits OCC to propose these changes. STANS considers a security’s historical price volatility in generating its simulated market moves resulting in coverage parameters that vary based on the overall risk of a particular underlying security. STANS also identifies and addresses concentrated positions. By VerDate Nov<24>2008 16:37 Nov 20, 2009 Jkt 220001 61183 incorporating equity options positions, stock loan positions, and upon implementation of the Collateral in Margins changes common stock deposits within a single concentration analysis, OCC can identify where hedged positions exist and can also identify areas of cumulative exposure where additional collateral may be appropriate (e.g., where a clearing member has long options, stock loan positions, and margin deposits all relating to the same security). OCC will implement the changes to stock loan eligibility criteria immediately. The changes in eligibility criteria for common stock deposited as margin will be implemented concurrently with implementation of the Collateral in Margins program, which is scheduled for implementation in the fourth quarter 2009. For the Commission by the Division of Trading and Markets, pursuant to delegated authority.10 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–28023 Filed 11–20–09; 8:45 am] III. Discussion 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 November 6, 2009, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. In particular, the Commission believes that by amending its rules to revise minimum eligibility criteria applicable to common stock loaned through OCC’s Stock Loan Programs and deposited as margin collateral, the proposal is consistent with the requirements of Section 17A(b)(3)(F),6 which requires, among other things, that the rules of a clearing agency are designed to promote the prompt and accurate clearance and settlement of securities transactions. IV. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act 7 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,8 that the proposed rule change (File No. SR– OCC–2009–15) be, and hereby is, approved.9 6 15 U.S.C. 78q–1(b)(3)(F). U.S.C. 78q–1. 8 15 U.S.C. 78s(b)(2). 9 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 7 15 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–60999; File No. SR–FINRA– 2009–077] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to the Restructuring of Quotation Collection and Dissemination for OTC Equity Securities November 13, 2009. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing a rule change to restructure quotation collection and dissemination for OTC Equity Securities. The text of the proposed rule change is available on FINRA’s Web site at https://www.finra.org, at the principal office of FINRA 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, FINRA 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. FINRA has prepared summaries, set forth in sections A, B, 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\23NON1.SGM 23NON1

Agencies

[Federal Register Volume 74, Number 224 (Monday, November 23, 2009)]
[Notices]
[Pages 61182-61183]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-28023]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61006; File No. SR-OCC-2009-15]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Revise the Minimum Eligibility 
Criteria for Common Stock Loaned Through Stock Loan Programs and 
Deposited as Margin Collateral

November 16, 2009.

I. Introduction

    On August 28, 2009, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-OCC-2009-15 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change 
was published for comment in the Federal Register on October 6, 
2009.\2\ No comment letters were received on the proposal. This order 
approves the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 60743 (September 29, 
2009), 74 FR 51348.
---------------------------------------------------------------------------

II. Description

    The proposed rule change revises minimum eligibility criteria 
applicable to common stock loaned through OCC's Stock Loan Programs and 
deposited as margin collateral.
    OCC's clearing services involve common stock \3\ in several ways. 
Stocks are: (i) Underlying securities for exchange-traded equity option 
contracts; (ii) constituent securities of stock indexes that underlie 
stock index options or of indexes on which underlying ETFs are based; 
(iii) constituent securities of ETFs that although are not underlying 
securities are based on indexes that underlie index options (``Index 
Option Related ETFs''); (iv) the subject of stock loan or borrow 
transactions cleared pursuant to OCC's Stock Loan Programs; and (v) 
deposited with OCC as margin collateral. Rationalizing the 
interrelationship among the criteria applied to stocks for these 
various purposes will maximize the potential for offsets and reduce 
risk in the clearing system.
---------------------------------------------------------------------------

    \3\ The term ``common stock'' or ``stock'' is broadly used in 
this rule change to refer to different types of equity securities 
including ETFs but not preferred stock.
---------------------------------------------------------------------------

    Under OCC's Stock Loan Programs, only loans of stocks that are 
either underlying securities for options or futures or ETFs based on a 
stock index underlying an index option contract are eligible for 
clearance through OCC (collectively, ``Options-Related Stocks''). OCC 
restricted stock loan activity to limit its risk to loans supporting 
short sales that might be serving as hedges for options transactions or 
helping to add liquidity to the options markets. At the time this 
criterion was implemented in 2002, OCC managed the risk of stock loan 
transactions for most clearing members on a credit basis--that is OCC 
did not collect margin on such transactions. As noted above, OCC now 
requires margin on all stock loan transactions thus reducing the risk 
associated with this activity. Accordingly, OCC believes that it is no 
longer necessary or appropriate to limit stock loan transactions to 
Options-Related Stocks.
    In connection with the foregoing change, OCC is supplementing its 
existing criteria for stock eligible for the Stock Loan Programs by 
requiring that in order to qualify as an ``Eligible Stock'' for 
purposes of the Stock Loan Programs a stock must be a ``covered 
security'' as defined in Section 18(b)(1) of the Securities Act of 
1933.\4\ By agreement with the options exchanges, OCC already requires 
that all underlying stocks meet this criterion, and OCC believes that 
it is an appropriate minimum assurance of quality. In addition, OCC is 
imposing a $3 minimum share price requirement that is applicable only 
to stocks other than Options-Related Stocks.\5\ OCC, however, retains 
the ability to waive the $3 minimum price where specified other factors 
suggest that the stock is nevertheless suitable for inclusion in the 
Stock Loan Programs.
---------------------------------------------------------------------------

    \4\ ``Covered securities'' are securities that are authorized 
for listing on the New York Stock Exchange, the American Stock 
Exchange (now known as NYSE Amex LLC), the National Market System of 
the Nasdaq Stock Market (collectively, ``Exchanges''), or any other 
national securities exchange, or tiers thereof, that the Commission 
determines are substantially similar to the listing standards 
applicable to securities on the Exchanges. 15 U.S.C. 77r(b)(1).
    \5\ This minimum price requirement corresponds to the minimum 
price standard contained in the criteria used by the options 
exchanges for initial selection of underlying securities that are 
also ``covered securities.''
---------------------------------------------------------------------------

Common Stock as Collateral

    Under current OCC Rule 604(b)(4), clearing members can deposit 
common stocks that meet the following criteria: Minimum price of $3 per 
share and traded on a national securities exchange or traded in the 
Nasdaq Global Market or the Nasdaq Capital Market. The aggregate value 
of margin attributed to a single stock cannot exceed 10% of a clearing 
member's total margin requirement. Stocks are haircut by 30% for margin 
valuation purposes. Stocks that have been suspended from trading by or 
are subject to special margin requirements under the rules of a listing 
market because of volatility, lack of liquidity, or similar 
characteristics are not eligible for deposit as margin.
    Under the approved but not yet implemented Collateral in Margins 
program, any common stock that meets the above criteria except the 
minimum price requirement and that is deliverable upon exercise or 
maturity of a cleared contract (i.e., is an underlying security), as 
well as index option related ETFs, will be afforded collateral value as 
determined by STANS. Moreover, the margin concentration requirement 
will be inapplicable to such deposits. Thus, upon implementation of the 
Collateral in Margins proposal, the minimum price requirement and 
margin concentration requirement will be eliminated for common stocks 
that are underlying securities or index option related ETFs. The 
minimum price requirement is being eliminated for these securities in 
order to provide a greater opportunity for members to hedge their 
equity options positions with pledges of the underlying securities. 
This decision also reflects OCC's judgment that the minimum price 
requirement is less important in the current environment where OCC is 
able to closely monitor collateral in the form of common stock and to 
apply the sophisticated risk management technique incorporated in STANS 
in order to determine the appropriate value to assign to such 
collateral. The concentration test requirement is being eliminated 
because STANS contains its own built-in functionality that adequately 
handles concentrated options and collateral holdings.
    In anticipation of the implementation of the Collateral in Margins 
program, and effective with such implementation, OCC further amends 
Rule 604(b)(4)(i) as follows:
    (1) Replace the requirement of listing on a national securities 
exchange or specific Nasdaq markets with the requirement that all 
common stocks

[[Page 61183]]

deposited as margin must be ``covered securities'' as described above;
    (2) Provide that the $3 minimum share price requirement will apply 
to deposits of common stocks that are not Options Related Stocks;
    (3) Permit OCC to waive the $3 minimum share price if it determines 
that other factors, including trading volume, the number of 
shareholders, the number of outstanding shares, and current bid/ask 
spreads warrant such action; and
    (4) Delete Interpretation and Policy .13, adopted in SR-OCC-2009-
08, which made the 10% concentration test inapplicable to certain ETFs 
because the 10% test will be eliminated for all stocks (including ETFs) 
when Collateral in Margins is implemented.
    In addition, OCC is amending Rule 1001 to provide that the 
determination of ``average aggregate daily margin requirement'' and 
``daily margin requirement'' are performed without reference to any 
deposits of securities (e.g., common stocks including fund shares) that 
were valued within STANS pursuant to Rule 601. This change ensures that 
contributions to the clearing fund will be determined without taking 
into account any reduction in margin requirements resulting from 
valuing deposits of such securities under STANS. Other proposed changes 
to Rule 1001 are conforming or clarifying in nature.
    The changes proposed in this rule filing more closely align both 
the stock collateral and stock loan eligibility criteria with the 
criteria for selection of underlying equity securities. While some 
differences still exist, OCC believes that the discretionary authority 
provides OCC with sufficient flexibility to treat equity options, stock 
loan transactions, and stock collateral in a consistent manner when 
appropriate. For example, the $3 minimum price requirement is similar 
or identical to requirements contained in the equity options listing 
criteria of the options exchanges. In addition, the factors that OCC 
will consider in determining whether an exception to the $3 minimum may 
be granted are consistent with those reflected in such criteria. These 
factors are widely regarded as among the most relevant in determining 
whether a stock is liquid.
    STANS's functionality permits OCC to propose these changes. STANS 
considers a security's historical price volatility in generating its 
simulated market moves resulting in coverage parameters that vary based 
on the overall risk of a particular underlying security. STANS also 
identifies and addresses concentrated positions. By incorporating 
equity options positions, stock loan positions, and upon implementation 
of the Collateral in Margins changes common stock deposits within a 
single concentration analysis, OCC can identify where hedged positions 
exist and can also identify areas of cumulative exposure where 
additional collateral may be appropriate (e.g., where a clearing member 
has long options, stock loan positions, and margin deposits all 
relating to the same security).
    OCC will implement the changes to stock loan eligibility criteria 
immediately. The changes in eligibility criteria for common stock 
deposited as margin will be implemented concurrently with 
implementation of the Collateral in Margins program, which is scheduled 
for implementation in the fourth quarter 2009.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a registered clearing agency. In particular, 
the Commission believes that by amending its rules to revise minimum 
eligibility criteria applicable to common stock loaned through OCC's 
Stock Loan Programs and deposited as margin collateral, the proposal is 
consistent with the requirements of Section 17A(b)(3)(F),\6\ which 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \7\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-OCC-2009-15) be, and 
hereby is, approved.\9\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(2).
    \9\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-28023 Filed 11-20-09; 8:45 am]
BILLING CODE 8011-01-P
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