Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Novation of Trades at OCC, 79731-79732 [2011-32780]

Download as PDF Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices proposed rule change (File No. SR–ICC– 2011–03) be, and hereby is, approved.13 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–32781 Filed 12–21–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65990; File No. SR–OCC– 2011–17] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Novation of Trades at OCC December 16, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,1 notice is hereby given that on December 12, 2011, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘the Commission’’) the proposed rule change as described in Items I and II below, which items have been prepared primarily by OCC. OCC filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 2 and Rule 19b–4(f)(4) thereunder 3 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. jlentini on DSK4TPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of Terms of Substance of the Proposed Rule Change The proposed rule change would make clarifying amendments to provisions of OCC’s By-Laws relating to the timing of OCC’s acceptance or ‘‘novation’’ of exchange transactions in order to provide clearing members with certainty as to when their credit exposure to the original counterparty to a trade is terminated and OCC becomes obligated with respect to such trades.4 13 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). 14 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78s(b)(3)(A)(iii). 3 17 CFR 240.19b–4(f)(4). 4 The proposed rule change neither alters the rights of members nor the timing of OCC’s novation. Telephone conference between Steve Szarmack, Vice President and Associate General Counsel, OCC, and Pamela Kesner, Special Counsel, Securities and Exchange Commission Division of Trading and Markets on December 14, 2011. VerDate Mar<15>2010 19:17 Dec 21, 2011 Jkt 226001 II. Self-Regulatory Organization’s Statement of 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. A. Self-Regulatory Organization’s Statement of Purpose of, and Statutory Basis for, the Proposed Rule Change Recently, certain OCC clearing members have expressed uncertainty as to the time when an exchange transaction is accepted for clearing and the ‘‘novation’’ of such transaction occurs under OCC’s By-Laws and Rules. The purpose of this proposed rule change is to make clarifying amendments to provisions of OCC’s ByLaws relating to the timing of OCC’s acceptance or ‘‘novation’’ of exchange transactions in order to provide clearing members with certainty as to when their credit exposure to the original counterparty to a trade is terminated and OCC becomes obligated with respect to such trades. Background Article VI, Section 5 of OCC’s ByLaws generally establishes that exchange transactions (i.e., matched trades in an option, future, or other cleared contract) are deemed to be accepted by OCC for clearing at the ‘‘commencement time’’ for such transactions, or in the case of a future, when a matched trade has been properly reported to OCC. The definition of ‘‘commencement time’’ in Article I of OCC’s By-Laws contains substantive provisions establishing specific times when exchange transactions are deemed accepted for clearing for the majority of exchange transactions (i.e., commencement time is when daily position reports are made available to clearing members) as well as exceptions establishing different commencement times for cross-rate currency options, FX Index Options and certain noncompetitively executed transactions in cleared futures. However, neither Section 5 of Article VI nor the definition of ‘‘commencement time’’ expressly state that OCC’s ‘‘novation’’ of trades occurs at this time, and the term ‘‘novation’’ is used only once in OCC’s By-Laws—in an interpretation following PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 79731 Section 6 of Article IV (Issuance of Cleared Contracts). Confusion may also arise from the fact that Article VI, Section 5 of the By-Laws states that futures contracts are accepted for clearing when they are properly reported to OCC, rather than at the commencement time of such transactions. This provision appears to give futures contracts more favorable treatment than options, although there is no such result as a practical matter. Section 8 of Article VI provides that, except with respect to trades in certain narrow categories of options, OCC generally has no right to reject any exchange options transaction due to the failure of the purchasing clearing member to pay any amount due to OCC at or before the settlement time.5 Accordingly, exchange transactions in most option products will inevitably be accepted for clearing and novated under the rules at the commencement time of such transactions simply due to the passage of time. Prior to the 1987 crash, OCC reserved the right to reject trades in options due to non-payment of premiums. However, OCC subsequently gave up that right (with limited exceptions) in order to create greater certainty for clearing members.6 Therefore, the right to reject an exchange transaction for non-payment is now the exception rather than the rule. When OCC began clearing futures, it was deemed appropriate to state in the By-Laws that futures contracts would be accepted when properly reported because futures do not require premium payments.7 Proposed By-Law Changes OCC proposes to amend the definition of ‘‘commencement time’’ in Article I of the By-Laws to (i) remove the substantive provisions establishing the specific times when exchange transactions in various products are deemed accepted for clearing (as such provisions should be placed in the 5 The exceptions are contained in the Articles governing specific products. For example, Section 5 of Article XX (addressing cross-rate foreign currency options and Section 7 of Article XXIII (addressing FX Index Options) condition OCC’s acceptance of trades in those products for clearing on the completion of settlement payments in respect of such trades. These exceptions apply because settlements involving foreign currencies in different time zones create heightened exposure to OCC if a Clearing Member were to default. 6 The staff notes that this change was adopted in filing SR–OCC–90–05. See Securities Exchange Act Release No. 29853 (October 25, 1991), 56 FR 55968 (October 30, 1991). 7 Article XII, Section 7 of the By-Laws makes an exception for non-competitively executed futures trades. Because such trades may be executed away from the market price, OCC does not accept them until the initial variation payment is made. E:\FR\FM\22DEN1.SGM 22DEN1 79732 Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / Notices Articles governing those products), and (ii) add a cross reference within the definition that will direct the reader to the locations within the By-Laws where the specific times can be found. In connection therewith, OCC proposes to amend Section 5 of Article VI, Section 7 of Article XII, Section 1 of Article XX and Section 1 of Article XXIII to establish the specific commencement times for transactions in various products. OCC also proposes to amend Section 5 of Article VI (i) to expressly state that novation occurs when exchange transactions are accepted for clearing by OCC, and (ii) to delete the language that appears to give futures contracts more favorable treatment than options. Finally, OCC proposes to amend the bracketed language following the definitions in Section 1 of Article XX and Section 1 of Article XXIII to eliminate unnecessary complexity and conform such language stylistically to similar language elsewhere in the Bylaws (e.g., the bracketed language following the definitions in Section 1 of Article XXII). OCC believes that the proposed changes to OCC’s By-Laws are consistent with the purposes and requirements of Section 17A of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), because they are clarifying amendments that do not adversely affect OCC’s obligations with respect to the prompt and accurate clearance and settlement of securities transactions or the protection of securities investors and the public interest.8 The proposed rule change is not inconsistent with any rules of OCC. B. Self-Regulatory Organization’s Statement on Burden on Competition OCC does not believe that the proposed rule change will have any impact or impose any burden on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others jlentini on DSK4TPTVN1PROD with NOTICES OCC has not solicited or received written comments relating to the proposed rule change. 8 The staff notes that Rule 19b–4(f)(4) provides that a proposed rule change may take effect upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Exchange Act if the change does not adversely affect the safeguarding of securities or funds in the custody or control of the clearing agency or for which it is responsible and does not significantly affect the respective rights or obligations of the clearing agency or persons using the service. VerDate Mar<15>2010 19:17 Dec 21, 2011 Jkt 226001 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)(iii) of the Act 9 and Rule 19b–4(f)(4) 10 and became effective on filing. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend 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. business days between the hours of 10 a.m. and 3 p.m. Copies of such filings also will be available for inspection and copying at OCC’s principal office and OCC’s Web site (https://www.theocc. com/components/docs/legal/rules_and_ bylaws/sr_occ_11_17.pdf). 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 No. SR–OCC–2011–17 and should be submitted on or before January 12, 2012. 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: For the Commission by the Division of Trading and Markets, pursuant to delegated authority.11 Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml) or • Send an email to rulecomments@sec.gov. Please include File No. SR–OCC–2011–17 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–OCC–2011–17. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (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 Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2011–32780 Filed 12–21–11; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–65993; File No. SR–DTC– 2011–11] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rules Relating To Update DTC’s Custody Service Guide December 16, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 notice is hereby given that on December 7, 2011, The Depository Trust Company (‘‘DTC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change described in Items I and II below, which items have been prepared primarily by DTC. DTC filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act and Rule 19b–4(f)(4) thereunder so that the proposed rule change was effective upon filing with the Commission.2 The Commission is publishing this notice to solicit comments on the proposed rule change from interested parties. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The purpose of this proposed rule change is to update DTC’s Custody Service Guide in order to streamline the 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78s(b)(3)(A)(iii) and 17 CFR 240.19b– 4(f)(4). 1 15 9 Supra note 2. note 3. 10 Supra PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 E:\FR\FM\22DEN1.SGM 22DEN1

Agencies

[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79731-79732]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32780]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65990; File No. SR-OCC-2011-17]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Novation of Trades at OCC

December 16, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on December 12, 2011, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``the Commission'') the proposed rule change as described 
in Items I and II below, which items have been prepared primarily by 
OCC. OCC filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \2\ and Rule 19b-4(f)(4) thereunder \3\ 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(4).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    The proposed rule change would make clarifying amendments to 
provisions of OCC's By-Laws relating to the timing of OCC's acceptance 
or ``novation'' of exchange transactions in order to provide clearing 
members with certainty as to when their credit exposure to the original 
counterparty to a trade is terminated and OCC becomes obligated with 
respect to such trades.\4\
---------------------------------------------------------------------------

    \4\ The proposed rule change neither alters the rights of 
members nor the timing of OCC's novation. Telephone conference 
between Steve Szarmack, Vice President and Associate General 
Counsel, OCC, and Pamela Kesner, Special Counsel, Securities and 
Exchange Commission Division of Trading and Markets on December 14, 
2011.
---------------------------------------------------------------------------

II. Self-Regulatory Organization's Statement of 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.

A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Recently, certain OCC clearing members have expressed uncertainty 
as to the time when an exchange transaction is accepted for clearing 
and the ``novation'' of such transaction occurs under OCC's By-Laws and 
Rules. The purpose of this proposed rule change is to make clarifying 
amendments to provisions of OCC's By-Laws relating to the timing of 
OCC's acceptance or ``novation'' of exchange transactions in order to 
provide clearing members with certainty as to when their credit 
exposure to the original counterparty to a trade is terminated and OCC 
becomes obligated with respect to such trades.
Background
    Article VI, Section 5 of OCC's By-Laws generally establishes that 
exchange transactions (i.e., matched trades in an option, future, or 
other cleared contract) are deemed to be accepted by OCC for clearing 
at the ``commencement time'' for such transactions, or in the case of a 
future, when a matched trade has been properly reported to OCC. The 
definition of ``commencement time'' in Article I of OCC's By-Laws 
contains substantive provisions establishing specific times when 
exchange transactions are deemed accepted for clearing for the majority 
of exchange transactions (i.e., commencement time is when daily 
position reports are made available to clearing members) as well as 
exceptions establishing different commencement times for cross-rate 
currency options, FX Index Options and certain non-competitively 
executed transactions in cleared futures. However, neither Section 5 of 
Article VI nor the definition of ``commencement time'' expressly state 
that OCC's ``novation'' of trades occurs at this time, and the term 
``novation'' is used only once in OCC's By-Laws--in an interpretation 
following Section 6 of Article IV (Issuance of Cleared Contracts).
    Confusion may also arise from the fact that Article VI, Section 5 
of the By-Laws states that futures contracts are accepted for clearing 
when they are properly reported to OCC, rather than at the commencement 
time of such transactions. This provision appears to give futures 
contracts more favorable treatment than options, although there is no 
such result as a practical matter. Section 8 of Article VI provides 
that, except with respect to trades in certain narrow categories of 
options, OCC generally has no right to reject any exchange options 
transaction due to the failure of the purchasing clearing member to pay 
any amount due to OCC at or before the settlement time.\5\ Accordingly, 
exchange transactions in most option products will inevitably be 
accepted for clearing and novated under the rules at the commencement 
time of such transactions simply due to the passage of time. Prior to 
the 1987 crash, OCC reserved the right to reject trades in options due 
to non-payment of premiums. However, OCC subsequently gave up that 
right (with limited exceptions) in order to create greater certainty 
for clearing members.\6\ Therefore, the right to reject an exchange 
transaction for non-payment is now the exception rather than the rule. 
When OCC began clearing futures, it was deemed appropriate to state in 
the By-Laws that futures contracts would be accepted when properly 
reported because futures do not require premium payments.\7\
---------------------------------------------------------------------------

    \5\ The exceptions are contained in the Articles governing 
specific products. For example, Section 5 of Article XX (addressing 
cross-rate foreign currency options and Section 7 of Article XXIII 
(addressing FX Index Options) condition OCC's acceptance of trades 
in those products for clearing on the completion of settlement 
payments in respect of such trades. These exceptions apply because 
settlements involving foreign currencies in different time zones 
create heightened exposure to OCC if a Clearing Member were to 
default.
    \6\ The staff notes that this change was adopted in filing SR-
OCC-90-05. See Securities Exchange Act Release No. 29853 (October 
25, 1991), 56 FR 55968 (October 30, 1991).
    \7\ Article XII, Section 7 of the By-Laws makes an exception for 
non-competitively executed futures trades. Because such trades may 
be executed away from the market price, OCC does not accept them 
until the initial variation payment is made.
---------------------------------------------------------------------------

Proposed By-Law Changes
    OCC proposes to amend the definition of ``commencement time'' in 
Article I of the By-Laws to (i) remove the substantive provisions 
establishing the specific times when exchange transactions in various 
products are deemed accepted for clearing (as such provisions should be 
placed in the

[[Page 79732]]

Articles governing those products), and (ii) add a cross reference 
within the definition that will direct the reader to the locations 
within the By-Laws where the specific times can be found. In connection 
therewith, OCC proposes to amend Section 5 of Article VI, Section 7 of 
Article XII, Section 1 of Article XX and Section 1 of Article XXIII to 
establish the specific commencement times for transactions in various 
products. OCC also proposes to amend Section 5 of Article VI (i) to 
expressly state that novation occurs when exchange transactions are 
accepted for clearing by OCC, and (ii) to delete the language that 
appears to give futures contracts more favorable treatment than 
options. Finally, OCC proposes to amend the bracketed language 
following the definitions in Section 1 of Article XX and Section 1 of 
Article XXIII to eliminate unnecessary complexity and conform such 
language stylistically to similar language elsewhere in the By-laws 
(e.g., the bracketed language following the definitions in Section 1 of 
Article XXII).
    OCC believes that the proposed changes to OCC's By-Laws are 
consistent with the purposes and requirements of Section 17A of the 
Securities Exchange Act of 1934, as amended (the ``Exchange Act''), 
because they are clarifying amendments that do not adversely affect 
OCC's obligations with respect to the prompt and accurate clearance and 
settlement of securities transactions or the protection of securities 
investors and the public interest.\8\ The proposed rule change is not 
inconsistent with any rules of OCC.
---------------------------------------------------------------------------

    \8\ The staff notes that Rule 19b-4(f)(4) provides that a 
proposed rule change may take effect upon filing with the Commission 
pursuant to Section 19(b)(3)(A) of the Exchange Act if the change 
does not adversely affect the safeguarding of securities or funds in 
the custody or control of the clearing agency or for which it is 
responsible and does not significantly affect the respective rights 
or obligations of the clearing agency or persons using the service.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    OCC has not solicited or received written comments relating 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)(iii) of the Act \9\ and Rule 19b-4(f)(4) \10\ and became 
effective on filing. At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
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.
---------------------------------------------------------------------------

    \9\ Supra note 2.
    \10\ Supra note 3.
---------------------------------------------------------------------------

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 email to rule-comments@sec.gov. Please include 
File No. SR-OCC-2011-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-OCC-2011-17. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filings also will be available for 
inspection and copying at OCC's principal office and OCC's Web site 
(https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_11_17.pdf). 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 No. SR-OCC-
2011-17 and should be submitted on or before January 12, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32780 Filed 12-21-11; 8:45 am]
BILLING CODE 8011-01-P
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