[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Notices]
[Pages 53371-53373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27052]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39203; File No. SR-OCC-97-14]
Self-Regulatory Organizations; The Option Clearing Corporation;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Relating to a Cross-Margining Agreement With the Board of
Trade Clearing Corporation
October 3, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 18, 1997, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I and II below, which items have been prepared
primarily by OCC. The Commission is publishing this notice and order to
solicit comments form interested persons and to grant accelerated
approval of the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change will allow OCC to amend the cross-
margining agreement between OCC and the Board of Trade Clearing
Corporation (``BOTCC'') and to amend the agreements that are required
to be executed by participating clearing members and market
professionals participating in the cross-margining programs established
by the cross-margining agreement.
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.\2\
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\2\ The Commission has modified the text of the summaries
prepared by OCC.
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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 filing is to revise the amended
and restated cross-margining agreement between OCC and BOTCC
(``Agreement'').\3\ OCC and BOTCC have executed an amendment to the
Agreement to revise the Agreement.\4\ Specifically, OCC proposed to
amend Exhibit A to the Agreement to update the list of contracts
eligible of OCC/BOTCC cross-margining. OCC also proposes to amend the
agreements governing the cross-margin accounts of clearing members and
market professionals that participate in OCC/BOTCC cross-margining. The
changes to those agreements essentially will conform them to the
comparable form of the agreements used in the cross-margining program
among OCC, the Chicago Mercantile Exchange (``CME'') and the Commodity
Clearing Corporation (``CCC'').\5\
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\3\ For a description of the existing agreement, refer to
Securities Exchange Act Release No. 29888 (October 31, 1991), 56 FR
56680 [File No. SR-OCC-91-07] (order approving establishment of
cross-margining program between OCC and BOTCC) and Securities
Exchange Act Release No. 32681 (July 27, 1993), 58 FR 41302 [File
No. SR-OCC-92-24] (order approving expansion of cross-margining
program between OCC and BOTCC to include non-proprietary positions).
\4\ A copy of the amendment has been submitted with the proposed
rule change and is available for inspection and copying at the
Commission 's Public Reference Room or at the principal office of
OCC.
\5\ For a description of the cross-margining agreement among
OCC, CME, and CCC, refer to Securities Exchange Act Release No.
38584 (May 8, 1997), 62 FR 26602 [File No. SR-OCC-97-04] (order
granting accelerated approval to proposed rule change).
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The following forms of agreements are required to be executed by
clearing members and market professionals participating in the cross-
margining program established by the Agreement: (1) Proprietary cross-
margin account agreement and security agreement for a joint clearing
member; (2) proprietary cross-margin account agreement and security
agreement for affiliated clearing members; (3) non-proprietary cross-
margin account agreement and security agreement for a joint clearing
member; (4) non-proprietary cross-margin account agreement and security
agreement for affiliated clearing members; (5) subordination agreement
for cross-margining for a joint clearing member; and (6) subordination
agreement for cross-margining for
[[Page 53372]]
affiliated clearing members.\6\ Each of these agreements is based on
the comparable existing agreement used in the current OCC/BOTCC cross-
margining program, and each of the agreements has been modified as
necessary to reflect changes that have been made to the cross-margining
program among OCC, CME, and CCC.
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\6\ Copies of the agreements have been submitted with the
proposed rule change and are available for inspection and copying at
the Commission's Public Reference Room or at the principal office of
OCC.
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With respect to the proprietary cross-margin account agreement and
security agreement for a joint clearing member, section 2 will be
revised to make clear that margin deposited with respect to the cross-
margined proprietary accounts (``proprietary X-M accounts'') is
security for all of the obligations of the joint clearing member
whether or not such obligations arise from the proprietary X-M
accounts. Section 5 will be amended to make clear that OCC and BOTCC
have a joint lien on and security interest in the proprietary X-M
accounts. Section 5 also will be updated to comply with recent
revisions to Article 8 and Article 9 of the Uniform Commercial Code.
Section 5 will be changed by making explicit that OCC and BOTCC have a
right of setoff against collateral held with respect to the proprietary
X-M accounts. Section 5 will be amended to reflect that the prohibition
against the joint clearing member granting any lien on or security
interest in such collateral without the written consent of OCC and
BOTCC shall not apply to any interest of the joint clearing member in
the collateral which is subordinate to that of OCC and BOTCC. OCC has
informed the Commission that no other substantive changes have been
made to the proprietary cross-margin account agreement and security
agreement for a joint clearing member.
With respect to the proprietary cross-margin account agreement and
security agreement for affiliated clearing members, section 2 will be
amended to make the affiliated clearing members jointly and severally
liable to OCC and BOTCC for any obligation arising from the proprietary
X-M accounts. Section 2 also will be revised to make clear that neither
of the affiliated clearing members is obligated to make any
contribution to the clearing or guarantee fund of a clearing
organization (i.e., OCC or BOTCC) of with such clearing member is not
itself a member. Section 3 will be revised to make clear that margin
deposited with respect to the proprietary X-M accounts is security for
all of the obligations of the affiliated clearing members whether or
not such obligations arise from the proprietary X-M accounts. Section 6
will be amended to make clear that OCC and BOTCC have a joint lien on
and security interest in the proprietary X-M accounts by adding a
specific reference to the accounts. Section 6 also will be updated to
comply with recent revisions to Article 8 and Article 9 of the Uniform
Commercial Code. Section 6 will be changed by making explicit that OCC
and BOTCC have a right of setoff against collateral held with respect
to the proprietary X-M accounts. Section 6 also will be amended to
reflect that the prohibition against a clearing member granting any
lien on or security interest in such collateral without the written
consent of OCC and BOTCC shall not apply to any interest of the
clearing member in the collateral which is subordinate to that of OCC
and BOTCC. OCC has informed the Commission that no other substantive
changes have been made to the proprietary cross-margin account
agreement and security agreement for affiliated clearing members.
With respect to the non-proprietary cross-margin account agreement
and security agreement for a joint clearing member, section 3 will be
amended to provide for the selection of a designated clearing
organization (``DCO'') (i.e., either OCC or BOTCC) by a joint clearing
member that does not maintain any proprietary X-M accounts. Section 5
will be amended to make clear that OCC and BOTCC have a joint lien on
and security interest in the cross-margined non-proprietary accounts
(``non-proprietary X-M accounts''). Section 5 also will be updated to
comply with recent revisions to Article 8 and Article 9 of the Uniform
Commercial Code. In addition, section 5 will be changed by making
explicit that OCC and BOTCC have a right of setoff against collateral
held with respect to the non-proprietary X-M accounts. OCC has informed
the Commission that no other substantive changes have been made to the
non-proprietary cross-margin account agreement and security agreement
for a joint clearing member.
With respect to the non-proprietary cross-margin account agreement
and security agreement for affiliated clearing members, section 2 will
be changed to make affiliated clearing members jointly and severally
liable to OCC and BOTCC for any obligation arising from the non-
proprietary X-M accounts, Section 2 also will be changed to provide
that neither of the affiliated clearing member is obligated to make any
contribution to the clearing or guarantee fund of a clearing
organization (i.e., OCC or BOTCC) of which such clearing member is not
itself a member. Section 4 will be amended to provide for the selection
of a DCO by affiliated clearing members that do not maintain
proprietary X-M accounts. Section 6 will be amended to make clear that
OCC and BOTCC have a joint lien on and security interest in the non-
proprietary X-M accounts. Section 6 also will be amended to comply with
recent revisions to Article 8 and Article 9 of the Uniform Commercial
Code. In addition, section 6 will be changed by making explicit that
OCC and BOTCC have a right of setoff against collateral held with
respect to the non-proprietary X-M accounts. OCC has informed the
Commission that no other substantive changes have been made to the non-
proprietary cross-margin account agreement and security agreement for
affiliated clearing members.
With respect to each of the subordination agreement for cross-
margining for a joint clearing member and the subordination agreement
for cross-margining for affiliated clearing members (``market
professionals agreements''), section 1 will be changed to include a
representation that the member executing the agreement is a member or a
firm owning a membership on the Chicago Board of Trade. Section 4 of
each of the market professionals agreements will be amended to include
the liquidation provisions found in Appendix B of Part 190 of the
regulations of the Commodity Futures Trading Commission (``CFTC'') \7\
and to provide that claims against a clearing member will be
subordinated to all other customers as provided in subchapter III of
Chapter 7 of the U.S. Bankruptcy Code.\8\ The current market
professionals agreements used for OCC/BOTCC cross-margining do not
follow the liquidation distribution scheme of Appendix B of Part 190 of
the CFTC's regulations. Section 5 of the market professionals
agreements will be amended to make clear that OCC and BOTCC have a
joint lien on and security interest in the non-proprietary X-M
accounts. Section 5 also will be amended to make explicit that the
member has granted to OCC and BOTCC a right of setoff against
collateral held with respect to the non-proprietary X-M accounts of the
clearing member. A new section 7 will be added to each of the market
professional agreements to provide that an executed copy of each such
agreement is to be filed with OCC and BOTCC and that an executed market
professionals agreement cannot
[[Page 53373]]
be modified without the approval of the clearing organization. These
changes are intended for the protection of OCC and BOTCC. OCC has
informed the Commission that all other changes to the market
professionals agreements are either stylistic or nonsubstantive in
nature.
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\7\ 17 CFR 190, App. B.
\8\ 11 U.S.C. 741, et seq.
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OCC believes that the proposed rule change is consistent with the
purposes and requirements of section 17A of the Act because cross-
margining enhances the safety of the clearing system while providing
lower clearing margin costs to participants.
(B) Self-Regulatory Organization's Statement on Burden of 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
Section 17A(b)(3)(F) of the Act \9\ requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in the custody and control of the clearing agency
or for which it is responsible. Section 17A(a)(2)(A)(ii) of the Act
\10\ directs the Commission to use its authority under the Act to
facilitate the establishment of transactions in securities, securities
options, contracts of sale for future delivery and options thereon, and
commodity options. The Commission believes that the proposed rule
change is consistent with these requirements under the Act.
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ 15 U.S.C. 78q-1(a)(2)(A)(ii).
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Similar to other cross-margining arrangements to which OCC is a
party, the current proposal links and coordinates the clearance and
settlement facilities of OCC and BOTCC with respect to shared
management of risks associated with the clearing members' intermarket
portfolios and with respect to information sharing regarding the
financial condition of participating joint and affiliated members. The
Commission views cross-margining arrangements as a significant risk
reduction method because they provide a means whereby individual
clearing organizations do not have to manage independently the risk
associated with some components (i.e., the futures or options
component) of a clearing member's total portfolio. Therefore, cross-
margining programs serve to help OCC assure the safeguarding of
securities and funds and to facilitate the establishment of linked or
coordinated facilities for the clearance and settlement of futures and
options, transactions in securities.
OCC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after publication
of the notice of filing. The Commission finds good cause for approving
the proposed rule change prior to the thirtieth day after publication
of the notice of the filing because the proposed changes to the OCC/
BOTCC cross-margining program are based on the OCC/CME/CCC cross-
margining program, which the Commission has previously approved. In
addition, the Commission does not expect to receive any adverse
comments on the proposed rule change.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of OCC. All submissions
should refer to File No. SR-OCC-97-14 and should be submitted by
November 4, 1997.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (File No. SR-OCC-97-14) be and
hereby is approved.
\11\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27052 Filed 10-10-97; 8:45 am]
BILLING CODE 8010-10-M
