[Federal Register Volume 62, Number 18 (Tuesday, January 28, 1997)]
[Notices]
[Pages 4089-4091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2012]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38188; File No. SR-OCC-96-18]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Revise Rules To Include
Limited Cross-Guarantee Agreements
January 21, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 9, 1996, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II, and III below, which items have been prepared
primarily by OCC. The Commission is publishing this notice to solicit
comments from interested persons on the proposed rule change.
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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 purpose of the proposed rule change is to revise OCC's by-laws
and rules to authorize OCC to execute ``limited cross-guarantee
agreements'' with other clearing agencies.
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 change is to revise OCC's by-laws
and rules to authorize OCC to execute ``limited cross-guarantee
agreements'' with other clearing agencies. A limited cross-guarantee
agreement is an agreement between two or more clearing agencies that
provides that if the parties to the agreement must liquidate the assets
of an entity that is a member of two or more of the agencies (``common
member'') and at least one of the clearing agencies liquidates the
assets of
[[Page 4090]]
the common member in its control to a loss and at least one liquidates
the assets of the common member to a gain, each clearing agency
liquidating to a gain will make the excess assets of the common member
in its control available to each clearing agency liquidating to a loss
up to the amount of the loss. If all of the parties to a limited cross-
guarantee agreement liquidate the assets of a common member in their
respective control to a gain or if all liquidate to a loss, the
agreement provides that no assets will be made available by any party
to the agreement to any other party. The cross-guaranties established
in a limited cross-guarantee agreement are limited in the sense that
each party to the agreement guarantees funds to the other parties only
if it liquidates the assets of a common member in its control to a net
gain and only up to the amount of the net again.
The effect of a limited cross-guarantee agreement is to enable each
party to the agreement to have recourse to the assets of a defaulting
common member in the control of the other parties to the agreement.
Therefore, a limited cross-guarantee agreement should reduce the risk
of each of the clearing agencies which is a party to the agreement
because a defaulting common member may have positions spread across
markets in such a manner that its net asset position at one clearing
agency is positive even though its net asset position at another
clearing agency is negative.
OCC is currently pursuing discussions of the terms of a limited
cross-guarantee agreement with other clearing agencies. OCC anticipates
that it will be filing with the Commission one or more limited cross-
guarantee agreements to which it has become a party following the
conclusion of those discussions.
The Commission has generally stated its support of the use of
limited cross-guarantee agreements as a means of reducing the exposure
of clearing agencies to loss as a result of the default of common
members.\3\ OCC proposes to add definitions of ``common member,''
``cross-guarantee party,'' and ``limited cross-guarantee agreement'' to
Article I of its by-laws.
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\3\ Securities Exchange Act Release No. 37616 (August 28, 1996),
61 FR 46887 [File Nos. SR-MBSCC-96-02, SR-GSCC-96-03, and SR-ISCC-
96-04] (order approving proposed rule changes seeking authority to
enter into limited cross-guaranty agreements filed by MBS Clearing
Corporation, Government Securities Clearing Corporation and
International Securities Clearing Corporation).
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OCC proposes to add new paragraph (i) to Section 5 of Article VIII
of its by-laws to provide explicitly that OCC may use the clearing fund
contributions of a clearing member to satisfy its limited cross-
guarantee obligations to other clearing agencies with respect to that
clearing member. New paragraph (i) provides that the amount charged
against a clearing member's contributions to the stock clearing fund
and non-equity securities clearing fund will be in proportion to the
clearing member's contributions to the stock clearing fund and the non-
equity securities clearing fund as fixed at the time of the suspension
of the clearing member. New paragraph (i) does not provide OCC with any
authority to use the clearing fund contributions of other clearing
members (i.e., other than the defaulting clearing member) to satisfy
any limited cross-guarantee obligation that OCC has to another clearing
agency because OCC will not have any obligation pursuant to a limited
cross-guarantee agreement which could require recourse to the clearing
fund contributions of other clearing members.
OCC also proposes to add new paragraph (j) to Section 5 of Article
VIII of its by-laws to establish a rule for allocating funds received
by OCC pursuant to a limited cross-guarantee agreement where OCC has
charged, or will charge, the stock clearing fund and the non-equity
securities clearing fund. The new paragraph provides that the funds
will be credited to the stock clearing fund and the non-equity
securities clearing fund in proportion to the computed contributions of
the suspended clearing member to the two clearing funds as fixed at the
time of the suspension of the clearing member. If one of the two
clearing funds is made whole then the remainder of the funds will be
credited entirely to the other clearing fund.
OCC proposes to add three new interpretations to Article VIII,
Section 5 of its by-laws. New interpretation .03 states explicitly that
if OCC has a deficiency after the application of all available funds of
a suspended clearing member and if OCC cannot determine whether or in
what amount it will be entitled to receive funds from a cross-guarantee
party or when it will receive such funds, with respect to the clearing
member, OCC may, in its discretion, make a charge against other
clearing members; contributions to the stock clearing fund and/or the
non-equity securities clearing fund. New interpretation .04 states
explicitly that if OCC determines that it is likely to receive funds
from a cross-guarantee party with respect to the clearing member, OCC
may in anticipation of receipt of the funds from the cross-guarantee
party, forego making a charge, or make a reduced charge against other
clearing members' contributions to the stock clearing fund and/or the
non-equity securities clearing fund. If OCC does not receive the
anticipated funds or receives funds in a smaller amount than
anticipated, OCC may make a charge or an additional charge against
other clearing members' contributions to the stock clearing fund and/or
the non-equity securities clearing fund. New interpretation .05 states
explicitly that if OCC were ever to be required to refunds funds which
it had received from a cross-guarantee party back to the cross-
guarantee party, OCC could make a charge or an additional charge
against other clearing members' contributions to the stock clearing
fund and/or the non-equity securities clearing fund to make itself
whole. The charge would be based on the other clearing members'
computed contributions as fixed at the time of the refund and not at
the time of the suspension of the clearing member.
OCC also proposes to add a new paragraph (d) to its Rule 1104 to
state explicitly that OCC may use any positive balance remaining in a
clearing member's liquidating settlement account to satisfy any
obligation with respect to that clearing member which OCC may have to
any other clearing agency pursuant to a limited cross-guarantee
agreement. OCC believes the new paragraph is needed to assure that
OCC's use of the assets of a clearing member in this manner is
authorized by OCC's rules because Rule 1104(a) states that funds of a
suspended clearing member subject to OCC's control shall be placed in
the clearing member's liquidating settlement account and used ``for the
purposes hereinafter specified.''
OCC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder because the proposal assures the safeguarding of securities
and funds in its custody or control or for which OCC is responsible.
B. Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will have any
material impact 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 by
OCC with respect to the proposed rule change, an none have been
received.
[[Page 4091]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which OCC consents, the Commission will:
(a) By order approve such proposed rule change or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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, N.W., Washington, D.C. 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, N.W.,
Washington, D.C. 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-96-18 and should be
submitted by February 18, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2012 Filed 1-27-97; 8:45 am]
BILLING CODE 8010-01-M
