01-28274. Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to Forms of Margin Collateral

November 5, 2001.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] notice is hereby given that on March 9, 2001, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) and on August 24, 2001, amended 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 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 expand the forms of high quality debt securities that OCC may accept as margin collateral to include non-callable fixed income debt securities issued by approved government sponsored enterprises.

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]

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

The purpose of this rule change is to expand the types of debt securities that clearing members may deposit with OCC as margin collateral. The declining supply of U.S. Treasury bills, notes, and bonds has been the subject of increased scrutiny from the financial markets. In light of this decreasing supply, OCC proposes to accept non-callable, fixed income debt securities issued by approved government sponsored enterprises (“GSEs”) as another form of high quality, liquid debt securities that clearing members may deposit as margin. OCC's membership/margin committee has approved the debt securities issued by two GSEs, the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), as being eligible for deposit. Both companies are stockholder-owned, Congressionally chartered corporations with the public purpose of increasing the supply and availability of home mortgages.

In 1998, Freddie Mac initiated its Reference Debt Program (“RDP”) in order to finance the mortgages it retains. Through the RDP program, which was expanded to include bills in 2000, Freddie Mac sells large issues of long and short-term non-callable debt (i.e., bills, notes, and bonds) to provide investors with high quality debt securities. The debt securities generally are distributed through a group of participating dealers that also support secondary trading in the securities. To ensure broad based dealer participation, Freddie Mac limits the allocation to any one dealer to 35 percent of the offered amount. The debt securities are offered according to a predetermined schedule and issued in sufficient quantities to provide investors with liquid secondary markets.^[3] The RDP debt securities issued by Freddie Mac are the general obligations of the company and are not secured by the full faith and credit of the U.S. Government. Not all RDP debt has been rated. However, all such debt that has been rated has received S&P and Moody's top ratings. Domestic clearing and settlement may be done through organizations participating in one or more U.S. clearing systems, principally the book entry system operated by the Board of Governors of the Federal Reserve System or the DTC system. As a result, OCC will be readily able to perfect its security interest in these securities.

Also in 1998, Fannie Mae launched the Benchmark Debt Program (BDP), its debt financing initiative. The BDP model is almost identical to the RDP model. Through the BDP, Fannie Mae sells large issues of non-callable long and short-term debt securities ^[4] that are the general obligations of the company and are not secured by the full faith and credit of the U.S. Government. Other than the total value of securities issued in the programs, the most notable difference between the RDP and BDP is that all BDP securities have been rated and have received Moody's and S&P's top credit ratings.

The debt securities issued by Freddie Mac and Fannie Mae are liquid, marketable, and of high credit quality, making them an appropriate form of collateral. These characteristics ensure that OCC will be readily able to liquidate the securities and realize their market value in order to cover any clearing member default. Securities haircuts have been prescribed to cover any market and liquidity risk.^[5] They are based upon OCC's analysis of the daily volatility of these issues since their launch. The haircuts in all cases cover the largest one-day decline in the securities and, therefore, are considered appropriate.

OCC believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations. In particular, OCC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act ^[6] because it responds to the decreasing supply of U.S. Government securities by allowing clearing members to deposit other high quality, liquid debt securities with OCC as margin collateral in a manner that safeguards securities that are within OCC's custody and control.

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

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 the 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, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 will also be available for inspection and copying at the principal office of OCC. All submissions should refer to File No. SR-OCC-2001-04 and should be submitted by December 4, 2001.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[7]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  The Commission has modified parts of these statements.

4.  At the end of 2000, the total outstanding notional value of non-callable RDP bonds and notes approached $100 billion while the outstanding notional value of the non-callable RDP bills approached $600 billion. Freddie Mac's web site, www.freddiemac.com,, provides a detailed description of the RDP program.

5.  At the end of 2000, the total outstanding notional value of non-callable BDP bonds and notes approached $180 billion. The outstanding notional value of BDP bills approached $350 billion in notional value at the end of 2000. Fannie Mae's web site, www.fanniemae.com,, provides a detailed description of its BDP program.

5.  Technical changes are also being made to Rule 604(b)(1) in order to more accurately describe the maturity periods of Government securities for purposes of valuation as margin collateral.

6.  15 U.S.C. 78q-1(b)(3)(F).

7.  17 CFR 200.30-3(a)(12).