01-28489. Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change To Rescind Concentration Restrictions on Letters of Credit Issued by Certain Non-U.S. Institutions

November 6, 2001.

On April 11, 2001, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-OCC-2001-03) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).^[1] Notice of the proposed rule change was published in the Federal Register on August 24, 2001.^[2] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

I. Description

The purpose of the proposed rule change is to rescind the concentration restrictions placed upon the use as margin of letters of credit issued by a non-U.S. institution where the issuing institution has qualified as a financial holding company under Regulation Y of the Board of Governors of the Federal Reserve System (“Fed”) or is an institution owned by or under the control of such a financial holding company.

OCC began accepting letters of credit from non-U.S. institutions in January 1983 in response to concerns that U.S. institutions were increasing their fees to clearing members or were otherwise reducing their overall commitment to financing clearing members. A combination of factors led OCC to impose more stringent qualification standards on non-U.S. institutions than on U.S. institutions issuing letters of credit for the benefit of OCC.^[3] The qualification standards generally are found in sections .01 through .08 of the Interpretations and Policies under OCC Rule 604.

OCC recently reassessed these standards to ensure that they remain appropriate and achieve their intended purposes. OCC concluded that with the enactment of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (“GLB Act”) ^[4] and the Fed amendments to Regulation Y implementing GLB Act, the concentration restrictions found in Interpretations and Policies .02 should be rescinded for certain non-U.S. institutions.

GLB Act created a new type of holding company called a “financial holding company” and specified certain eligibility requirements for such institutions.^[5] To become a financial holding company, GLB Act requires a bank holding company to submit a declaration to the Fed that the company elects to be a financial holding company and a certification that all of the depositor institutions controlled by the company are well capitalized and well managed. Under GLB Act, foreign banks are specifically permitted to qualify as financial holding companies. GLB Act also requires the Fed to apply comparable capital and management standards to such banks that are comparable to those applied to U.S. banks owned by a financial holding company, giving due regard to certain enumerated principles.

The Fed amended Regulation Y in order to implement provisions of the GLB Act governing the creation and conduct of financial holding companies.^[6] Section 225.90 sets forth requirements that a foreign bank must meet for purposes of qualifying as a financial holding company, including capitalization and management tests.^[7] The well-capitalized test includes risk based capital assessments.^[8] The well-managed test requires the foreign bank to receive satisfactory Fed regulatory ratings, to receive the consent of its home country supervisor to the expansion of its U.S. activities, and to meet management standards comparable to those required of a U.S. bank owned by a financial holding company.^[9] A foreign bank's election to be treated as a financial holding company is effective on the thirty-first day after the date that the election was received by the appropriate Federal Reserve Bank unless the applicant receives prior written notice that its election is effective or the applicant is notified that the election is ineffective.^[10]

OCC believes that the Fed's regulatory policies governing the qualification of foreign banks as financial holding companies provide sufficient safeguards as to the creditworthiness of such institutions and the collectibility of letters of credit issued by them to warrant rescinding the concentration restrictions currently imposed on such institutions. Letters of credit issued by non-U.S. institutions currently represent only 3.2% of total margin deposits,^[11] and OCC does not believe that rescinding the concentration requirements for qualified non-U.S. financial holding companies will materially increase its exposure to letters of credit issued by non-U.S. institutions specifically or letters of credit generally.

II. Discussion

Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the clearing agency's custody or control or for which it is responsible. The rule change removes restrictions on the percentage of clearing member's margin of obligations that may be satisfied by letters of credit issued by non-U.S. institutions where the issuing institution has qualified as a financial holding company under Regulation Y or is an institution owned by or under the control of such a financial holding company. Removing the restrictions from such non-U.S. institutions gives clearing members a larger pool of financially sound institutions from which they may obtain letters of credit to use the satisfy their margin obligations while still providing OCC with comfort that the non-U.S. issuing financial institutions have sufficient capital and adequate management to issue letters of credit for OCC margin purposes. Therefore, the Commission finds that OCC's proposed rule change is consistent with section 17A of the Act and the rules and regulations thereunder.

III. Conclusion

On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (File No. SR-OCC-2001-03) be and hereby is approved.

For the Commission, by the Division of Market Regulation pursuant to delegated authority.^[12]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Act Release No. 44723, (August 20, 2001), 66 FR 44659.

3.  Those factors included concerns about the diversity of regulatory structures, exposure to economic or political risk outside of the United States, and OCC's relative inexperience in dealing with non-U.S. institutions. Securities Exchange Act Release No. 19422 (January 12, 1983), 48 FR 2481 [File No. SR-OCC-82-8] (formalizing certain OCC criteria for approving domestic and foreign banks as issuers of letters of credit for margin purposes).

4.  Gramm-Leach-Bliley Financial Modernization Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338 (1999).

5.  Qualified financial holding companies may engage in securities, insurance, and other activities that are financial in nature or incidental to a financial activity. 50 FR 14433.

6.  See 66 FR 399 (January 3, 2001) (Board of Governors of the Federal Reserve Board adopting a final rule to amend Regulation Y to implement the financial holding company provisions of the GLB Act).

7.  Section 225.93 sets forth provisions that are applicable should a foreign bank fail to meet the applicable capital and management standards and specifies the consequences of such failure. Consequences include being required to execute an agreement with the Fed providing for a schedule of actions to be taken by the foreign bank to become compliant and, if the foreign bank is unable to meet such schedule, being subjected to an order requiring the divestiture or termination of certain business in the United States. Section 12 CFR 225.93.

8.  Section 12 CFR 225.90(b).

9.  Section 12 CFR 225.90(c).

10.  Section 12 CFR 225.92. The Fed publishes a list of effective financial holding company elections on its web site. As of January 2001, 13 out of 32 non-U.S. institutions approved by OCC to issue letters of credit have qualified as financial holding companies.

11.  Letters of credit currently represent only 11.9% of total margin deposits.

12.  17 CFR 200.30-3(a)(12).