[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Notices]
[Pages 67005-67006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31307]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36606; International Series Release No. 905; File No.
SR-CC-95-11]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change Modifying the Capital
Computation Formula and Reporting Requirements Applicable to Canadian
Clearing Members of The Options Clearing Corporation
December 20, 1995.
On July 13, 1995, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-OCC-95-11) pursuant to Section 19(b)(1) of the
Securities and Exchange Act of 1934 (``Act'').\1\ Notice of the
proposal was published in the Federal Register on September 13,
1995.\2\ No comment letters were received. For the reasons discussed
below, the Commission is granting approval of the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 36197, International
Series Release No. 850 (September 7, 1995), 60 FR 47633.
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I. Description of the Proposal
OCC is modifying its rules concerning the financial requirements of
Canadian clearing members, including the capital computation formula
and reporting requirements applicable to Canadian clearing members, to
reflect revisions to the capital computation and reporting standards
recently adopted by various Canadian regulatory authorities. OCC's
rules allow Canadian clearing members to submit required financial
reports in accordance with the accounting and reporting standards of
their appropriate self-regulatory body.\3\ In monitoring Canadian
clearing members' compliance with OCC financial requirements, OCC
converts this financial information into a form consistent with Rule
15c3-1 under the Act.\4\
\3\ OCC By-law, Article I.N. (2) employs the term ``appropriate
self-regulatory body'' as defined in the Supplementary Instructions
re Completion of the Joint Regulatory Financial Questionnaire to
refer to the government agency or self-regulatory authority
primarily responsible for regulating the activities of a Canadian
Clearing Member.
\4\ 17 CFR 240.15c3-1.
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The capital formula applied under Canadian securities regulations
to Canadian securities firms has been revised and incorporated into a
new standard report format. The prior capital formula applied a minimum
capital requirement, as assessed by a working capital computation
(i.e., total capital less nonallowable assets), based upon volume of
business determined by a percentage of adjusted liabilities. The new
capital formula continues to be based on a working capital computation
minus certain charges, including charges that reflect the risk of
proprietary securities held in inventory. However, the new capital
formula replaces the concept of adjusted liabilities with revised
definitions of allowable assets and margin charges that are intended to
reflect the credit worthiness of counterparties and the economic
substance of transactions.
The report format used by Canadian securities firms to report their
capital computation also has been revised. Accordingly, OCC is changing
its financial requirements and reporting rules to conform them to the
revised capital formula and reporting format.
Specifically, the prior Interpretations and Policies
(``Interpretation'') .01 to OCC Rule 301, regarding initial financial
requirements, provided that a Canadian clearing member that commenced
doing business as a broker or dealer within twelve months prior to its
admission to OCC clearing membership must have maintained ``initial net
free capital,'' as defined in the Supplementary Instructions re
Completion of the Joint Regulatory Financial Questionnaire
(``Supplementary Instructions''),\5\ of not less than ten percent of
such clearing member's ``adjusted liabilities,'' as defined in the
Supplementary Instructions, until the later of (i) three months after
its admission to OCC clearing membership or (ii) twelve months after it
commenced doing business as a broker or dealer. Interpretation .01 to
OCC Rule 302, regarding minimum net capital requirements, provided that
a Canadian clearing members must have maintained net free capital, as
defined in the Supplementary Instructions, of not less than the amount
of net free capital that would be required of such clearing member
under Section 100.2 of the By-Laws of the Investment Dealers
Association of Canada (``IDAC'') if the clearing member was a member of
the IDAC.
\5\ The Supplementary Instructions are issued by the Investment
Dealers Association of Canada and provide additional guidance for
securities firms in connection with the preparation of the Joint
Regulatory Financial Questionnaire and Report.
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As amended, Interpretation .01 to Rule 301 requires a Canadian
clearing member to maintain an initial ``early warning reserve,'' as
determined in accordance with the Joint Regulatory Financial
Questionnaire and Report (``JRFQ&R)''),\6\ of not less than $1, 000,000
(U.S.) for the same period as previously required. The amended
Interpretation .01 to Rule 302 will provide that the minimum net
capital requirement of a Canadian clearing member is the early warning
reserve, as determined under the JRFQ&R, in an amount not less than the
greater of $750,000 (U.S.) or 2% of such Canadian clearing member's
total margin requirements as determined in accordance with the JRFQ&R.
Application of the early warning reserve as determined under the JRFQ&R
also replaces the use of the net free capital formula as determined
under the Interpretations to OCC Rules 303 and 304, regarding early
warning notice and restrictions on distributions.
\6\ The JRFQ&R is a financial reporting form which Canadian
securities firms are required to prepare and submit to appropriate
Canadian regulatory authorities and provincial exchanges to advise
them of such firms' financial condition.
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Finally, in connection with OCC's financial reporting requirements,
each Canadian clearing member now is required to file its JRFQ&R with
OCC on a monthly basis except as provided in the Interpretations to
Rule 306. The JRFQ&R replaces the Joint Industry Monthly Financial
Report which was previously required under the
[[Page 67006]]
Interpretations to OCC's financial reporting rule.
II. Discussion
Section 17A(b)(3)(F) \7\ of the Act requires the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible and to foster cooperation and coordination
with persons engaged in the clearance and settlement of securities
transactions. The Commission believes OCC's proposed rule change is
consistent with the requirements of Section 17A(b)(3)(F) because the
proposal conforms OCC's rules pertaining to Canadian clearing members
to the revised capital computation and reporting standards adopted by
various Canadian regulatory authorities. OCC allows Canadian clearing
members to submit required financial reports to OCC in accordance with
the accounting and reporting standards of their appropriate Canadian
self-regulatory body. OCC then converts this financial information into
a form consistent with Rule 15c3-1 under the Act \8\ in order to
monitor Canadian clearing member compliance with OCC financial
requirements. As a result of this monitoring scheme, conformity of OCC
rules to the current computation and reporting standards of Canadian
regulatory authorities is critical to the efficient and proper
monitoring of Canadian clearing members' compliance with OCC financial
requirements. The Commission believes the proposed rule change should
provide consistency between OCC's rules concerning Canadian clearing
members' financial requirements and the capital computation and
reporting standards adopted by Canadian regulatory authorities and
thereby should help assure the safeguarding of securities and funds
which are in the custody or control of OCC or for which it is
responsible and should foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions.
\7\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
\8\ 17 CFR 240.15c3-1.
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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-95-11) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
\9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31307 Filed 12-26-95; 8:45 am]
BILLING CODE 8010-01-M
