[Federal Register Volume 61, Number 30 (Tuesday, February 13, 1996)]
[Notices]
[Pages 5594-5596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3131]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36819; File No. SR-OCC-95-12]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change Amending the Agreements Governing
Non-Proprietary Cross-Margining Accounts of Market Professionals in
Cross-Margining Programs
February 7, 1996.
On August 15, 1995, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-95-12) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On
September 12, 1995, and on October 11, 1995, OCC filed amendments to
the proposed rule change to include, in addition to proposed changes to
the agreements governing non-proprietary cross-margining (``XM'')
accounts in the XM program among OCC, The Intermarket Clearing
Corporation (``ICC''), and the Chicago Mercantile Exchange (``CME''),
proposed changes to the agreements governing non-proprietary XM
accounts in the XM program between OCC and ICC and in the XM program
between OCC and the Kansas City Board of Trade Clearing Corporation
(``KCC''), respectively.\2\ On January 11, 1996, OCC filed an amendment
to the proposed rule change to correct minor typographical errors in
two of the agreements that are the subject of the proposed rule
change.\3\ Notice of the proposal was published in the Federal Register
on December 11, 1995.\4\ 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. Sec. 78s(b)(1) (1988).
\2\ Letters from Jean M. Cawley, OCC, to Jerry W. Carpenter,
Assistant Director, Division of Market Regulation (``Division''),
Commission (September 11, 1995, and October 10, 1995).
\3\ Letter from Jean M. Cawley, OCC, to Jerry W. Carpenter,
Assistant Director, Division, Commission (January 8, 1996).
\4\ Securities Exchange Act Release No. 36551, (December 4,
1995), 60 FR 63558.
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I. Description of the Proposal
OCC is amending the agreements governing non-proprietary XM
accounts of market professionals in the OCC/ICC/CME XM program, in the
OCC/ICC XM program, and in the OCC/KCC XM program in order to make the
agreements correspond with the revised distributional scheme adopted by
the Commodity Futures Trading Commission (``CFTC'') in the new appendix
to the CFTC's bankruptcy rules.\5\ The proposed rule change also
conforms the terms of the agreements governing the proprietary and non-
proprietary XM accounts in the OCC/KCC XM program with the terms of the
agreements used in the OCC/ICC/CME XM program and in the OCC/ICC XM
program.
\5\ The CFTC's distributional requirements are set forth in
Appendix B to Part 190 of the CFTC's General Regulations. 17 CFR
190. The CFTC's distributional framework was adopted in April 1994.
59 FR 17468 (April 13, 1994).
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The Commission and the CFTC approved non-proprietary cross-
margining in November 1991.\6\ As part
[[Page 5595]]
of the CFTC's approval, it required each futures commission merchant
(``FCM'') participating in cross-margining to agree that all funds and
property in a non-proprietary XM account would be treated as customer
property subject to the segregation requirements of the Commodity
Exchange Act \7\ and to agree to segregate such funds and property from
that of non-XM customers. The CFTC also required each market
professional to subordinate its XM related claims to customer claims
based on non-XM positions.
\6\ Securities Exchange Act Release Nos. 29991 (November 26,
1991), 56 FR 61458 (order approving OCC/CME non-proprietary XM
program); 56 FR 61404 (CFTC 1991) (order approving OCC/CME non-
proprietary XM program); 30041 (December 5, 1991) 56 FR 64824 [File
Nos. SR-OCC-90-04 and SR-ICC-90-03] (order approving OCC/ICC non-
proprietary, market professional cross-margin program); and 56 FR
61406 (CFTC 1991) (order approving OCC/ICC non-proprietary cross-
margin program. In August 1993, the Commission approved expansion of
the OCC/KCC XM program established in February of 1992 to include
non-proprietary positions. Securities Exchange Act Release No. 32708
(August 2, 1993), 58 FR 42586 [File No. SR-OCC-93-13] (order
approving OCC/KCC non-proprietary XM program).
\7\ 7 U.S.C. Sec. 6d(2) (1988) and 17 CFR 1.20 (1991).
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Pursuant to that subordination requirement, if a clearing member
became insolvent, all non-XM customers of the FCM would be paid their
pro rate share of the combined segregated funds pool, including funds
of XM market professionals, before the XM market professionals received
any portion of their claims. The subordination was intended to insulate
non-XM customers from losses arising from XM accounts and to ensure
that the XM accounts of market professionals would not be treated as
accounts of securities customers subject to liquidation under the
Securities Investor Protection Act of 1970 (``SIAP'') \8\ or the stock
broker liquidation provisions of the Bankruptcy Code.\9\ As a result,
the accounts would be liquidated as accounts of commodity customers
under the commodity broker liquidation provisions of the Bankruptcy
Code \10\ and the CFTC's bankruptcy rules,\11\ and both the
Commission's order and the CFTC's order approving non-proprietary XM
provide for such result.
\8\ 15 U.S.C. Secs. 78aaa-78lll (1988).
\9\ 11 U.S.C. Secs. 741-752 (1988).
\10\ 11 U.S.C. Secs. 761-766 (1988).
\11\ 17 CFR 190.1-190.10.
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The revised distribution rules adopted by the CFTC continue the
concept of subordination for the purpose of ensuring that the market
professionals' securities included in a XM account will be subject to
commodity broker liquidation rules but modify the method for property
distribution in the event of the liquidation of the firm(s) carrying
the non-proprietary XM account.\12\ Under the revised distributional
scheme, FCMs will continue to make separate calculations for non-XM
customers and XM market professionals, and funds deposited pursuant to
those calculations will continue to be separately maintained. However,
in the event of the failure of the firm(s) carrying the non-proprietary
XM accounts, the respective shortfalls, if any, of the pools of funds
would be determined as a percentage of the segregation requirement for
each pool.
\12\ Supra note 5.
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In the event of (i) No shortfall in either pool, (ii) an equal
percentage of shortfall in both pools, (iii) a shortfall in the non-XM
pool only, or (iv) a greater percentage of shortfall in the non-XM pool
than in the XM pool, then the two pools of segregated funds would be
combined and non-XM customers and XM market professionals would share
pro rata in the combined pool. In the event of (i) A shortfall in the
XM pool only or (ii) a greater percentage shortfall in the XM pool than
in the non-XM pool, then the two pools of segregated funds would not be
combined. Instead, XM market professionals would share pro rata in the
pool of XM segregated funds while non-XM customers would share pro rata
in the pool of non-XM segregated funds.
In order to implement the CFTC's new distributional requirements,
the clearing organizations operating non-proprietary XM programs must
submit amended agreements to the respective regulatory authorities
deleting the subordination requirement and substituting a reference to
the CFTC's distribution rules. Accordingly, OCC is making those and
other conforming changes \13\ to the agreements governing non-
proprietary XM accounts for the XM program among OCC, CME, and ICC, the
XM program between OCC and ICC, and the XM program between OCC and KCC.
\13\ The conforming changes include provisions that ensure that
non-broker-dealer XM market professional will not be treated as
``customers'' for purposes of Rule 15c3-3 under the Act pursuant to
the conditions set forth in the Commission's no-action letter from
Michael Macchiaroli, Associate Director, Division of Market
Regulation, Commission, to Jean Cawley, OCC (July 31, 1995).
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In addition, pursuant to the amendment filed on October 11, 1995,
OCC is revising the agreements governing the proprietary XM accounts in
the OCC/KCC XM program to conform the terms of those agreements to the
terms of the agreements used in the OCC/ICC/CME and OCC/ICC XM
programs. These revisions primarily consist of the use of uniform
definitions under the agreements.
II. Discussion
Section 17A(b)(3)(F) \14\ of the Act requires that the rules of a
clearing agency be designed to facilitate the prompt and accurate
clearance and settlement of securities transactions, 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 amending the agreements governing
the OCC/ICC/CME XM program, the OCC/ICC XM program, and the OCC/KCC XM
program to correspond with the revised bankruptcy distribution scheme
adopted by the CFTC is consistent with the requirements of Section
17A(b)(3)(F).
\14\ 15 U.S.C. Sec. 78q-1(b)(3)(F) (1988).
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The Commission previously has noted the widespread belief that XM
systems can provide (i) A more accurate measure of intermarket risk
exposure for clearing organizations, (ii) added liquidity and depth to
markets by reducing cash flow levels for clearing members and by
reducing potential for financial gridlock, particularly during volatile
markets when clearing organizations may demand additional clearing
margin from their members, (iii) more efficient use of broker-dealer
capital due to a more accurate measure of market risk, (iv) reduced
clearing costs by the integration of clearing functions and the
centralization of asset management, and (v) safer broker-dealer
liquidation mechanisms by simplifying and clarifying the unwinding of
each side of an intermarket hedge.\15\ The Commission believes that by
conforming the terms of OCC's agreements governing the OCC/ICC/CME XM
program, the OCC/ICC XM program, and the OCC/KCC XM program with the
CFTC's new distributional framework, the proposal should help
facilitate the continued benefits derived from the operation of OCC's
XM programs. The agreements also should provide that any claim asserted
by an XM market professional arising out of or based upon an XM non-
proprietary account will be subordinated to the claims of all other
customers, as defined in Subchapter III of Chapter 7 of the Bankruptcy
Code \16\ or SIPA,\17\ to the extent that such a claims would otherwise
be a claim against customer property. The Commission believes the
foregoing amendments to the agreements should ensure that XM accounts
of market professionals will continue to be treated as non-customer
accounts for purposes
[[Page 5596]]
of Rule 15c3-3 under the Act.\18\ The amendments to the agreements
facilitating the treatment of XM accounts in this manner foster
cooperation and coordination with persons engaged in the clearance and
settlement of securities transactions by helping to assure that the
liquidation of a FCM can be done in accordance with the CFTC's
distribution framework, thus helping to assure the safeguarding of
securities and funds which are in the custody or control of OCC or for
which it is responsible.
\15\ Securities Exchange Act Release No. 30041 (December 5,
1991), 56 FR 64824 [File Nos. SR-OCC-90-04 and SR-ICC-90-03] (order
approving OCC/ICC non-proprietary, market professional cross-
margining program).
\16\ 11 U.S.C. Secs. 741-752.
\17\ 15 U.S.C. Secs. 78aaa-78lll.
\18\ 17 CFR 240.15c3-3.
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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-95-12) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\19\
\19\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3131 Filed 2-12-96; 8:45 am]
BILLING CODE 8010-01-M
