[Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2723]
[[Page Unknown]]
[Federal Register: February 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33543; File Nos. SR-OCC-92-05; SR-NSCC-91-07; SR-SCCP-
92-01; and SR-MCC-92-02]
Self-Regulatory Organization; The Options Clearing Corporation,
et al.; Order Approving Proposed Rule Changes Relating to Revised
Options Exercise Settlement Agreements
January 28, 1994.
On January 27, 1992, October 21, 1991, February 27, 1992, and March
5, 1992, The Options Clearing Corporation (``OCC''), the National
Securities Clearing Corporation (``NSCC''), the Stock Clearing
Corporation of Philadelphia (``SCCP'') and the Midwest Clearing
Corporation (``MCC''), respectively, filed proposed rule changes1
with the Securities and Exchange Commission (``Commission'') under
section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'').2 The self-regulatory organizations filed several
amendments to the original filings.3 The proposed rule changes and
amendments implement revised options exercise settlement agreements
among OCC, NSCC, SCCP, and MCC (hereinafter referred to as the
``correspondent clearing corporations'' or ``CCCs''). The Commission
published notice of these proposed rule changes in the Federal Register
on October 14, 1993.\4\ No comments have been received. For the reasons
discussed below, the Commission is approving the proposed rule changes.
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\1\File Nos. SR-OCC-92-05, SR-NSCC-91-07, SR-SCCP-92-01, and SR-
MCC-92-02.
\2\15 U.S.C. 78s(b)(1).
\3\OCC filed Amendment No. 1 to File No. SR-OCC-92-05 on
February 27, 1992, and Amendment No. 2 on June 4, 1993. SCCP filed
Amendment No. 1 to File No. SR-SCCP-92-01 on May 26, 1992, and
Amendment No. 2 on July 1, 1993. MCC filed Amendment No. 1 to File
No. SR-MCC-92-02 on January 7, 1993, and Amendment No. 2 on July 6,
1993. NSCC filed Amendment No. 1 to File No. SR-NSCC-91-07 on May
19, 1993.
\4\The Commission first published notice in Securities Exchange
Act Release Nos. 30488 (March 17, 1992), 57 FR 10201 [File No. SR-
OCC-92-05]; 30489 (March 17, 1992), 57 FR 10197 [File No. SR-NSCC-
91-07]; 30490 (March 17, 1992), 57 FR 10205 [File No. SR-SCCP-92-
01]; and 30491 (March 17, 1992) 57 FR 10197 [File No. SR-MCC-92-02].
The Commission republished notice of the amended proposed rule
changes in Securities Exchange Act Release No. 33011 (October 4,
1993), 58 FR 53231.
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I. Description
The proposed rule changes will permit the correspondent clearing
corporations to put into effect amended and restated agreements
providing for the settlement of exercises and assignments of equity
options. In addition, OCC's proposed rule change makes related changes
to OCC's By-Laws, Rules, and certain form agreements used by OCC's
clearing members.
In the original filings, OCC, NSCC, SCCP, and MCC proposed to make
effective Amended and Restated Options Exercise Settlement Agreements
(hereinafter collectively referred to as the ``First Restated
Agreements''). OCC, NSCC, SCCP, and MCC have amended the First Restated
Agreements (hereinafter collectively referred to as the ``Second
Restated Agreements'') and will make the three Second Restated
Agreements, which are the subjects of this approval order, effective in
place of the three First Restated Agreements.5 The Second Restated
Agreements replace the options exercise settlement agreements that were
previously in effect between OCC and each CCC (hereinafter collectively
referred to as the ``Original Agreements''). The MCC and SCCP Second
Restated Agreements are substantially identical in form. The NSCC
Second Restated Agreement is substantially in the same form with
variations reflecting that NSCC will provide OCC with a daily report
identifying all securities which are eligible for settlement through
NSCC's continuous net settlement (``CNS'') system.
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\5\Each Second Restated Agreement provides that it will become
effective on the later of the effective date set forth in the Second
Restated Agreement or the date of approval by the Commission of both
parties' proposed rule changes that include the Second Restated
Agreement as an Exhibit. The date of the Commission approval will be
the effective date for all three Second Restated Agreements. Each
Second Restated Agreement provides that it shall become effective in
lieu of the respective First Restated Agreement.
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A. The Original Agreements and the Changes Made by the Second Restated
Agreements
(1) Operation and Continuing Use of Broker-to-Broker Settlement
Procedures
Prior to implementing the Original Agreements, exercises of equity
options were settled broker-to-broker. In broker-to-broker settlement,
upon receipt of an equity option exercise notice, OCC would issue a
delivery advice to the delivering clearing member (i.e., the assigned
clearing member in the case of a call or the exercising clearing member
in the case of a put) and to the receiving clearing member (i.e., the
exercising clearing member in the case of a call or the assigned
clearing member in the case of a put). The delivery advice would
instruct the delivering clearing member to make delivery of the
security underlying the exercised option directly to the receiving
clearing member and would specify the address at which delivery was to
be made and the exercise settlement amount to be paid. OCC continues to
have rules governing broker-to-broker settlement.6 However,
broker-to-broker settlement has been largely replaced by settlement
through the facilities of the CCCs. The Second Restated Agreements
provide that OCC will use broker-to-broker settlement only for
exercises and assignments of equity options overlying securities which
are not eligible for settlement in NSCC's continuous net settlement
system (``CNS Securities'').7
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\6\OCC Rules 901-912.
\7\CNS Securities are defined only in the terms of NSCC's CNS
System and not in terms of the securities that are eligible for each
individual CCC's continuous net settlement system. The definition is
new in the Second Restated Agreements as is the exclusion of non-CNS
Securities. Both of these changes are made necessary by changes to
OCC's margin system, which changes were designed to improve the
margin system's ability to evaluate and neutralize OCC's risk during
the five business day period between the exercise and settlement of
an equity option. Because all securities underlying equity options
issued by OCC are ordinarily CNS Securities, all exercise
settlements will continue to be settled through the CCCs. However,
in unusual circumstances in which an underlying security ceases to
be a CNS Security or in which the owners of an underlying security
become entitled to an additional security as a result of a rights
offering or other extraordinary transaction and that additional
security is not a CNS Security, exercise settlement may be effected
entirely or partly through OCC's broker-to-broker settlement system.
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(2) Operation of the Original Options Exercise Settlement Agreements
After OCC entered into the Original Agreements with the CCCs, OCC
began to settle the great majority of equity option exercises through
the facilities of the CCCs.\8\ Each clearing member was required to
designate a CCC as its designated clearing corporation (``DCC'') for
purposes of effecting settlements of exercises of equity options.
Rather than delivering an underlying security broker-to-broker, in the
revised system a delivering clearing member delivers the security to
and receives payment of the exercise settlement amount from its DCC. A
receiving clearing member makes payment to and receives the security
from its DCC. If the delivering clearing member and the receiving
clearing member have designated the same CCC as their DCCs, all
deliveries and receipts of securities and all payments and receipts of
settlement monies will take place at that DCC in accordance with its
settlement procedures. If the delivering clearing member and receiving
clearing member have designated different CCCs as their respective
DCCs, the DCC for the delivering clearing member delivers the security
to and receives payment from the DCC for the receiving clearing member
in accordance with the interface arrangements between the two DCCs.
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\8\OCC first executed Options Exercise Settlement Agreements
with each of Stock Clearing Corporation (NSCC 's predecessor), SCCP,
and MCC in 1976.
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The Original Agreements provide for a five-day settlement period
for settlement of exercises of equity options. The date of the exercise
and the settlement period are analogous to the trade date (``T'') and
settlement period for ordinary, regular-way stock trades. OCC reports
the exercises and assignments of clearing members to their respective
DCCs during the night of T. The DCCs effect settlement on the fifth
business day after T (``T+5'').\9\
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\9\Consistent with the recently approved Commission Rule 15c6-1
under the Act that, effective June 1, 1995, will shorten from five
business days to three business days the standard settlement time
frame for most broker-dealer trades, the settlement period for
settlement of exercises of equity options will be shortened to three
business days. If the parties to the Second Restated Agreement
determine that the agreement needs to be amended to accommodate a
three business day settlement cycle of equity option exercises, the
CCCs and OCC will file the necessary proposed rule changes with the
Commission. Telephone conversation between James C. Yong, Deputy
General Counsel, OCC, and Jerry W. Carpenter, Branch Chief, and
Peter R. Geraghty, Attorney, Division of Market Regulation
(``Division''), Commission (December 29, 1993). For a detailed
description and discussion of Rule 15c6-1, refer to Securities and
Exchange Commission Release Nos. 33-7022; 34-33023; IC-19768;
(October 13, 1993), 58 FR 52891 [File No. S7-5-93] (order adopting
Rule 15c6-1).
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B. Changes Made by the Second Restated Agreements
The Second Restated Agreements alter and supplement the provisions
of the Original Agreements in several ways. The most important
modifications are set forth below.
(1) Timing of the Effectiveness of the Guarantees of the Correspondent
Clearing Corporations
Section 4 of each Original Agreement provides that if the CCC does
not notify OCC prior to 12 Noon Central Time (1 p.m. Eastern Time) on
T+4 that the CCC has ceased to act for an OCC clearing member which had
designated the CCC as its DCC, the CCC is unconditionally obligated as
of that time to complete the settlement of the exercise. These
provisions were in accordance with the provisions of the rules of the
CCCs as in effect in 1976. However, each CCC has subsequently amended
its rules to provide that the CCC will be unconditionally obligated to
complete settlement of any ``locked-in'' trade\10\ in any security
eligible for settlement through the CCC's continuous net settlement
system. The CCC's guarantees commence at midnight, or in the case of
MCC at 11:59 p.m., of the day the trade is reported to the CCC's
participants, which is usually T+1.
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\10\Locked-in trades are trades executed through automated order
routing and trade execution systems. Each of the Second Restated
Agreements provides that exercises and assignments of options
reported by OCC to the CCC will be deemed to be locked-in trades.
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Section 4(a) of each Second Restated Agreement provides that the
CCC will become unconditionally obligated to effect settlement or to
close out each exercise and assignment of equity options overlying CNS
Securities commencing at the time specified by the CCC 's rules
applicable to locked-in trades in securities eligible for settlement
through the CCC's continuous net settlement system. This revised
provision has the effect of causing options exercises and assignments
reported by OCC to the CCCs during the night of T to become guaranteed
as of the time at which the CCCs generally become obligated to effect
settlement (i.e., usually midnight at the end of T+1.\11\ OCC Rule 913
is amended to state expressly that OCC's direct guarantee to the
clearing member acting on behalf of the holder of the option terminates
at the time that the clearing member's DCC becomes unconditionally
obligated to effect settlement of the transaction.\12\
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\11\The trade guarantee rules of the CCCs described in the text
have been approved by the Commission on a temporary basis.
Securities Exchange Act Release No. 32547 (June 29, 1993), 58 FR
26491 [File Nos. SR-NSCC-93-04, SR-SCCP-93-02, and SR-MCC-93-02]
(order granting approval until June 30, 1994). If the Commission
should in the future decline to approve these rules, OCC and the
CCCs will need to review the question of the point in time at which
the CCCs guarantee options exercise settlements, and OCC will need
to review its procedures for settling stock option exercises and, in
particular, make adjustments to its margin system.
\12\Section 4(a) of each First Restated Agreement permitted the
CCC to eliminate an exercise transaction from its system in
accordance with its rules even after its guarantee had attached to
the transaction. Although this could have occurred only in the
extremely unlikely event that a security were to cease to be
eligible for settlement through the continuous net settlement system
of the CCC during the time remaining until actual settlement of the
transaction, OCC has concluded that it cannot efficiently develop a
margin system that reflects and neutralizes OCC's risk exposure if a
CCC's guarantee can be revoked after attaching to an exercise
transaction. Accordingly, each Second Restated Agreement provides
that the CCC will not eliminate any exercise transaction of options
overlying CNS Securities from its system after its guarantee
attaches.
Section 4(b) of each First Restated Agreement provided that in
the event of a default by an entity for which it is the DCC, the CCC
voluntarily could determine to complete settlement of transactions
with respect to which it had not yet become obligated at the time of
the default. OCC has concluded that it cannot efficiently develop a
margin system that reflects and neutralizes OCC's risk exposure if
the CCCs have the right to make this voluntary determination.
Accordingly, each Second Restated Agreement expressly provides that
the CCC will not effect settlement of transactions which have been
reported to it but to which it has not yet become obligated at the
time of the default.
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(2) Guarantee by OCC to Each Correspondent Clearing Corporation
Each Second Restated Agreement provides that OCC will compensate
the CCC for losses incurred by it in closing out the exercises and
assignments of a defaulting participating member.\13\ The amount of the
compensation will be the smallest of the ``net options loss,'' the
``net overall loss,'' or the ``maximum guarantee amount.'' The net
options loss is essentially the actual net loss incurred by the CCC in
closing out exercises and assignments of options to which the CCC is
unconditionally obligated at the time of the default. The net overall
loss is essentially the actual net loss incurred by the CCC in closing
out all transactions of the defaulting participating member to which
the CCC is unconditionally obligated at the time of the default. The
maximum guarantee amount is essentially the sum of the mark-to-market
amounts,\14\ positive and negative, for all options exercises and
assignments to which the CCC is unconditionally obligated at the time
of the default.\15\
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\13\The term participating member is defined in the Second
Restated Agreement as an entity that is an OCC clearing member and
also is a participant in a CCC or is an entity that is a party to
any of the three alternative arrangements for effecting settlement
through a CCC (i.e., the appointing, Canadian, or nominating
clearing arrangements). The alternative arrangements are discussed
later in this order.
\14\The term mark-to-market amount is defined to mean the
difference between the exercise price of an option and the closing
price of the underlying stock on the trading day immediately
preceding the then most recently completed regular morning
settlement of the participating member with OCC.
For example, if a participating member defaults prior to the
opening of business on T+4 and if the participating member has not
made regular morning settlement with OCC on T+4 but had made regular
morning settlement with OCC on T+3, the mark-to-market amount for
the stock underlying the option will be determined as of the close
of trading on T+2.
\15\The effect of the maximum guarantee amount is to cap OCC's
exposure at an amount that should be covered by the margin deposits
collected by OCC and that should at least be equal to the net of the
in-the-money amounts for all exercises and assignments being settled
through a CCC as of the close of trading on the day or days on which
the exercises were effected.
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OCC's guarantee in each Second Restated Agreement does not cover
the exposure of the CCC to losses from exercise and assignment
settlements that can result if a participating member transfers
settlements from its account at the CCC to the account of any other
member of the CCC, including another participating member or another
member that is an affiliate of the participating member, and the
transferee member defaults on its obligations to the CCC with respect
to those settlements. This occurs for several reasons. First, OCC will
not be a party to the transfer and accordingly will not have the
ability to review the impact of the transfer on the financial condition
of the transfree member. Second, the three prongs of the computation of
OCC's guarantee obligation are all premised on the assumption that the
negative values arising from short positions of a participating member
may be offset against the positive values arising from the long
positions of the participating member. This assumption may not hold
true if, for example, a participating member transfers its short
positions but not its offsetting long positions to the account of
another member and that member fails to make settlement.
(3) Permissible Arrangements for Effecting Settlement through a
Correspondent Clearing Corporation
Each Original Agreement contemplated that settlements of exercises
and assignments would be effected by entities that are OCC clearing
members and also are participants in a CCC. Each Second Restated
Agreement retains the basic settlement concept contemplated in the
Original Agreement and also contains expanded provisions addressing the
alternative settlement arrangement, which are described later in this
order.
(i) Revised agreements for appointing clearing members and
appointed clearing members. Each Second Restated Agreement contains
provisions addressing the alternative settlement arrangement that is
currently described in OCC's Rules in which an OCC clearing member
appoints another OCC clearing member to effect settlement on its behalf
at the appointed clearing member's DCC. In connection with implementing
the Second Restated Agreements, OCC is revising the form of agreement
that OCC requires from each OCC clearing member that appoints another
OCC clearing member that is also a participant in a CCC to act for it
for purposes of settling exercises and assignments of equity options.
The most important purpose of the revisions is to cause the appointing
clearing member to acknowledge that its obligations to OCC with respect
to settlements of exercises and assignments are not satisfied until its
appointed clearing member has satisfied its obligations to the DCC
arising from the exercises and assignments and, accordingly, that the
uses that OCC may make of the appointing clearing member's margin
deposits and other assets include satisfying any obligation to the DCC
incurred by OCC as a result of the DCC's settlement of the appointing
clearing member's exercises and assignments.
(ii) New agreement for Canadian clearing members that settle
through CDS. The Original Agreement between OCC and NSCC was amended in
1987 to include Canadian clearing members.\16\ In connection with
implementing the Second Restated Agreements, OCC will require each
Canadian clearing member that settles through the Canadian Depository
for Securities (``CDS'') to execute a new agreement. The primary
purpose of the new agreement is to cause each such Canadian clearing
member to acknowledge expressly that the obligations of the Canadian
clearing member to OCC with respect to settlement of exercises and
assignments are not satisfied until CDS has satisfied its obligations
to the DCC of the Canadian clearing member arising from the exercises
and assignments and, accordingly, that the uses that OCC may make of
the Canadian clearing member's margin deposits and other assets include
satisfying any obligation to the DCC incurred by OCC as a result of the
DCC's settlement of the Canadian clearing member's exercises and
assignments through CDS. The agreement also causes the Canadian
clearing member to acknowledge that it will be deemed not to have
designated a DCC for purposes of OCC's rules if CDS at any time should
cease to be a participant in good standing of a CCC. The new agreement
is designed to make the Canadian clearing member alternative settlement
arrangement and related agreement as parallel as possible in form and
in content to the appointing clearing member and the nominating
clearing member alternative settlement arrangements and their related
agreements.\17\
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\16\Canadian clearing members are OCC clearing members that are
organized in Canada and that settle exercises and assignments of
equity options through the facilities of the Canadian Depository for
Securities (``CDS'').
\17\Currently, NSCC is the only CCC of which CDS is a
participant. Accordingly, Canadian clearing members that wish to
settle through CDS will be required to select NSCC as their DCC.
However, provisions relating to Canadian clearing members that
settle through CDS also are included in the MCC and the SCCP Second
Restated Agreements in order to preserve the similarity of the three
Second Restated Agreements as far as possible and in order to
accommodate the possibility that MCC or SCCP may enter into a
relationship with CDS at some time in the future.
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(iii) New agreement for nominating clearing members and nominated
correspondents. Each Second Restated Agreement contains provisions
addressing a new alternative settlement arrangement under which an OCC
clearing member nominates an entity that is not an OCC clearing member
but that is a participant in a CCC to effect settlement on its behalf.
The need to accommodate the nominating clearing member alternative
settlement arrangement came to OCC's attention as a result of a review
of the records of OCC and NSCC relating to settlements of options
exercises and assignments. In the course of that review, it was
determined that NSCC's procedures will permit an NSCC participant that
is not an OCC clearing member but that is affiliated with two OCC
clearing members, neither of which is an NSCC participant, to effect
settlement of options exercises and assignments on behalf of the two
OCC clearing members. After considering such an arrangement, OCC has
determined that it does not create any unusual risk for OCC or for the
system for settling options exercises and assignments. OCC also has
determined that such an arrangement will not involve any additional
risk to OCC or to the system even if the entities involved are not
affiliated. Accordingly, OCC has concluded that such arrangements
should be expressly described in and permitted by its By-Laws and
Rules.
The new agreement to be used for this settlement alternative
requires the nominating clearing member (i.e., an OCC clearing member)
to not only appoint its nominated correspondent (i.e., a participant in
a CCC that is not an OCC clearing member) but also to designate the CCC
through which its settlements are to be made.\18\ The nominating
clearing member does not have to be a participant of the CCC which it
designates as its DCC but the nominated correspondent must be a
participant in good standing of the CCC designated as the DCC. The new
agreement also requires that the DCC of the nominating clearing member
acknowledge the appointment of the nominated correspondent. This
additional acknowledgement is appropriate because OCC will report
exercises and assignments of each nominating clearing member to the DCC
using the OCC clearing member number of the nominating clearing
member.\19\ Therefore, OCC needs to be assured by the DCC that the DCC
is aware of the appointment of the nominated correspondent and is
prepared to recognize that settlements reported to it under the OCC
clearing member number of the nominating clearing member are to be
processed for the account of the nominated correspondent. In addition,
the nominating clearing member is deemed to be the delivering or
receiving clearing member, as the case may be, for purposes of OCC Rule
913, and accordingly, it is the recipient of delivery advices made
available by OCC.\20\
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\18\In contrast, an appointing clearing member is not required
to designate a DCC because settlement is effected through the DCC of
the appointed clearing member.
\19\In contrast, OCC reports exercises and assignments of each
appointing clearing member to the DCC of the appointed clearing
member using the OCC clearing member number of the appointed
clearing member.
\20\In contrast, OCC Rule 913(f) provides that the appointed
clearing member is deemed to be the delivering or receiving clearing
member, as the case may be, and accordingly, the appointed clearing
member is the recipient of delivery advices made available by OCC.
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In the nominated correspondent settlement arrangement, OCC will
collect margin throughout the settlement period from the nominating
clearing member. In the event that a nominated correspondent were to
default on its obligations to the DCC, OCC will use the margin deposits
and other assets of the nominating clearing member to satisfy any
resulting obligation to the DCC incurred by OCC in accordance with the
applicable Second Restated Agreement.
(4) OCC By-Laws and Rule Amendments
In connection with implementing the Second Restated Agreements, OCC
is making various changes, many of which are technical in nature, to
its By-Laws and Rules.\21\ NSCC, MCC, and SCCP have determined that no
changes to their By-Laws and Rules are required to implement the Second
Restated Agreements.
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\21\For a detailed description of the proposed rule changes to
OCC's By-Laws and Rules, refer to Securities Exchange Act Release
No. 33011, supra note 4.
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II. Discussion
Settlement of equity option assignments and exercises through the
facilities of the CCCs expose the CCCs to additional elements of risk.
If a participating member that was assigned an option exercise defaults
and the CCC's guarantee has attached, the CCC likely will have to
liquidate the failed participating member's position at a price that is
less favorable than the current market price for the underlying
security.\22\ In addition, the earlier guarantee of settlement of
exercises and assignments of equity options by the CCCs (i.e., from T+4
to T+1) may pose increased risk to the CCCs.
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\22\Assignments and exercises of equity options are valued at
the option strike price and not at the market price of the
underlying security. For example, if a participating member was
assigned an equity call option with a strike price of fifty dollars
and subsequent to the attachment of the CCC's guarantee the
participating member failed, the CCC would be obligated to deliver
securities whose current market price probably would be more than
fifty dollars per share. Conversely, if the failed participating
member was assigned on an equity put option, the CCC would be
obligated, after its guarantee attached, to purchase the shares at
the strike price, which must likely would be above the current
market price.
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To limit the CCC's exposure to such risk, the Second Restated
Agreements provide that OCC will compensate the CCCs for losses
incurred by them in closing out the exercises and assignments of a
defaulting participating member.\23\ OCC has taken steps to ensure that
it is protected from loss and to ensure that it will have adequate
resources in the event it must compensate a CCC for losses. Among other
measures, OCC will continue to collect margin throughout the settlement
period. OCC is making amendments to its By-Laws and Rules so that it
has the authority to use the margin of a defaulting participating
member to compensate a CCC and the authority to hold a clearing
member's margin deposits for an extra day if OCC receives notice from
the clearing member's DCC that the clearing member or its appointed
clearing member, its nominated correspondent, or CDS, in the case of a
Canadian clearing member, had not performed an obligation to the
DCC.\24\ OCC's Rules regarding margin requirements also are being
amended to ensure that OCC does not give any margin credit which arises
from positions which will be controlled by a CCC and which OCC might
not be able to recover in the event that it suspends a clearing
member.\25\
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\23\Because OCC has agreed to compensate the CCCs for losses
incurred in closing out the exercises and assignments of a
defaulting participating member, NSCC will no longer factor the
exercise and assignment positions into the market risk component of
its clearing fund calculation. Telephone conversation between Karen
Saperstein, Associate General Counsel, NSCC, and Jerry W. Carpenter,
Branch Chief, and Peter R. Geraghty, Attorney, Division, Commission
(December 20, 1993).
\24\OCC Rules, Chapter VI, Rule 601(e)(2).
\25\OCC Rule 601(c)(2).
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OCC's By-Laws and Rules also are being amended to provide that OCC
may apply the clearing fund deposit of a failed clearing member to
satisfy any obligation incurred by OCC to a CCC as a result of OCC's
guarantee.\26\ In addition, OCC rules make it clear that a clearing
member has a continuing obligation to reimburse OCC for any guarantee
payments made to a CCC and that OCC may satisfy this obligation out of
the clearing member's assets that are subject to OCC's lien.\27\ OCC
also has the authority to use the funds of a suspended clearing member
that are subject to OCC's control to satisfy the suspended clearing
member's obligation to OCC as a result of a guarantee payment to a
CCC.\28\
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\26\OCC By-Laws, Art. VIII, Secs. 1(a) and 5(a).
\27\OCC Rule 913(j).
\28\OCC Rule 1107.
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Sections 17A(b)(3) (A) and (F)\29\ under the Act require that each
registered clearing agency be organized and its rules 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. The Commission believes that the proposed rule changes and
the steps being taken by OCC and the CCCs to implement them, as
described above, are consistent with these sections and will better
enable OCC and the CCCs to fulfill their safeguarding obligations under
the Act.
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\29\15 U.S.C. 78q-1(b)(3) (A) and (F).
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In Section 17A(a)(2)(A) of the Act, Congress directed the
Commission to use its authority under the Act to facilitate the
establishment of a national system for the prompt and accurate
clearance and settlement of securities transactions and to facilitate
the establishment of linked or coordinated facilities for the clearance
and settlement of transactions in securities and securities
options.\30\ The Commission believes that the proposed rule changes
implementing the Second Restated Agreements are consistent with these
directives. The proposed rule changes and the Second Restated
Agreements provide for the efficient settlement of equity options
exercises through the facilities of the equity clearing corporations,
without increasing the risks to those clearing corporations or OCC.
Coordination of this settlement activity will enable clearing members
to avoid the duplicative margining of equity options exercises that
occurs today. In addition, the rule changes and the Second Restated
Agreements provide for several alternative settlement arrangements
(i.e., the appointing, Canadian, and nominating clearing arrangements)
for effecting settlement through the CCCs for firms that are not joint
members of OCC and either NSCC, MCC, or SCCP. These alternative
settlement arrangements will allow more firms to take advantage of the
uniform and efficient procedures provided for by the settlement of
options through the automated clearance and settlement facilities of
the CCCs instead of through broker-to-broker settlement procedures.
Participants also will continue to receive the benefit of a guarantee
of settlement on T+1 which will reduce the risk of a contraparty
default and will provide early assurance of settlement.
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\30\15 U.S.C. 78q-1(a)(2)(A) (i) and (ii).
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule changes are consistent with the Act and in particular
with Section 17A thereunder.
It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule changes (File Nos. SR-OCC-92-05; SR-NSCC-91-07;
SR-SCCP-92-01; and SR-MCC-92-02) be, and hereby are, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\31\
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\31\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2723 Filed 2-4-94; 8:45 am]
BILLING CODE 8010-01-M
