[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: 94-2724]
[[Page Unknown]]
[Federal Register: February 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33549; File No. SR-OCC-89-4]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change To Convert OCC's Index Option
Escrow Receipt Program From Pilot to Permanent Status
January 31, 1994.
On May 2, 1989, The Options Clearing Corporation (``OCC'') filed a
proposed rule change (File No. SR-OCC-89-04) under Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'')\1\ to convert OCC's index
option escrow receipt program from pilot to permanent status,\2\ to
revise portions of OCC's index option escrow receipt form, and to amend
certain OCC rules concerning index option escrow receipts. The
Commission published notice of the proposal in the Federal Register on
June 26, 1989.\3\ OCC amended the proposal on February 28 and July 3,
1990.\4\ No public comments were received. For the reasons discussed
below, the Commission is approving the proposal.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\The Commission approved the program on a pilot basis on
August 13, 1985. Securities Exchange Act Release No. 22324 (August
13, 1985), 50 FR 33443.
\3\Securities Exchange Act Release No. 26951 (June 21, 1989), 54
FR 27840.
\4\These amendments made technical, non-substantive revisions to
OCC's proposal and, therefore, were not published for comment.
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I. Description
A. Background
The program permits OCC clearing members to deposit index option
escrow receipts with OCC to satisfy the margin requirements arising
from short call positions on index options in their customers'
accounts. An OCC-approved custodian bank that holds an escrow deposit
issues an index option escrow receipt to acknowledge that it holds a
specific deposit of assets for the account of a specific customer of an
OCC clearing member and to acknowledge that it will not release the
property without OCC's written consent. An index option escrow receipt
covers specific index options and obligates the issuing bank to hold
the escrow deposit until OCC releases the escrow receipt or until OCC
directs the issuing bank to make payment on the escrow receipt.
B. The Proposal
The proposal converts the index option escrow receipt program from
pilot to permanent status with several amendments. First, the proposal
increases the cap on the value of index option escrow receipts an
issuing bank may have outstanding. The index option escrow receipt
currently requires the issuing bank to certify that the value of the
cash and securities held by it pursuant to outstanding index option
escrow receipts or the intrinsic value of all options covered by its
outstanding index option escrow receipts does not exceed 25% of the
equity attributable to that bank's outstanding capital stock. The
proposal increases that cap from 25% to 100% of the issuing bank's
outstanding capital stock.
Second, the proposal alters requirements regarding the type of
property acceptable as an escrow deposit. The proposal eliminates
certificates of deposit and banker's acceptances as permissible escrow
deposits and adds as a permissible escrow deposit U.S. government
securities having one year or less until maturity.\5\
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\5\Cash, common stocks listed on a national securities exchange,
and marginable over-the-counter stocks also are permissible escrow
deposits.
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Third, the proposal gives OCC the authority to close out short
option positions of a suspended member covered by index option escrow
receipts and to draw on the proceeds of the escrow receipt to cover
costs associated with such closing transactions.\6\ OCC may exercise
this authority if the value of collateral deposited under the escrow
receipt falls below a certain maintenance level, OCC requests an
additional margin deposit to cover the deficit, and OCC suspends the
member.
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\6\Currently, OCC must maintain short positions of a suspended
member covered by an index option escrow receipt until it receives
instructions from that suspended member or its representative.
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Fourth, the proposal eliminates from the index option escrow
receipt a clause requiring issuing banks to certify that they will not
permit customers to subject the escrow deposit to any lien or
encumbrance. The proposal adds language to the escrow receipt which
precludes the issuing bank from subjecting the escrow deposit to any
right (including any right of set-off), charge, security interest,
lien, or claim of any kind in favor of the issuing bank or any person
claiming through the issuing bank.
Fifth, the proposal revises the index option escrow receipt to
permit issuing banks to value escrow deposits at the end of the day
rather than throughout the day in connection with their obligation to
request additional customer collateral or to notify OCC of a collateral
deficiency. Currently, an issuing bank must (1) request from the
customer a supplemental escrow deposit if at any time the value of the
escrow deposit decreases below 55% of the underlying index option's
value and (2) notify OCC if at any time the value of the escrow deposit
decreases below 50% of the underlying index option's value. Under the
proposal, these obligations will not be triggered unless the applicable
thresholds are hit at the close of any business day rather than at any
time. Banks have represented to OCC that they are unable to conduct
intraday monitoring of the value of escrow deposits.
Finally, the proposal contains several technical amendments to the
index option escrow receipt and corresponding OCC rules. For instance,
the index option escrow receipt now specifies that written notification
from an issuing bank to OCC of a collateral deficiency may be by
facsimile or other electronic transmission if followed by immediate
telephone confirmation. Throughout Rule 1801, the proposal replaces the
term ``market value'' with the term ``value'' when referring to
deposited property because the methods for valuing the various types of
property eligible for deposit are described in OCC Rule 1801(f). The
proposal also eliminates ``initial position value'' as a definitional
term in Rule 1801(c) because that term is not used elsewhere in OCC
Rule 1801. The proposal replaces the term ``agent'' with the term
``duly authorized representative'' in the index option escrow receipt.
The proposal revises the index option escrow receipt to require issuing
banks to include the value of collateral backing index participation
escrow receipts in computing limitations on the amount of escrow
receipts they can issue. The revised index option escrow receipt
requires issuing banks to certify that they hold escrow deposits as
``trustee or custodian'' for the account of customers rather than
merely as ``custodian'' and specifies that the issuing banks hold the
escrow deposits in accordance with the terms of the index option escrow
receipt rather than in accordance with OCC rules.
II. Discussion
The Commission believes that OCC's proposal is consistent with the
Act and in particular with section 17A(b)(3)(F) thereunder.\7\ That
section requires, among other things, that the rules of a clearing
agency be designed to remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of securities transactions and to assure the safeguarding of
funds and securities in the clearing agency's custody or control or for
which it is responsible.
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\7\15 U.S.C. 78q-1(b)(3)(F) (1988).
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With regard to OCC's safeguarding obligations under the Act, OCC
has implemented procedures designed to diminish the risks associated
with the program. As discussed above and in the Commission order
approving the program on a pilot basis,\8\ these risk reduction
measures include: (1) The requirement that the issuing bank monitor
daily the value of escrow deposits and take appropriate action (i.e.,
collection of additional collateral and/or notification to OCC) if that
value falls below certain thresholds;\9\ (2) escrow deposit eligibility
standards whereby only liquid assets are eligible to underlie escrow
receipts; and (3) OCC's new authority to close out the short positions
of a suspended clearing member covered by index option escrow receipts
and to draw on the proceeds of those receipts to cover liquidation
costs.
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\8\Securities Exchange Act Release No. 22324 (August 13, 1985),
50 FR 33443.
\9\If the value of the deposit decreases below 55% of the index
option's value, the issuing bank must notify the clearing member and
request that the deposit be supplemented. If the value of the
deposit decreases below 50% of the index option's value, the issuing
bank must notify OCC. In that event, OCC may disregard the escrow
receipt and may require margin on the short positions.
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OCC also has rules and procedures governing banks designated by OCC
as custodian banks (i.e., banks authorized to issue index option escrow
receipts). These controls include: (1) financial standards (e.g.,
issuing banks must have shareholder equity of not less than $20
million); (2) regulatory standards (e.g., issuing banks must be
supervised and examined by state or federal authorities); and (3)
depository standards (e.g., issuing banks must file certain financial
statements with OCC). Moreover, OCC requires each custodian bank to
supply OCC with a letter from the bank's independent auditors
describing the adequacy of the custodian bank's procedures relating to
the issuance of index option escrow receipts.
III. Conclusion
In conclusion, the Commission believes that OCC's index option
escrow receipt program should encourage broader participation in the
index options market and is designed to provide adequate safeguards to
protect OCC and its clearing members from financial loss.
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the Act and, in particular,
with Section 17A of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-89-04) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2724 Filed 2-4-94; 8:45 am]
BILLING CODE 8010-01-M
