[Federal Register Volume 59, Number 26 (Tuesday, February 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2825]
[[Page Unknown]]
[Federal Register: February 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33557; File Nos. SR-OCC-93-04 and SR-ICC-93-03]
Self-Regulatory Organizations; The Options Clearing Corporation
and The Intermarket Clearing Corporation; Notice of Filing of a
Proposed Rule Change Relating to the Acceptance of Mutual Funds as
Margin Deposits
January 31, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 26, 1993, and on
November 9, 1993, The Options Clearing Corporation (``OCC'') and The
Intermarket Clearing Corporation (``ICC''), respectively, filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule changes as described in Items I, II, and III below, which Items
have been prepared primarily by OCC and ICC. On November 11, 1993, and
on December 29, 1993, OCC filed amendments to the proposed rule
changes.\2\ The Commission is publishing this notice to solicit
comments on the proposed rule changes from interested persons.
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\1\15 U.S.C. 78s (1988).
\2\The November 11, 1993, amendment sets forth Global Settlement
Fund's (``GSF'') agreement to advise OCC on a daily basis the total
asset value of each portfolio whose shares OCC accepts as margin
collateral. The December 29, 1993, amendment presents OCC's
representation that with respect to GSF portfolios that are
denominated in other than U.S. dollars, OCC will not accept more
than 50% of the total value of each such portfolio for margin
purposes. The amendment also includes a resolution by GSF's Board of
Directors whereby the investment advisor of each portfolio
denominated in other than U.S. dollars will seek to insure that at
least 50% of the portfolio's assets will be invested in securities
for which the settlement time is not longer than the time for
redeeming shares in the normal course.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance
of the Proposed Rule Changes
The proposed rule changes will expand the acceptable forms of
margin collateral which clearing members may deposit with OCC and ICC
to include mutual fund shares that are denominated in either U.S.
dollars or in a foreign currency designated by OCC and ICC.
II. Self-Regulatory Organizations' Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In its filing with the Commission, OCC and ICC included statements
concerning the purposes of and basis for the proposed rule changes. The
text of these statements may be examined at the places specified in
Item IV below. OCC and ICC have prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organizations' Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
The purpose of this rule change is to expand the acceptable forms
of margin collateral to include shares of mutual funds that are
denominated in either U.S. dollars or in a foreign currency designated
by OCC and ICC. In order to be eligible as a form of margin collateral
mutual fund shares must meet the standards prescribed in proposed OCC
Rule 604(b)(2) and ICC Rule 502(a)(5). Pursuant to these proposed
rules, OCC and ICC will accept redeemable mutual fund shares that are
issued by an open-end management investment company that is registered
with the Commission under the Investment Company Act of 1940 (``1940
Act'').\3\ Approval of each mutual fund as an eligible form of margin
deposit will be made on a case-by-case basis by each of OCC's and ICC's
board of directors, and such approval may be refused or revoked at any
time for any reason. This reservation reflects OCC's and ICC's right to
determine whether a particular fund is acceptable to OCC or ICC and to
ensure that OCC and ICC may act expeditiously in the event a change in
the financial or operational condition of a particular fund puts OCC or
ICC at risk.
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\3\15 U.S.C. 80a (1988).
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A fund whose shares are denominated in U.S. dollars will be
required to maintain its portfolio investments in accordance with the
provisions of proposed OCC Rule 604(b)(2)(A)(1) and ICC Rule
502(a)(5)(A)(1), which incorporate the conditions of paragraphs (c)(1),
(c)(2), (c)(3), and (c)(4) of Commission Rule 2a-7 under the 1940
Act.\4\ Paragraph (c) of Commission Rule 2a-7 generally sets forth the
formulas that may be used in calculating the current price per share
for purposes of distribution and redemption. Paragraph (c)(1) specifies
that a fund's board of directors must determine that it is in the best
interest of the fund to maintain a stable net asset value and paragraph
(c)(2) requires the fund to limit the maturity of its portfolio
investments to the terms set forth therein. Paragraph (c)(3) requires
that a fund's portfolio investments be limited to instruments that
present minimal credit risks and, with certain exceptions enumerated in
paragraph (c)(3), be ``eligible securities''\5\ at the time of their
acquisition. Paragraph (c)(4) limits to 5% the percentage of the fund's
total assets that may be invested in the securities of a single issuer
(except for U.S. government securities).\6\
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\4\17 CFR 270.2a-7(c)(1)-(4) (1992). Rule 2a-7(b) [17 CFR
270.2a-7(b) (1992)] establishes parameters pursuant to which a
registered investment company must operate in order to hold itself
out as a ``money market fund'' or the equivalent thereof.
Specifically, Rule 2a-7(b) requires an investment company to meet
the conditions of paragraphs (c)(2), (c)(3), and (c)(4) of Rule 2a-
7. OCC and ICC will require such investment companies to also meet
the requirements of paragraph (c)(1).
\5\Under Rule 2a-7(a)(5) of the 1940 Act [17 CFR 270.2a-7(a)(5)
(1992)] the term ``eligible security'' means a security with a
specified remaining maturity that is rated or is issued by an issuer
that is rated with respect to its short-term debt obligations in one
of the two highest rating categories for short-term debt obligations
by the requisite nationally recognized statistical ratings
organizations (``requisite NRSROs''). Under Rule 2a-7(a)(13) (17 CFR
270.2a-7(a)(13) (1992)), the term requisite NRSROs means (i) any two
NRSROs that have issued a rating with respect to a security or debt
obligation of an issuer or (ii) if only one NRSRO has issued a
rating with respect to such security or issuer at the time the fund
purchases or rolls over the security, that NRSRO.
\6\Under Rule 2a-7(c)(4)(i), a repurchase agreement is deemed to
be an acquisition of the underlying security, provided that the
obligation of the seller is collateralized fully, as that term is
defined in Rule 2a-7(a)(3). For a discussion of the term
``collateralized fully,'' refer to note 9 below and accompanying
text.
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By incorporating the foregoing standards in proposed OCC Rule
604(b)(2) and ICC Rule 502(a)(5), OCC and ICC intend for the present
time to limit their acceptance of U.S. dollar-denominated mutual fund
shares to those which qualify as money market funds under Rule 2a-7.
OCC and ICC believe that the foregoing standards are well-founded in
that they are based on the Commission's rule governing money market
funds and thereby create reasonable and prudent safeguards for OCC's
and ICC's protection.
A fund whose shares are denominated in a designated foreign
currency will be required to maintain its portfolio investments in
accordance with proposed OCC Rule 604(b)(2)(A)(2) and ICC Rule
502(a)(5)(A)(2), which have been adapted from Commission Rule 2a-7.\7\
Consistent with the valuation method imposed on U.S. dollar-denominated
funds, a non-U.S. dollar-denominated fund will be required to maintain
a stable net asset value. The average portfolio maturity of such fund
will be no more than thirty days. Accordingly, the fund's portfolio
should be invested in frequently maturing assets for the purposes of,
among other things, funding redemptions.
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\7\Rule 2a-7(c)(3) of the 1940 Act restricts money market fund
portfolio investments to U.S. dollar-denominated instruments.
Therefore, OCC and ICC will impose substantially similar
requirements upon foreign currency-denominated mutual fund
investments as OCC and ICC impose on U.S. dollar-denominated funds.
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In addition, the portfolio investments of a non-U.S. dollar-
denominated fund will be limited to the following assets: (1) Short-
term government securities that are denominated in the designated
foreign currency, provided that such government securities are issued
or guaranteed by a sovereign government whose standard unit of official
medium of exchange is the designated foreign currency; (2) debt
securities of supranational organizations;\8\ (3) fully-collateralized
repurchase agreements;\9\ or (4) instruments in the form of bankers'
acceptances, certificates of deposit, or demand or other deposits that
are denominated in the designated foreign currency.\10\ Any issuer of
such instruments must have shareholders' equity in excess of
$200,000,000.\11\
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\8\Such securities must be denominated in the designated foreign
currency and must be rated in one of the two highest rating
categories by the requisite NRSROs.
\9\Under Rule 2a-7(a)(3) (17 CFR 270.2a-7(a)(3) (1992))
collateralized fully, in the case of a repurchase agreement,
generally means that: the value of the securities collateralizing
the agreement are at least equal to the resale price provided for in
the agreement, the fund or its custodian has possession of the
collateral or the collateral is registered by book-entry in the name
of the fund or its custodian, the fund has retained the unqualified
right to possess and sell the collateral in the event of a default,
and the collateral consists entirely of Government securities or
securities rated in the highest rating category by the requisite
NRSROs. To adapt this definition to mutual funds that are
denominated in a designated foreign currency, the proposed rules
require that repurchase agreements may only be secured by government
securities that are denominated in the designated foreign currency,
provided that such government securities are issued or guaranteed by
a sovereign government whose standard unit of official medium of
exchange is the designated foreign security and provided further
that such government securities have no more than two years
remaining to maturity.
\10\Such instruments must have a remaining maturity of no more
than sixty days from the date of their acquisition by the fund and
must be rated or issued by an issuer who is rated in one of the two
highest rating categories by the requisite NRSROs.
\11\As the issuers of such instruments will be banking
institutions, OCC and ICC have incorporated their shareholder equity
standards applicable to non-U.S. issuers of letters of credit. Refer
to section .01(b) of the Interpretations and Policies to OCC Rule
604. The types of assets in which a foreign currency denominated
mutual fund may invest under ICC's proposed Rule 502(a)(5) are
broader than those currently permitted under an order dated October
2, 1992, issued by the CFTC that approved rule amendments proposed
by the Chicago Mercantile Exchange.
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OCC Rule 604(b)(2) and ICC Rule 502(a)(5) also specify a
diversification requirement for a designated foreign currency fund's
portfolio investments. Specifically, as of the last day of each fiscal
quarter, no more than 25% of a fund's total portfolio investments may
be held in the securities of a single issuer and with respect to 50% of
the fund's total portfolio investments, no more than 5% of such assets
may be invested in the securities of a single issuer.\12\ OCC and ICC
believe that these standards create reasonable and prudent safeguards
as they have been adapted from the Commission's rule applicable to
money market funds.
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\12\OCC and ICC have been advised that the portfolios of such
funds would be considered diversified under the requirements of the
U.S. Internal Revenue Code (``Code''). The Code's 25% limitation on
investments in the securities of a single issuer applies to non-U.S.
government securities.
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The current market value of deposited shares of each fund will be
calculated by multiplying the number of deposited shares by the fund's
last reported net asset valuation. That amount, less any ``haircut''
and, in the case of mutual funds denominated in a designated foreign
currency, exchange rates that OCC or ICC apply for their protection,
will represent the amount of margin credit given to a clearing member
with respect to such shares.
OCC Rule 604(b)(2)(B) and ICC Rule 502(a)(5)(B) contain other
provisions that also are intended for OCC's and ICC's protection. OCC
and ICC will be permitted to establish a limitation on the amount of
the margin requirement in an account of a clearing member which may be
met by depositing shares of any one fund. The chairman or president (or
their designee) also will be authorized to limit the amount of margin
credit given to each clearing member that has deposited shares of a
particular fund to an account of OCC or ICC.\13\ OCC and ICC further
will be authorized to redeem or otherwise order the disposition of
deposited shares at any time without prior notice to the clearing
member regardless of whether or not the clearing member has been
suspended.
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\13\For example, should the number of transferred shares of a
particular mutual fund represent in OCC's or ICC's view a
disproportionate number of the fund's outstanding shares, this
authority could be relied on to limit the total percentage of shares
given margin credit by OCC or ICC. With this authority, OCC and ICC
may be able to take precautionary measures in order to limit their
liquidation risks. This authority is premised on a similar provision
contained in OCC Rule 1106(e), which was approved by the Commission
in Release No. 34-27104.
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OCC and ICC contemplate that the shares of mutual funds will be
uncertificated securities and that shares acquired by a clearing member
will be deposited with OCC or ICC via book-entry. The shares will be
registered in OCC's or ICC's name to secure the obligations of the
depositing clearing member to OCC or ICC. Consistent with other OCC and
ICC rules, all gain or dividends accrued on such shares (prior to their
redemption or disposition) will belong to the depositing clearing
member.
In considering whether to accept mutual fund shares as a qualified
form of margin collateral, OCC and ICC became aware of the Global
Settlement Fund (``GSF''). GSF is an open-end investment company
registered with the Commission. Based upon information presented by GSF
concerning the portfolios that it offers, OCC's and ICC's boards have
approved the acceptance of GSF shares. A complete description of GSF
policies and operations is contained in its registration statement and
amended prospectus, which are incorporated by reference herein.\14\ The
following paragraphs summarize the portions of GSF's prospectus on
which OCC and ICC rely in accepting GSF shares.
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\14\The registration statement by which GSF is offering its
securities was declared effective by the Commission on March 13,
1992. GSF's prospectus was amended on September 4, 1992.
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GSF currently is designed to offer three individual portfolios,
each of which is represented by a separate series of common stock of
GSF. The three portfolios are denominated in U.S. dollars (``U.S.
dollar portfolio''), British pound sterling (``pound portfolio''), and
Japanese yen (``yen portfolio''). At this time, GSF only offers shares
in the U.S. dollar portfolio.
Each portfolio is authorized to invest in specific instruments. The
investments in the U.S. dollar portfolio are limited to U.S. Treasury
securities with maturities of ninety days or less and repurchase
agreements covering U.S. Treasury securities. Such repurchase
agreements must be secured by U.S. Treasury securities having no more
than two years remaining to maturity.\15\ The average portfolio
maturity of the U.S. dollar portfolio is fifty days. The pound and yen
portfolios will be limited to investments in the short-term obligations
of the British and Japanese governments, respectively, and certain
short-term certificates of deposit, and demand or time deposits of
British and Japanese banks, respectively, with credit ratings in one of
the two highest rating categories of two NRSROs. In addition, the pound
and yen portfolios will invest in the short-term debt securities of
supranational organizations which have a credit rating in the highest
rating category of two NRSROs. The yen portfolio also will invest in
repurchase agreements secured by direct obligations of the Japanese
government which have a remaining term to maturity of no more than two
years. The average term to maturity of securities in the pound and yen
portfolios is thirty days. Accordingly, the investment activities of
the U.S. dollar, pound, and yen portfolios meet the applicable
standards of proposed OCC Rule 604(b)(2) and ICC rule 502(a)(5).
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\15\According to GSF's prospectus, the U.S. dollar portfolio
will not enter into a repurchase agreement with an issuer if, as a
result of such repurchase agreement, the portfolio will have
invested more than 10% of its total assets in repurchase agreements
with that issuer.
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OCC, TCC, and their clearing members will interface with GSF
through what is termed the GlobeSet System. The GlobeSet System entails
use of specialized software on a personal computer along with a modem
and encryption device. Additional security for the GlobeSet System will
include the use of identification codes and passwords. Purchase,
redemption, transfer, and other instructions will be transmitted to GSF
through the GlobeSet System. In addition, it may be used to review
account balances and transaction histories and to access and make
entries on GSF's electronic bulletin board.\16\ In the event that the
GlobeSet System is unavailable due to operational difficulties,
instructions may be sent to GSF via facsimile transmission. GSF will
only accept such instructions if, among other things, they are signed
by authorized individuals who previously submitted a signature specimen
and GSF has verified the contents of the instruction with such
individual.
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\16\GSF's electronic bulletin board may be used to identify
counterparties (i.e., other GSF shareholders) for purposes of
selling fund shares or effecting a matched transfer of fund shares.
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Operationally, OCC, ICC, and their clearing members will each
execute shareholder agreements with GSF which will provide, among other
things, that shares in the funds acquired by an OCC or ICC clearing
member will be deposited in OCC's or ICC's primary account via book-
entry.\17\ OCC or ICC will hold such shares as the ``registered owner''
(within the meaning of Article 8 of the Uniform Commercial Code) as
security for the obligations of the depositing clearing member in
accordance with OCC's and ICC's rules. Upon receipt of a margin
withdrawal request made by a clearing member in accordance with OCC's
or ICC's rules, OCC or ICC will transfer the shares back to the
clearing member via book-entry transfer after the clearing member's
margin requirement ends or the clearing member deposits other
collateral.
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\17\Specifically, OCC and ICC will execute two separate forms of
shareholder agreements. One shareholder agreement will provide for
the establishment of a primary account in the name of OCC or ICC and
for subaccounts in the name of each clearing member that desires to
deposit shares in OCC or ICC. All deposited shares will be held in
OCC's or ICC's primary account with the subaccounts being used for
accounting purposes. The other shareholder agreement will establish
a secondary account in OCC's or ICC's name into which OCC or ICC
will transfer shares from their primary accounts in order to redeem
shares from GSF or in order to effect a disposition of shares with a
counterparty identified through GSF's electronic bulletin board. OCC
and ICC will limit the value of the margin deposits to 50% of the
total value of each non-U.S. dollar-denominated portfolio.
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Liquidation of shares in each GSF portfolio may be accomplished by
one of four means: (i) Redeeming shares for payment in the designated
currency;\18\ (ii) redeeming shares for payment in securities held by
the portfolios (subject to the approval of GSF's investment adviser);
(iii) selling shares to a counterparty identified through GSF's
electronic bulletin board; or (iv) effecting a matched transfer with a
counterparty identified through GSF's electronic bulletin board. GSF
will fund liquidations accomplished by the means specified in (i) and
(ii) above from payments received on the sale of shares issued by a
portfolio, proceeds from maturing portfolio securities, proceeds from
the sale of portfolio securities, and proceeds of borrowings by a
portfolio that are collateralized by portfolio securities.
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\18\While OCC or ICC may order the redemption of shares at any
time, share redemption occurs at each next asset valuation. The
proceeds therefrom, however, will be transferred to OCC and ICC only
during the times that the local bank wire system for a particular
portfolio is in operation. Accordingly, proceeds of share
redemptions from the U.S. dollar portfolio will be paid during the
applicable banking hours on the banking days on which the Fedwire is
operational. Proceeds of share redemptions from the pound portfolio
will be paid during the applicable banking hours on the banking days
on which CHAPS is operational. Proceeds of share redemptions from
the yen portfolio will be paid during the banking hours on the
applicable banking days on which BOJNET is operational.
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OCC and ICC believe the proposed rule changes are consistent with
the requirements of Section 17A of the Act because the proposed rule
changes will accommodate clearing members by providing them another
alternative by which to meet their margin requirements because OCC's
and ICC's portfolio of margin collateral will be further diversified.
B. Self-Regulatory Organizations' Statement on Burden on Competition
OCC and ICC do not believe that the proposed rule changes will
impose any burden on competition.
C. Self-Regulatory Organizations' Statement on Comments on the Proposed
Rule Changes Received From Members, Participants, or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule changes, and non have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) By order approve the proposed rule changes or
(B) Institute proceedings to determine whether the proposed rule
changes should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the above-
referenced self-regulatory organizations.
All submisisons should refer to file Nos. SR-OCC-93-04 and SR-ICC-
93-03 and should be submitted by March 1, 1994.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2825 Filed 2-7-94; 8:45 am]
BILLING CODE 8010-01-M
