98-6766. Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposing Rule Change Relating to the Stock Loan/Hedge System

[Federal Register Volume 63, Number 51 (Tuesday, March 17, 1998)]
[Notices]
[Page 13082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6766]



[[Page 13082]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39738; File No. SR-OCC-97-11]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposing Rule Change Relating to the Stock Loan/Hedge 
System

March 10, 1998.
    On July 11, 1997, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-97-11) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Regiser on December 9, 1997.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 39386 (December 2, 
1997), 62 FR 64902 (December 9, 1997).
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I. Description

    OCC's stock loan/hedge system (``HEDGE system'') is a clearing 
system for stock loans between OCC clearing members.\3\ The rule change 
amends OCC's by-laws governing the HEDGE system to eliminate the 
requirements with respect to the accounts in which stock loan positions 
must be maintained.
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    \3\ For a complete description of the HEDGE system, refer to 
Securities Exchange Act Release No. 32638 (July 15, 1993), 58 FR 
39254 (July 22, 1993) [File No. SR-OCC-92-34] (order approving 
proposed rule change establishing HEDGE system).
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    OCC's by-laws that govern the HEDGE system \4\ currently treat 
stock loans as if they were pledges of loaned securities subject to the 
Commission's hypothecation rules.\5\ The hypothecation rules limit the 
circumstances under which a broker-dealer may pledge securities carried 
for the account of any customer \6\ and specifically prohibit broker-
dealers from pledging securities carried for the account of any 
customer under circumstances that will permit such securities to be 
commingled with securities carried for the account of any person other 
than a bona fide customer of such broker or dealer under a lien for a 
loan made to such broker or dealer.\7\ Accordingly, under the HEDGE 
system's account segregation rules, a clearing member that desires to 
lend stock must (1) first determine whether the stock is a customer or 
proprietary security and (2) carry out the loan through its OCC 
customers' account (or where permitted through its OCC marketmaker's 
account) if the stock is a customer security.
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    \4\ OCC By-Laws, Article XXI, Section 5.
    \5\ 17 CFR 240.8c-1 and 240.15c2-1.
    \6\ For purposes of the hypothecation rules, the term 
``customer'' includes registered broker-dealers so long as they are 
not affiliated in specified ways with the broker-dealer effecting 
the pledge. 17 CFR 240.8c--1(b)(1), 240.15c2-1(b)(1). References to 
customers'' and ``non-customers'' herein are based on the definition 
in the hypothecation rules.
    \7\ 17 CFR 240.15c2-1(a)(2). See also 17 CFR 240.8c-1(a)(2) 
(providing the same requirements as Rules 15c2-(1)(a)(2) except that 
its scope is limited to exchange members and brokers and dealers 
that transact business through exchange members).
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    OCC has determined that there is no legal reason for OCC's by-laws 
to treat stock loans under the HEDGE system as hypothecations. 
Therefore, OCC has concluded that it may eliminate the HEDGE system's 
account segregation requirements for stock loans without violating or 
causing its clearing members to violate the Commission's hypothecation 
rules.

II. Discussion

    Section 17A(b)(3)(F) of the Act \8\ requires that the rules of a 
clearing agency be designed to remove impediments to and perfect the 
mechanism of the national system for the prompt and accurate clearance 
and settlement of securities transactions. For the reasons discussed 
below, the Commission believes that OCC's rule change relating to the 
HEDGE system is consistent with OCC's obligations under Section 
17A(b)(3)(F).
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission is satisfied with OCC's determination that it is not 
obligated to treat stock loans carried out through the HEDGE system as 
if they were pledges of loaned securities subject to the Commission's 
hypothecation rules. The Commission believes that the rule change 
should increase the use of OCC's HEDGE system which should in turn help 
to improve the efficiency and safety of stock lending transactions. 
Accordingly, the Commission believes that the rule change should enable 
OCC to remove impediments to and to help perfect the mechanism of the 
national system for the prompt and accurate clearance and settlement of 
securities transactions.

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 with Section 17A of the Act \9\ and the rules and 
regulations thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-97-11) 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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-6766 Filed 3-16-98; 8:45 am]
BILLING CODE 8010-01-M