[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Notices]
[Pages 12124-12126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7068]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36983; File No. SR-OCC-96-01]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Concerning Choice of Law
Provisions in Connection With Amendments to Articles 8 and 9 of the
Uniform Commercial Code
March 18, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on January 16, 1996, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
primarily by OCC. The Commission is publishing this notice to solicit
comments from interested persons.
\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change will change the choice of law provisions
and other provisions in OCC's by-laws and rules in connection with
Illinois' adoption of the 1994 amendments to Articles 8 and 9 of the
Uniform Commercial Code (``UCC'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\2\
\2\ The Commission has modified the text of the summaries
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In 1994, The American Law Institute and the National Conference of
Commissioners on Uniform State Laws promulgated amendments to Articles
8 and 9 of the UCC (``1994 amendments''). To a significant degree, the
1994 amendments were adopted in response to the views of the Commission
and others that the shortcomings in the provisions of the 1977 version
of Articles 8 and 9 of the UCC contributed to the liquidity problems
associated with the October 1987 stock market decline. The 1994
amendments were intended to reduce legal uncertainty and to facilitate
the transfer of ownership of and creation of security interests in
securities as well as other financial assets and investment property,
including futures and futures options, through a set of rules designed
to apply to the modern securities and futures holding systems.
OCC participated in certain aspects of the drafting process and
believes that revised Articles 8 and 9 provide a framework of rules
more appropriate to the special characteristics of OCC-cleared
securities and for the holding of securities deposited with OCC for
margin and for clearing fund purposes. OCC also believes the creation
and
[[Page 12125]]
perfection of security interests arising in connection with cross-
margining will be facilitated.\3\ Accordingly, OCC believes that the
1994 amendments should govern its operations to the fullest extent
possible even though the amendments have not been adopted in all
jurisdictions.
\3\ Currently, there is a two to three week delay before OCC
members that also are members of the Chicago Mercantile Exchange
(``CME'') or the Kansas City Board of Trade (``KCBOT'') (``joint
members'') are eligible to participate in the cross-margining
arrangements OCC has with CME and KCBOT (``cross-margining
participants''). Prior to participation in these cross-margining
arrangements, OCC requires that security interests be created and
perfected in securities held by the joint member prior to such
member's eligibility as a cross-margining participant. Under the
1977 version of the UCC, one option to perfect a security interest
in securities requires the filing of the appropriate financing
statements. Filing of the appropriate financing statements and
confirmation thereof typically can take from two to three weeks.
However, under the 1994 amendments, OCC believes that financing
statements no longer will be necessary for perfection purposes. As a
result, joint members can become cross-margining participants in a
matter of days instead of weeks. Telephone Conversation between
Michael G. Vitek, Staff Counsel, OCC, and Mark Steffensen, Attorney,
Division of Market Regulation, Commission (February 12, 1996).
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Without this rule change, OCC will not receive the benefits of the
application of the 1994 amendments despite its adoption in Illinois
because OCC's by-laws and rules contain choice of law provisions that
select Delaware as the governing law. Although the 1994 amendments have
been adopted in Illinois, they have not been adopted in many other
jurisdictions, including Delaware, the state of OCC's incorporation.
OCC originally adopted the Delaware choice of law provisions to
reinforce the provisions of the 1977 version of the UCC under which OCC
options were deemed uncertificated securities. Under the conflict of
laws rules in the 1977 version of the UCC, the law of the jurisdiction
of incorporation of the issuer of uncertificated securities governs the
perfection of security interests therein.
Under the 1994 amendments, OCC will function as a ``securities
intermediary'' rather than an issuer of uncertificated securities.
Under the new choice of law provisions in the 1994 amendments, the
applicable law will be the law of the securities intermediary's
jurisdiction, which may be selected by agreement between OCC and its
clearing members. In absence of a contrary agreement, OCC believes that
Illinois law will apply because under the choice of law rules found in
the 1994 amendments, Illinois would be deemed the securities
intermediary's jurisdiction. As discussed above, OCC's present choice
of law rules were adopted solely to reinforce the choice of law
provisions of the 1977 version of the UCC. However, in light of the
1994 amendments, OCC believes that Delaware law no longer has any
special relevance. Accordingly, the present rule change will replace
those provisions with Illinois choice of law provisions and makes
certain other changes intended to create conformity with or a nexus
between the terminology of OCC's by-laws and rules and the terminology
of the 1994 amendments.
Notwithstanding the adoption of the Illinois choice of law
provisions as set forth in this proposed rule change, there still will
be situations in which the 1977 version of the UCC will be applicable.
This could occur whenever UCC issues arise in a jurisdiction that has
not adopted the 1994 amendments and a tribunal in that jurisdiction
applies its own choice of law rules. Because the choice of law
provisions in the 1977 version of the UCC are mandatory and cannot be
altered by agreement, OCC's choice of law rules would not likely be
enforceable and therefore Delaware law would be controlling.
Because this possibility exists, OCC is proposing to retain the
provisions in its by-laws and rules that were deemed necessary or
desirable to manage the application of Delaware law to options
transactions. OCC's by-laws and rules presently contain interpretations
to alert clearing members and others to the fact that Delaware law will
not always govern notwithstanding the choice of law provisions. These
interpretations will be adapted to reflect the proposed choice of law
change from Delaware law to Illinois law. The effect of this change
will be to alert members and others that now Illinois law, instead of
Delaware law, may not always govern notwithstanding the choice of law
provisions contained in OCC's by-laws.
To accommodate Illinois' adoption of the 1994 amendments, OCC
proposes to make the following specific changes in its by-laws and
rules. Article I, Section 1 of OCC's by-laws will be amended to add
definitions of the terms ``lien'' and ``pledge'' to make it clear that
these terms refer to a security interest within the meaning of the 1994
amendments. Even though the likelihood of misinterpretation on this
point may be remote, OCC believes that the addition of these
definitions seems prudent because lien and pledge no longer appear in
the provisions of UCC Articles 8 and 9 under the 1994 amendments that
are applicable to OCC. Section 1-201(37) of the UCC defines ``security
interest'' broadly but without reference to such common law concepts as
lien and pledge, which are subsumed within the amended definition of
security interest.
Article 1, Section 1 will be amended further to modify OCC's
definition of ``rules.'' In effect, Section 8-111 of the 1994
amendments provides that a rule adopted by a clearing corporation
supersedes contrary provisions of the UCC. In order to take full
advantage of this provision, OCC has proposed that the definition of
rules be amended to make it clear that for purposes of Articles 8 and 9
the term ``rules of a clearing agency'' as applied to OCC will mean
anything deemed to be a rule of a clearing agency under the Act.
Article VI, Section 9(c) of OCC's by-laws will be amended to
replace the basic choice of law provision applicable to option holders
and writers with respect to cleared securities. Subparagraph 1 of
Section 9(c) will contain statements indicating how revised Articles 8
and 9 will apply to OCC and its clearing members with regard to
ownership of and security interests in cleared securities. These
statements are not intended to alter the substantive operation of
Articles 8 and 9 but are intended merely to provide a guide to proper
interpretation of Articles 8 and 9. However, UCC Section 8-111 does
permit OCC to supersede provisions of the UCC with its own rules.
Accordingly, Section 9(c)(1) as proposed sets forth that all cleared
securities will be deemed financial assets without the need to consider
whether a particular cleared security is a similar obligation to an
option as would be required under the regular definition of financial
asset set forth in Section 8-102 of the 1994 amendments. Subparagraph 2
of Section 9(c), which essentially is the prior OCC choice of law
provision, will remain in place to cover situations where the 1977
version of the UCC is applicable.
OCC Rule 610(g) involves the use of depository receipts and
electronic confirmations in connection with specific or bulk deposits
made to OCC in lieu margin payments. As proposed in the current filing
(File No. SR-OCC-96-01), OCC does not intend to amend Rule 610(g), if
the Commission approves SR-OCC-95-17 prior to the current filing.\4\
However, if the current rule filing is approved prior to SR-OCC-95-17,
OCC has proposed in the current filing certain amendments to Rule
610(g), and OCC will be required to amend SR-OCC-95-17 to reflect the
[[Page 12126]]
changes made to this rule by the current rule filing.\5\
\4\ On November 2, 1995, OCC filed a proposed rule change (File
No. SR-OCC-95-17) to amend OCC Rule 610(g).
\5\ SR-OCC-95-17 will amend Rule 610(g) to eliminate the
requirement that in certain circumstances a depository has to
acknowledge that securities transfers or pledges were effected
through book-entry. This requirement arose because in order to
effect a securities pledge and the corresponding perfection of a
security interest therein or to deposit securities in favor of OCC,
the 1977 version of Article 8 required that the pledgor or depositor
``transfer'' the security to OCC. In order to effect this transfer,
Section 8-313 of the 1977 version of the UCC required an
acknowledgement by the depository if the securities were delivered
by book-entry. Under the 1994 amendments, a transfer pursuant to
Section 8-313 is no longer required to effect a securities deposit
or pledge. In fact, the entire concept of a transfer requirement in
connection with a securities pledge or deposit previously embodied
in Section 8-313 of the 1977 version of the UCC has been removed
from the 1994 amendments. Under Sections 9-115 and 8-106 of the 1994
amendments, a securities deposit or pledge in favor of OCC with the
corresponding perfection of a security interest therein is effected
once the transferee or pledge obtains control over the securities.
Therefore, depository acknowledgement no longer is required in
connection with securities deposits or pledges in favor of OCC
involving book-entry delivery of securities.
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Finally, OCC Rule 614(m) concerning OCC's obligations to pledges
under OCC's pledge program will be revised to make clear that certain
provisions of this rule which relate to the 1977 version of Articles 8
and 9 will apply only if the 1977 version of the UCC is otherwise
applicable.
OCC believes the proposed rule change is consistent with the
purposes and requirements of Section 17A of the Act \6\ because it will
promote the protection of investors by enhancing OCC's ability to
safeguard the securities and funds in its possession or subject to its
control.
\6\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change will impose any
burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments were not and are not intended to be solicited by
OCC with respect to the proposed rule change and none were 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 OCC consents, the Commission will:
(a) By order approve such proposed rule change or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submission
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submissions, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change 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 Room, 450 Fifth Street, NW., Washington,
DC 20549. Copies of such filings will also be available for inspection
and copying at the principal office of OCC. All submissions should
refer to the file number SR-OCC-96-01 and should be submitted by April
15, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
\7\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7068 Filed 3-22-96; 8:45 am]
BILLING CODE 8010-01-M
