[Federal Register Volume 59, Number 74 (Monday, April 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9269]
[[Page Unknown]]
[Federal Register: April 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33893; File No. SR-OCC-92-13]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Amendment to Filing and Order Granting Accelerated Approval
to Proposed Rule Change Amending the Valuation Rate Applied to
Securities Deposited as Clearing Margin
April 14, 1994.
On May 4, 1992, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change pursuant to section 19(b) of the Securities Exchange Act of
1934 (``Act'')\1\ relating to the valuation of securities deposited as
clearing margin (File No. SR-OCC-92-13). On June 8, 1992, OCC filed a
technical amendment with the Commission.\2\ Notice of the proposal
appeared in the Federal Register on September 17, 1992, to solicit
comment from interested persons.\3\ Two comments letters supporting the
proposal were received by the Commission.\4\ On March 9, 1994, OCC
again filed an amendment with the Commission.\5\ The Commission is
publishing this notice and order to solicit comments on the amendment
to the filing and to approve the amended proposal on an accelerated
basis.
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\1\15 U.S.C. 78s(b) (1988).
\2\For a description of the June 8, 1992, amendment, refer to
note 9.
\3\Securities Exchange Act Release No. 31169 (September 10,
1992), 57 FR 43041.
\4\Letters from Robert D. Noble, Principal, Morgan Stanley &
Co., Incorporated, to Gerry [sic] Carpenter, Division of Market
Regulation (December 15, 1993); and Anthony Miserandino, Chairman,
Options Operations Committee, National Options and Futures Society,
to Gerry [sic] Carpenter, Division of Market Regulation (December
23, 1993).
\5\for a discussion of the March 9, 1994, amendment, refer to
note 11.
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I. Description of the Proposal
A. The Proposal
The proposed rule change amends the rate used to value equity and
corporate debt issues deposited for clearing margin purposes pursuant
to OCC Rule 604(d)(1).\6\ Currently, OCC Rule 604(d)(1) provides that
deposited stock and convertible bonds shall be valued on a daily basis
at the maximum loan value permitted under the provisions of Regulation
U of the Board of Governors of the Federal Reserve System (``FRB'')\7\
or at such lower value as the OCC Membership/Margin Committee may
prescribe, and that non-convertible debt shall be valued on a daily
basis at 70% of current market value or at such lower value as the
Membership/Margin Committee may prescribe.\8\ Interpretations and
Policies (``I&P'') .09 to OCC Rule 604 currently provides that for
clearing margin purposes equity and debt issues shall not be valued in
excess of 50% of current market value.\9\ The proposal permits OCC to
value deposits of stocks and bonds\10\ at 60% of current market value
or at such lower rate as determined by OCC's Membership/Margin
Committee.\11\
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\6\OCC Rule 604(d)(1) sets forth the requirements for the use of
preferred and common stock and corporate debt issues as forms of
margin. In addition to these valued securities, Rule 604 permits OCC
to accept U.S. Government securities and letters of credit in lieu
of cash margin.
\7\12 CFR 221 (1993). Section 221.8. (a) of Regulation U [12 CFR
221.8. (a) (1993)] provides that the maximum loan value of margin
stocks, other than options, is fifty per cent of their current
market value.
\8\The OCC Membership/Margin Committee is a committee of six
members of the OCC Board of Directors that reviews membership
applications and makes margin policy. Telephone conversation between
Jean M. Cawley, Staff Counsel, OCC, and Thomas C. Etter, Jr.,
Attorney, Division of Market Regulation (``Division''), Commission
(May 7, 1992).
\9\In its June 8, 1992, amendment, OCC notes that an I&P .09 to
Rule 604 was approved by the Commission in Securities Exchange Act
Release No. 29576 (August 16, 1991), 56 FR 41873 [File No. SR-OCC-
88-03] (order approving proposed rule change involving valued
securities program), but because of an oversight, it was never
included in OCC's rule book. As a result, a later I&P to Rule 604,
which was approved by the Commission in Securities Exchange Act
Release No. 29920 (November 15, 1991), 56 FR 58105 [File No. SR-OCC-
91-04] (order approving proposed rule change relating to cross-rate
foreign currency options), was entered into OCC's rule book as I&P
.09. Thus, there are currently two I&Ps to Rule 604 which were filed
and approved as .09. The June 8, 1992, amendment corrects this
misnumbering.
\10\The filing also amends OCC Rule 604(d) so that both
convertible and non-convertible corporate bonds are treated
consistently for margin purposes and are referred to simply as
corporate bonds.
\11\The March 9, 1994, amendment modified the loan value rate
from 70% to 60% of the current market value. Letter from Jean M.
Cawley, Associate Counsel, OCC to Jerry W. Carpenter, Chief, Branch
of Clearing Agency Regulation, Division of Market Regulation (March
8, 1994). The initial proposal had called for increasing the loan
value to 70%.
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OCC also is amending its Rule 705, which describes the forms of
margin that may be deposited for cross-margin obligations, to provide
that common stock may be deposited as margin only if mutually
acceptable to OCC and the participating commodities clearing
organization (``CCO''). Such deposits, if acceptable, will be valued in
accordance with the cross-margining agreement between OCC and the
participating CCO. This amendment is intended to preserve OCC's and the
participating CCO's rights to determine whether they will accept common
stock as a form of margin collateral, and it provides a means for OCC
and the participating CCO to value these deposits without requiring OCC
to further amend Rule 705.
B. OCC's Valued Securities Program
In 1975, OCC proposed to institute a program through which it would
accept deposits of common stocks as clearing margin collateral
(``valued securities program'') under Rule 604(d).\12\ The novelty of
the proposed program, however, resulted in extensive regulatory review
by the staffs of the FRB and the Commission. As a result of this review
process, several significant changes were made to the OCC valued
securities program that the Commission subsequently approved in
1982.\13\ In 1983, the Commission approved a proposal whereby OCC was
authorized to expand the types of stocks that clearing members could
deposit to meet their clearing margin obligations.\14\ Pursuant to that
amendment, however, clearing members are permitted to deposit only
stocks that have a market value of greater than $10 a share and either
(1) are traded on a national securities exchange that has last sale
reports collected and disseminated pursuant to a consolidated
transaction reporting plan or (2) are traded in the over-the-counter
market and are designated as a National Market System security.\15\ The
proposal also established that such deposits are to be valued at the
lesser of the maximum loan value prescribed by the FRB in Regulation U
for margin stocks or 70% of current market value.\16\
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\12\Securities Exchange Act Release No. 11820 (November 12,
1975), 40 FR 53637 [File No. SR-OCC-75-05] (notice of proposed rule
change). This submission did not receive Commission approval. In
fact, because of the filing's potential conflicts with FRB
regulations, including Regulation T [12 CFR 220], OCC requested that
File No. SR-OCC-75-05 be withdrawn and submitted File No. SR-OCC-82-
11 in its place. Securities Exchange Act Release No. 18994 (August
20, 1982), 47 FR 37731 [File No. SR-OCC-82-11] (order approving File
No. SR-OCC-82-11 and withdrawing File No. SR-OCC-75-05).
\13\The valued securities program, as approved, amended OCC Rule
604 to allow OCC clearing members to meet their clearing margin
obligations with OCC by depositing common stocks underlying listed
options that were not being used as cover for existing options
positions. Previously, Rule 604 had limited clearing margin
collateral to cash, government securities, or letters of credit.
Securities Exchange Act Release No. 18994 (August 20, 1982), 47 FR
37731 [File No. SR-OCC-82-11] (order approving File No. SR-OCC-82-11
and withdrawing File No. SR-OCC-75-05).
\14\Securities Exchange Act Release No. 20558 (January 13,
1984), 49 FR 2183 [File No. SR-OCC-83-17].
\15\Id.
\16\Pursuant to Regulation U, the maximum loan value for margin
stocks was then and currently is 50% of current market value.
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In 1991, the Commission authorized OCC to add preferred stock and
corporate debt to the valued securities program.\17\ To be eligible for
deposit as clearing margin collateral, preferred stock has to meet the
same eligibility standards as those previously approved for common
stocks. Corporate bonds are required to be listed on a national
securities exchange, to not be in default, and to have a current market
value that is readily determinable on a daily basis. The maximum loan
value for preferred stocks and corporate debt also was set at 50% of
current market value.\18\
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\17\Securities Exchange Act Release No. 29576 (August 16, 1991),
56 FR 41873 [File No. SR-OCC-88-03] (order approving proposed rule
change).
\18\Regulation U defines ``margin stock'' to include convertible
debt and thus subjects convertible debt to the 50% loan value
limitation. [12 CFR 221.2.(h)(4) and 221.8.(a)]. Regulation U does
not include non-convertible debt in its definition of margin stock,
and therefore, non-convertible debt is subject to ``good faith loan
value.'' [12 CFR 221.8.(b)]. Nevertheless, the OCC filing proposing
the inclusion of preferred stock and corporate debt, File No. SR-
OCC-88-03, included OCC's I&P .09 to Rule 604 which prescribes that
the 50% loan value limitation applies to all debt and equity
securities involved in the valued securities program.
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OCC states in its filing that it has accepted deposits of common
stock as clearing margin since 1982 and preferred stock and corporate
debt since 1991 and that, accordingly, it has gained substantial
experience in operating its valued securities program. OCC claims that
the valued securities program has been successful in (1) reducing OCC's
reliance on letters of credit by expanding acceptable forms of margin
deposits and (2) enhancing the efficient allocation of clearing member
capital.\19\
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\19\OCC states that because margin securities are the major
source of collateral for letters of credit, its valued securities
program was designed to eliminate the intermediate step of clearing
members' depositing margin securities at banks as collateral for the
issuance of letters of credit.
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OCC further states in its filing that from the program's
commencement clearing members have requested that deposits of
securities be valued at greater than 50% of current market value. OCC
has been unable to accommodate these requests because of its agreement
with the staffs of the FRB and the Commission that the OCC clearing
margin would be capped at the maximum loan rate provided by Regulation
U for margin securities. In response to OCC's filing, the FRB's staff
has stated that the FRB will not object to an increase in the valuation
rate applied to OCC's deposits of debt and equity issues.\20\ OCC
proposes to value stocks and bonds deposited as clearing margin at a
maximum of 60% of current market value or at such lesser value as OCC's
Membership/Margin Committee may prescribe from time to time.
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\20\Telephone conversation between Scott Holz, Senior Attorney,
Division of Banking Supervision and Regulation, FRB, and Thomas C.
Etter, Jr., Esq., Division, Commission (March 3, 1993) and letter
from Scott Holz to Thomas C. Etter, Jr. (March 11, 1993).
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OCC states that in addition to the 60% valuation rate providing a
safe level of protection for OCC, there are additional safeguards in
place for its protection. These safeguards include:
(1) The Commission's Uniform Net Capital Rule, which applies to OCC
clearing members;\21\
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\21\Act Rule 15c3-1 [17 CFR 240.15c3-1 (1993)].
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(2) The authority of OCC's Membership/Margin Committee to prescribe
a lower valuation rate from time to time; and
(3) OCC Rule 604(d)(1) which, among other things, establishes high
eligibility standards for securities in the valued securities program
and limits deposits of valued securities program and limits deposits of
valued securities issued by any one issuer to 10% of the margin
requirement of the account for which the securities are deposited.
II. Discussion
The Commission believes that the proposal is consistent with the
Act and particularly with Section 17A of the Act.\22\ Section
17A(b)(3)(F) of the Act\23\ requires that the rules of a clearing
agency be designed to assure the safeguarding of funds in the custody
or control of the clearing agency or for which it is responsible.
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\22\15 U.S.C. 78q-1 (1988).
\23\15 U.S.C. 78q-1(b)(3)(F) (1988).
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The Commission believes that the effective functioning of the OCC
valued securities program and OCC's various financial safeguards and
risk monitoring systems,\24\ taken as a whole, suggest that an increase
in the valuation rate for securities deposited as clearing margin
should not detract from OCC's ability to safeguard securities and funds
for which it is responsible. Increasing the valuation rate also should
help reduce OCC's reliance on letters of credit as margin
collateral.\25\
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\24\As discussed above, numerous financial safeguards and risk
reduction systems already employed by OCC will continue to be used
by OCC under this proposal. Among others, these include:
(1) The valued securities program eligibility standards for
stock and corporate debt;
(2) The valued securities program concentration ratio, which
limits the amount of stock of any one issuer that can be held in an
account to 10% of the margin requirement for the account;
(3) OCC's ability to monitor adequately the value of margin
deposits on a daily basis;
(4) The Theoretical Intermarket Margining System (``TIMS''),
which employs option price theory to identify and measure market
risk and to calculate margin requirements;
(5) The Concentration Monitoring System, which enables OCC to
analyze and address risks resulting from concentrated, undiversified
options portfolios; and
(6) The Risk Management System, which generally allows OCC to
evaluate the risks associated with the entire stock, options, and
futures portfolios held by its clearing members.
\25\The financial reliability of these credit agreements depends
on the creditworthiness of their issuers, and a clearing agency
holding letters of credit as clearing margin may be exposed to risk
in event of an issuer default or insolvency. Also, payment on
letters of credit can be subject to delay, depending on the terms of
the letter of credit and the timing of the default. See Securities
Exchange Act Release No. 30883 (July 1, 1992), 57 FR 30521 [File No.
SR-NSCC-92-05] (order approving limitations on letter of credit
clearing fund contributions).
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The Commission also finds good cause for approving the proposed
rule change prior to the thirtieth day after the date of publication of
notice of the filing of the amendment. Because the comment letters the
Commission received to OCC's proposal as originally filed were in favor
of increasing the valuation rate from 50% to 70% for equity and
corporate debt issues deposited for clearing margin, the Commission
does not foresee receiving any adverse comment letters with regard to
the March 9, 1994, amendment which amended the filing to increase the
valuation rate from 50% to 60%.
III. 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 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 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 OCC. All submissions
should refer to File No. SR-OCC-92-13 and should be submitted by May 9,
1994.
IV. Conclusion
For the reasons discussed above, the Commission believes that the
amended proposal is consistent with the requirements of the Act,
particularly with those of section 17A of the Act, and the rules and
regulations thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\26\ that the above-mentioned proposed rule change (File No. SR-
OCC-92-13) be, and hereby is, approved.
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\26\15 U.S.C. 78s(b)(2) (1988).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9269 Filed 4-15-94; 8:45 am]
BILLING CODE 8010-01
