02-9631. Self-Regulatory Organizations; the Options Clearing Corporation; Order Approving a Proposed Rule Change Relating to Forms of Margin Collateral

April 12, 2002.

On March 9, 2001, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) and on August 24, 2001, amended proposed rule change SR-OCC-2001-04 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).^[1] Notice of the proposal was published in the Federal Register on November 13, 2001.^[2] On April 8, 2002, OCC filed a second amendment.^[3] No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

I. Description

The proposed rule change expands the types of debt securities that clearing members may deposit with OCC as margin collateral. In light of the declining supply of U.S. Treasury bills, notes, and bonds, the rule change allows OCC clearing members to deposit as margin debt securities issued by Congressionally chartered corporations (government sponsored enterprise or “GSE” debt securities).

To be acceptable as margin collateral, the GSE debt securities must be approved by OCC's membership/margin committee. OCC's membership/margin committee has approved certain non-callable debt securities issued by two GSEs, the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), as being eligible for margin deposit.^[4] Both companies are stockholder-owned, Congressionally chartered corporations with the public purpose of increasing the supply and availability of home mortgages.

In 1998, Freddie Mac initiated its Reference Debt Program (“RDP”) in order to finance the mortgages it retains.^[5] Through the RDP program, Freddie Mac sells large issues of long and short-term non-callable debt (i.e., bills, notes, and bonds) to provide investors with high quality debt securities.^[6] The debt securities generally are distributed through a group of participating dealers that also support secondary trading in the securities. To ensure broad based dealer participation, Freddie Mac limits the allocation to any one dealer to 35 percent of the offered amount. The debt securities are offered according to a predetermined schedule and issued in sufficient quantities to provide investors with liquid secondary markets. The RDP debt securities issued by Freddie Mac are the general obligations of the company and are not secured by the full faith and credit of the U.S. Government. Not all RDP debt has been rated. However, all such debt that has been rated has received S&P and Moody's top ratings. Domestic clearing and settlement may be done through organizations participating in one or more U.S. clearing systems, principally the book entry system operated by the Board of Governors of the Federal Reserve System. As a result, OCC will be readily able to perfect its security interest in these securities.

Also in 1998, Fannie Mae launched the Benchmark Debt Program (BDP), which is its debt financing initiative.^[7] The BDP model is almost identical to the RDP model. Through the BDP, Fannie Mae sells large issues of non-callable long and short-term debt securities that are the general obligations of the company and are not secured by the full faith and credit of the U.S. Government.^[8] Other than the total value of securities issued in the programs, the most notable difference between the RDP and BDP is that all BDP securities have been rated and have received Moody's and S&P's top credit ratings.

These debt securities issued by Freddie Mac and Fannie Mae are liquid, marketable, and of high credit quality which makes them an appropriate form of margin collateral. These characteristics help ensure that OCC will be readily able to liquidate the securities and to realize their market value in order to cover any clearing member default. Securities haircuts, similar to those used for U.S. Government securities deposited as margin, have been prescribed to cover market and liquidity risk.^[9]

II. Discussion

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder and particularly with the requirements of Section 17A(b)(3)(F).^[10] Section 17A(b)(3)(F) requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. The Commission believes that OCC's rule change meets this requirement because it allows OCC's clearing members to deposit high quality, liquid debt securities with OCC as margin collateral in a manner that should provide OCC with sufficient safeguards to protect the securities and funds that are within its custody or control or for which it is responsible.

III. Conclusion

On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A(b)(3)(F) of the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-OCC-2001-04) be and hereby is approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[11]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Act Release No. 45021 (November 5, 2001), 65 FR 56876.

3.  The amendment was technical in nature and did not affect the substance of the proposal as published for notice.

4.  OCC will advise the Commission staff of additional GSE debt securities that the membership/margin committee approves for deposit as margin collateral.

5.  Freddie Mac's web site, www.freddiemac.com,, provides a detailed description of the RDP program.

6.  At the end of 2000, the total outstanding notional value of non-callable RDP bonds and notes approached $100 billion while the outstanding notional value of the non-callable RDP bills approached $600 billion.

7.  Fannie Mae's web site, www.fanniemae.com,, provides a detailed description of its BDP program.

8.  At the end of 2000, the total outstanding notional value of non-callable BDP bonds and notes approached $180 billion. The outstanding notional value of BDP bills approached $350 billion in notional value at the end of 2000.

9.  OCC is also making technical changes to Rule 604(b)(1) in order to more accurately describe the maturity periods of Government securities for purposes of valuation as margin collateral.

10.  U.S.C. 78q-1(b)(3)(F).

11.  17 CFR 200.30-3(a)(12).