[Federal Register Volume 62, Number 101 (Tuesday, May 27, 1997)]
[Notices]
[Pages 28751-28752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13805]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38659; File No. SR-OCC-96-15]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change Relating to Revisions to the
Standards for Letters of Credit Deposited as Margin
May 20, 1997.
On November 4, 1996, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-96-15) 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 February 21,
1997.\2\ No comment letters were received. For the reasons discussed
below, the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 38284 (February 13,
1997), 62 FR 8070.
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I. Description
The proposed rule change makes permanent the Commission's previous
temporary approvals \3\ of OCC's modifications to its Rule 604, which
sets forth the standards for letters of credit deposited with OCC as a
form of margin. First, to conform to the Uniform Commercial Code and to
avoid any ambiguity as to the latest time for honoring demands upon
letters of credit, letters of credit must state expressly that payment
must be made prior to the close of business on the third banking day
following demand. Second, letters of credit must be irrevocable. Third
letters of credit must expire on a quarterly basis. Fourth, OCC
included language in its Rule 604 to make explicit OCC's authority to
draw upon letters of credit at any time, whether or not the clearing
member that deposited the letter of credit has been suspended or is in
default, if OCC determines that such draws are advisable to protect
OCC, other clearing members, or the general public.
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\3\ Securities Exchange Act Release Nos. 29641 (August 30,
1991), 56 FR 46027 [File No. SR-OCC-91-13] (order temporarily
approving proposed rule change through February 28, 1992); 30424
(February 28, 1992), 57 FR 8160 [File No. SR-OCC-92-06] (order
temporarily approving proposed rule change through May 31, 1992);
30763 (June 1, 1992), 57 FR 24284 [File No. SR-OCC-92-11] (order
temporarily approving proposed rule change through August 31, 1992);
31126 (September 1, 1992), 57 FR 40925 [File No. SR-OCC-92-19]
(order temporarily approving proposed rule change through December
31, 1992); 31614 (December 17, 1992), 57 FR 61142 [File No. SR-OCC-
92-37] (order temporarily approving proposed rule change through
June 30, 1993); 32532 (June 28, 1993), 58 FR 36232 [File No. SR-OCC-
93-14] (order temporarily approving proposed rule change through
June 30, 1994); 34206 (June 13, 1994), 59 FR 31661 [File No. SR-OCC-
94-06] (order temporarily approving proposed rule change through
June 30, 1995); 36138 (August 23, 1995), 60 FR 44926 [File No. SR-
OCC-95-9] (order temporarily approving proposed rule change through
June 28, 1996); and 37618 (August 29, 1996), 61 FR 46889 [File No.
SR-OCC-96-07] (order temporarily approving proposed rule change
through June 30, 1997).
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II. Discussion
Section 17A(b)(3)(F) of the Act \4\ requires the rules of a
clearing agency to be designated to assure the safeguarding of
securities and funds in its custody or control or for which it is
responsible. The Commission believes the proposed rule change is
consistent with OCC's obligation under the Act because the modified
standards for letters of credit will enable OCC to draw upon a letter
of credit when the OCC determines that a draw is advisable to protect
OCC, the clearing members, or the general public. This ability will
allow OCC as needed to increase the liquidity of its margin deposits by
enabling OCC to substitute cash collateral for a clearing member's
letter of credit. The rule change also will increase the reliability of
the letters of credit because an issuer will no longer be able to
revoke a letter of credit when the clearing member is experiencing
financial difficulty and poses the greatest credit risk.
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\4\ 15 U.S.C. 78q-1(b)(3)(F).
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In addition, requiring that the letters of credit expire quarterly
rather than annually will result in the issuers conducting more
frequent credit reviews of the clearing members for whom the letters of
credit are issued. More frequent credit reviews should facilitate the
discovery of any adverse developments in a more timely manner. By
increasing the liquidity and reliability of the letters of credit and
the frequency of reviews of its members, OCC has increased its ability
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.
Finally, when the Commission granted temporary approval to OCC's
revisions to the standards for letters of
[[Page 28752]]
credit deposited as margin, the Commission stated that the temporary
approval period would allow the Commission and other interested parties
an opportunity to assess the effects these revised standards would have
on letter of credit issuance and margin deposits at OCC.\5\ The
Commission initially granted temporary approval for the rule change on
August 30, 1991. For that year, letters of credit deposited as margin
constituted approximately $1.9 billion of OCC's total margin deposit of
approximately $19.5 billion (9.7 percent of the total margin
deposit).\6\ As of December 31, 1996, the amount of letters of credit
deposited as margin increased to approximately $2.5 billion of OCC's
total margin deposits of approximately $18.3 billion (13.7 percent of
the total margin deposits).\7\ Therefore, it appears that the rule
change has neither hindered the use of the letters of credit nor
increased their use beyond a reasonable level.
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\5\ Supra note 3.
\6\ Conversation between Michael G. Vitek, OCC, and Jeffrey S.
Mooney, Attorney, Commission, (May 15, 1997).
\7\ OCC 1996 Annual Report, pg 22.
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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 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-96-15) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13805 Filed 5-23-97; 8:45 am]
BILLING CODE 8010-01-M
