[Federal Register Volume 62, Number 4 (Tuesday, January 7, 1997)]
[Notices]
[Pages 1013-1014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-231]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38103; File No. SR-OCC-96-11]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Relating to Membership Standards

December 31, 1996.
    On August 30, 1996, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change (File No. SR-OCC-96-11) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of 
the proposal was published in the Federal Register on October 11, 
1996.\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. 37792 (October 7, 1996), 
61 FR 53475.
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I. Description

    The proposed rule change amends OCC's by-laws and rules regarding 
OCC's initial membership standards and the ongoing duties of clearing 
members as follows.

A. Article V, Section 1 of the By-Laws

    Clause d. has been added to Interpretation .02 of the 
Interpretations and Policies (``Interpretations'') under Article V, 
Section 1 of OCC's by-laws. Clause d. provides that the Membership/
Margin Committee (``Committee'') of the Board of Directors (``Board'') 
will not recommend approval of an application for clearing membership 
unless the applicant's Designated Examining Authority (``DEA'') has 
stated that it has no objections to the application for clearing 
membership.\3\ Pursuant to that clause, the Committee, if requested in 
writing by the applicant, is permitted to waive the requirement in 
exceptional cases and where good cause is shown.
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    \3\ Under OCC's current membership review procedures, an 
applicant's DEA is contacted for information regarding the applicant 
and is requested to provide advice or any objections with respect to 
the applicant's ability to self-clear option transactions.
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    Interpretation .03 is amended to require that if an applicant 
elects to use an associated person \4\ to satisfy the applicable 
requirements of clause a. through c. thereof, the designated associated 
person must be a full time employee of the applicant.\5\ Interpretation 
.03 also is amended to require that the key operations employees 
required to have attended applicable OCC operations readiness review 
sessions and successfully completed any applicable OCC operational and 
financial examinations for operations employees be full time employees 
and attend all such review sessions. Interpretation .04 is amended to 
eliminate the ability of an applicant for clearing membership to enter 
into a facilities management arrangement with a non-clearing member.\6\
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    \4\ Associated person is defined in Interpretation .03 as any 
partner, officer, director, or branch manager of such applicant (or 
any person occupying a similar status or performing similar 
functions), any person directly or indirectly controlling, 
controlled by, or under common control with such applicant, or any 
employee of such applicant.
    \5\ Clauses a. through c. require that: an applicant that is a 
registered broker-dealer must be registered as a ``Limited 
Principal--Financial Operations'' with the National Association of 
Securities Dealers; an applicant that is applying for clearing 
membership as an exempt Canadian clearing member must be registered 
as a principal/director/officer and as a designated registered 
options principal with the Investment Dealers Association of Canada; 
and an applicant that is a non-U.S. securities firm must have 
completed any applicable OCC financial and operational examination 
for employees who are responsible for supervising the preparation of 
applicant's financial reports.
    \6\ Currently, OCC has two clearing members that use the same 
non-clearing member facilities manager.
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    Interpretation .05 is added to authorize the Committee to recommend 
to the Board that additional financial requirements be imposed on an 
applicant for clearing membership (e.g., an increase in net capital or 
a requirement to make and maintain

[[Page 1014]]

initial margin deposits) or that restrictions be imposed on the 
applicant's clearance of option transactions if the Committee has 
determined that the applicant's financial or operational condition in 
relation to the business that the applicant has proposed to transact 
through OCC makes such action necessary or advisable for the protection 
of OCC, clearing members, or the general public. The Board is required 
to review independently such a recommendation to determine whether it 
should be imposed on an applicant. Any requirements or restrictions so 
imposed would remain in force for the period determined by the Board 
but will last no longer than the end of the first three calendar months 
commencing after the applicant's admission to clearing membership. 
Furthermore, Interpretation .05 states that the imposition of any 
additional requirements or restrictions so imposed shall not preclude 
OCC from imposing contemporaneous requirements or restrictions pursuant 
to other provisions of OCC's by-laws and rules.\7\
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    \7\ E.g., OCC Rule 305.
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B. Article V, Section 3 of the By-Laws

    Interpretation .01 has been added to Section 3 of Article V. That 
interpretation requires an applicant approved for clearing membership 
subject to the satisfaction of specified conditions to meet those 
specified conditions within six months from the date on which its 
application is approved unless the Board prescribes a shorter time 
period at the time of approval. If an applicant fails to meet the 
specified conditions within the applicable time period, the approval of 
the application will be deemed withdrawn, and the application will be 
deemed to have lapsed unless the period to satisfy those conditions is 
extended by OCC. Any applicant seeking an extension will be required to 
make a written request specifying any material changes that have 
occurred in its ability to transact business with OCC. The Chairman or 
the President is vested with the authority to approve or disapprove an 
extension request. No deadline can be extended beyond one year from the 
date the application originally was approved.

C. Chapter II of the Rules

    Rule 201 is amended (i) to delete the requirement that each 
clearing member maintain an office in the vicinity of the office of OCC 
and (ii) to require every clearing member to provide OCC with prompt 
written notice of the relocation of its principal office or the office 
maintained by the clearing member to comply with the requirements of 
Rule 201(a) and with respect to a non-U.S. clearing member, prompt 
notice of a material change in the office arrangements OCC had 
previously found satisfactory.
    Rule 214(a) is amended to require that only associated persons who 
are full time employees of a clearing member may satisfy the applicable 
requirements of that rule.\8\ Interpretation .02 thereunder is amended 
(i) to shorten the time period from one year to three months within 
which a clearing member must replace an associated person through whom 
a clearing member has been meeting the requirements of the rule and 
(ii) to require prompt, written notice of any separation between the 
clearing member and such associated person.
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    \8\ Rule 214(a) contains provisions similar to Interpretation 
.03 of Article V, Section 1 of the by-laws, supra notes 4 and 5 and 
accompanying text.
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    Rule 215 has been added to require each clearing member to provide 
OCC with prompt, prior, written notice of material changes to its 
operations including: (i) its involvement in any merger, combination, 
or consolidation; (ii) the acquisition of another entity; (iii) the 
sale of a significant portion of its assets; (iv) a change in its form 
of business organization or the name under which it does business; and 
(v) a change in the direct or indirect beneficial ownership of 10% or 
more of the equity of the clearing member. Clearing members will be 
required to provide OCC with such documents as OCC might require with 
respect to such events as well as a list of persons or entities that 
are the beneficial owners directly or indirectly of 10% or more of the 
equity of the clearing member.

II. Discussion

    Section 17A(b)(3)(F) \9\ of the Act requires that the rules of a 
clearing agency be designed to safeguard securities and funds in its 
custody or control. The proposal should assist OCC in this regard by 
helping to ensure that only entities that meet certain standards are 
standards are admitted to OCC membership. For example, seeking the 
approval of an applicant's DEA prior to admission should help OCC to 
confirm that the admission is consistent with the applicant's current 
operations. Furthermore, by allowing the Committee to recommend that 
additional requirements or restrictions be placed on an applicant, OCC 
should be better able to monitor such applicant and evaluate the risks 
such applicant poses to OCC. Similarly, by requiring applicants to meet 
all conditions of membership within six months of admission, OCC limits 
the risk that such applicant poses to OCC while permitting an applicant 
a reasonable amount of time to comply with OCC rules.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    Members are now required to provide OCC prompt notice of such 
events as a change in office or a material change in operations. By 
providing prompt notice of these changes, the proposal should enable 
OCC to better monitor the financial and operational status of its 
members. By admitting applicants subject to certain conditions and by 
monitoring members' conditions, OCC should be able to further reduce 
the risk of member default and thereby further reduce the risk that OCC 
may need to expend funds in satisfaction of a defaulting member's 
obligations. Thus, the proposal should assist OCC in safeguarding funds 
and securities.

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 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-96-11) 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. 97-231 Filed 1-6-97; 8:45 am]
BILLING CODE 8010-01-M