[Federal Register Volume 62, Number 187 (Friday, September 26, 1997)]
[Notices]
[Pages 50647-50648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25520]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39104; File No. SR-OCC-97-01]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Permitting the Use of Certain 
Fund Shares to Satisfy Margin Requirements and Permitting the Use of 
Certain Fund Shares and Trust Units as Escrow Deposits

September 22, 1997.
    On February 21, 1997, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-97-01) 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 May 20, 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. 38625 (May 13, 1997), 62 
FR 27638.
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I. Description

(1) Using Fund Shares as a Form of Margin

    The proposal amends subparagraph (4) of OCC Rule 604(d), which sets 
forth the margin deposit eligibility requirements for debt and equity 
issues, to permit OCC's clearing members to deposit as a form of margin 
collateral fund shares issued by open-end management investment 
companies that hold portfolios or baskets of common stocks (``fund 
shares'').\3\ The proposal amends the term ``stock'' defined Rule 
604(d)(4) to include fund shares. Fund shares will have to meet the 
requirements applicable to stocks under Rule 604(d) and be of a class 
approved by OCC for deposit as margin to be eligible for deposit as 
margin collateral. Because Rule 604(d)(1) requires that a stock be 
exchange listed or traded on the NASDAQ National Market System, the 
``publicly traded'' requirement of subparagraph (4) has been deleted. 
The proposal also amends Section 11 of OCC's Interpretations and 
Policies to require that OCC's Membership/Margin Committee 
(``Committee'') approve classes of fund shares for deposit as margin. 
Presently, World Equity Benchmark Shares (``WEBS'') listed on the 
American Stock Exchange are the only class of fund shares the Committee 
has approved.
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    \3\ Similarly, OCC permits its clearing members to use certain 
publicly traded units of beneficial interest in unit investment 
trusts (``trust units'') as margin deposits under the conditions 
specified in subparagraph (4) of Rule 604(d). Currently, the only 
trust units approved for deposit as margin are Standard & Poor's 
(``S&P'') Depository Receipts (``SPDR's'') on the S&P 500 Index and 
S&P 400 Mid-Cap Index.
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(2) Using Fund Shares and Trust Units as Escrow Deposits

    The proposal amends OCC Rule 1801(b), which relates to index option 
escrow deposits, by adding new subparagraph (2) which will define the 
term ``common stocks'' to include fund shares and trust units.\4\ By 
adding this definition, OCC Rule 1801(b) now permits clearing members 
to use fund shares and trust units as part of an escrow deposit made 
with respect to index call option contracts carried in a

[[Page 50648]]

short position in a clearing members' customer account.\5\
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    \4\The proposed rule change also makes numbering changes to Rule 
1801 as a result of the addition of new subparagraph (b)(2).
    \5\ OCC has filed with the Commission a proposed rule change 
that will authorize OCC to issue and clear options on fund shares 
and trust units. Securities Exchange Act Release No. 38706 (June 2, 
1997, 62 FR 31468. OCC also asserts that, if approved by the 
Commission, fund shares and trust units will by definition become 
``underlying securities as defined by Article I, Section 1 of OCC's 
bylaws,'' and escrow deposits with respect to call option contracts 
on these underlying securities carried in a short position will be 
automatically permitted under the existing provisions of OCC Rule 
610, which relates to the deposit of underlying securities in lieu 
of margin.
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    The language of the new definition parallels that of Rule 604(d), 
as amended herein. Accordingly, fund shares and trust units deposited 
as index option escrow deposits must meet the existing requirements for 
deposits of common stock under Rule 1801(b) and must be of a class 
approved by OCC for deposit as margin collateral. Because the Committee 
already has approved for deposit as margin SPDRs on the S&P 500 Index 
and S&P 400 Mid-Cap Index (as an eligible class of trust units) and 
WEBS (as an eligible class of fund shares), upon approval of this rule 
filing SPDRs and WEBS will be eligible for use as escrow deposits for 
short positions in index call options.\6\
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    \6\ OCC has indicated that if the Commission approves the 
proposal, OCC will send a notice to each of its custodian banks 
advising them that the term ``common stocks'' as used in the Amended 
and Restated On-Line Escrow Deposit Agreement includes the SPDRs and 
WEBS identified above.
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II. Discussion

    Section 17A(b)(3)(F) \7\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in its custody or control or for which it is responsible. 
Because fund shares and trust units, among other things, must be either 
traded on a national securities exchange or designated as a national 
market system security to be eligible as margin collateral, the 
proposal ensures that only liquid securities will be accepted as a form 
of margin or an escrow deposit. In addition, fund shares and trust 
units are typically traded and cleared like shares of common stock and 
are typically held in book-entry form at a securities depository.\8\ As 
a result, OCC believes it will be able to readily perfect a security 
interest in deposited fund shares and will be able to liquidate them if 
necessary. Furthermore, OCC already has had an opportunity to gain 
experience in accepting trust units as a form of margin and will be 
able to use this experience in expanding to fund shares. Therefore, the 
Commission believes that OCC's proposed rule change is consistent with 
OCC's obligations under the Act to safeguard securities and funds.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ Securities Exchange Act Release No. 38105, (December 31, 
1996) 62 FR 1014 [File No. SR-OCC-96-13] (order approving a proposed 
rule change relating to unit investment trusts as margin 
collateral).
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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-97-01) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25520 Filed 9-25-97; 8:45 am]
BILLING CODE 8010-01-M