[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Notices]
[Pages 53371-53373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27052]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39203; File No. SR-OCC-97-14]


Self-Regulatory Organizations; The Option Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to a Cross-Margining Agreement With the Board of 
Trade Clearing Corporation

October 3, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 18, 1997, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared 
primarily by OCC. The Commission is publishing this notice and order to 
solicit comments form interested persons and to grant accelerated 
approval of the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change will allow OCC to amend the cross-
margining agreement between OCC and the Board of Trade Clearing 
Corporation (``BOTCC'') and to amend the agreements that are required 
to be executed by participating clearing members and market 
professionals participating in the cross-margining programs established 
by the cross-margining agreement.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule filing is to revise the amended 
and restated cross-margining agreement between OCC and BOTCC 
(``Agreement'').\3\ OCC and BOTCC have executed an amendment to the 
Agreement to revise the Agreement.\4\ Specifically, OCC proposed to 
amend Exhibit A to the Agreement to update the list of contracts 
eligible of OCC/BOTCC cross-margining. OCC also proposes to amend the 
agreements governing the cross-margin accounts of clearing members and 
market professionals that participate in OCC/BOTCC cross-margining. The 
changes to those agreements essentially will conform them to the 
comparable form of the agreements used in the cross-margining program 
among OCC, the Chicago Mercantile Exchange (``CME'') and the Commodity 
Clearing Corporation (``CCC'').\5\
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    \3\ For a description of the existing agreement, refer to 
Securities Exchange Act Release No. 29888 (October 31, 1991), 56 FR 
56680 [File No. SR-OCC-91-07] (order approving establishment of 
cross-margining program between OCC and BOTCC) and Securities 
Exchange Act Release No. 32681 (July 27, 1993), 58 FR 41302 [File 
No. SR-OCC-92-24] (order approving expansion of cross-margining 
program between OCC and BOTCC to include non-proprietary positions).
    \4\ A copy of the amendment has been submitted with the proposed 
rule change and is available for inspection and copying at the 
Commission 's Public Reference Room or at the principal office of 
OCC.
    \5\ For a description of the cross-margining agreement among 
OCC, CME, and CCC, refer to Securities Exchange Act Release No. 
38584 (May 8, 1997), 62 FR 26602 [File No. SR-OCC-97-04] (order 
granting accelerated approval to proposed rule change).
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    The following forms of agreements are required to be executed by 
clearing members and market professionals participating in the cross-
margining program established by the Agreement: (1) Proprietary cross-
margin account agreement and security agreement for a joint clearing 
member; (2) proprietary cross-margin account agreement and security 
agreement for affiliated clearing members; (3) non-proprietary cross-
margin account agreement and security agreement for a joint clearing 
member; (4) non-proprietary cross-margin account agreement and security 
agreement for affiliated clearing members; (5) subordination agreement 
for cross-margining for a joint clearing member; and (6) subordination 
agreement for cross-margining for

[[Page 53372]]

affiliated clearing members.\6\ Each of these agreements is based on 
the comparable existing agreement used in the current OCC/BOTCC cross-
margining program, and each of the agreements has been modified as 
necessary to reflect changes that have been made to the cross-margining 
program among OCC, CME, and CCC.
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    \6\ Copies of the agreements have been submitted with the 
proposed rule change and are available for inspection and copying at 
the Commission's Public Reference Room or at the principal office of 
OCC.
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    With respect to the proprietary cross-margin account agreement and 
security agreement for a joint clearing member, section 2 will be 
revised to make clear that margin deposited with respect to the cross-
margined proprietary accounts (``proprietary X-M accounts'') is 
security for all of the obligations of the joint clearing member 
whether or not such obligations arise from the proprietary X-M 
accounts. Section 5 will be amended to make clear that OCC and BOTCC 
have a joint lien on and security interest in the proprietary X-M 
accounts. Section 5 also will be updated to comply with recent 
revisions to Article 8 and Article 9 of the Uniform Commercial Code. 
Section 5 will be changed by making explicit that OCC and BOTCC have a 
right of setoff against collateral held with respect to the proprietary 
X-M accounts. Section 5 will be amended to reflect that the prohibition 
against the joint clearing member granting any lien on or security 
interest in such collateral without the written consent of OCC and 
BOTCC shall not apply to any interest of the joint clearing member in 
the collateral which is subordinate to that of OCC and BOTCC. OCC has 
informed the Commission that no other substantive changes have been 
made to the proprietary cross-margin account agreement and security 
agreement for a joint clearing member.
    With respect to the proprietary cross-margin account agreement and 
security agreement for affiliated clearing members, section 2 will be 
amended to make the affiliated clearing members jointly and severally 
liable to OCC and BOTCC for any obligation arising from the proprietary 
X-M accounts. Section 2 also will be revised to make clear that neither 
of the affiliated clearing members is obligated to make any 
contribution to the clearing or guarantee fund of a clearing 
organization (i.e., OCC or BOTCC) of with such clearing member is not 
itself a member. Section 3 will be revised to make clear that margin 
deposited with respect to the proprietary X-M accounts is security for 
all of the obligations of the affiliated clearing members whether or 
not such obligations arise from the proprietary X-M accounts. Section 6 
will be amended to make clear that OCC and BOTCC have a joint lien on 
and security interest in the proprietary X-M accounts by adding a 
specific reference to the accounts. Section 6 also will be updated to 
comply with recent revisions to Article 8 and Article 9 of the Uniform 
Commercial Code. Section 6 will be changed by making explicit that OCC 
and BOTCC have a right of setoff against collateral held with respect 
to the proprietary X-M accounts. Section 6 also will be amended to 
reflect that the prohibition against a clearing member granting any 
lien on or security interest in such collateral without the written 
consent of OCC and BOTCC shall not apply to any interest of the 
clearing member in the collateral which is subordinate to that of OCC 
and BOTCC. OCC has informed the Commission that no other substantive 
changes have been made to the proprietary cross-margin account 
agreement and security agreement for affiliated clearing members.
    With respect to the non-proprietary cross-margin account agreement 
and security agreement for a joint clearing member, section 3 will be 
amended to provide for the selection of a designated clearing 
organization (``DCO'') (i.e., either OCC or BOTCC) by a joint clearing 
member that does not maintain any proprietary X-M accounts. Section 5 
will be amended to make clear that OCC and BOTCC have a joint lien on 
and security interest in the cross-margined non-proprietary accounts 
(``non-proprietary X-M accounts''). Section 5 also will be updated to 
comply with recent revisions to Article 8 and Article 9 of the Uniform 
Commercial Code. In addition, section 5 will be changed by making 
explicit that OCC and BOTCC have a right of setoff against collateral 
held with respect to the non-proprietary X-M accounts. OCC has informed 
the Commission that no other substantive changes have been made to the 
non-proprietary cross-margin account agreement and security agreement 
for a joint clearing member.
    With respect to the non-proprietary cross-margin account agreement 
and security agreement for affiliated clearing members, section 2 will 
be changed to make affiliated clearing members jointly and severally 
liable to OCC and BOTCC for any obligation arising from the non-
proprietary X-M accounts, Section 2 also will be changed to provide 
that neither of the affiliated clearing member is obligated to make any 
contribution to the clearing or guarantee fund of a clearing 
organization (i.e., OCC or BOTCC) of which such clearing member is not 
itself a member. Section 4 will be amended to provide for the selection 
of a DCO by affiliated clearing members that do not maintain 
proprietary X-M accounts. Section 6 will be amended to make clear that 
OCC and BOTCC have a joint lien on and security interest in the non-
proprietary X-M accounts. Section 6 also will be amended to comply with 
recent revisions to Article 8 and Article 9 of the Uniform Commercial 
Code. In addition, section 6 will be changed by making explicit that 
OCC and BOTCC have a right of setoff against collateral held with 
respect to the non-proprietary X-M accounts. OCC has informed the 
Commission that no other substantive changes have been made to the non-
proprietary cross-margin account agreement and security agreement for 
affiliated clearing members.
    With respect to each of the subordination agreement for cross-
margining for a joint clearing member and the subordination agreement 
for cross-margining for affiliated clearing members (``market 
professionals agreements''), section 1 will be changed to include a 
representation that the member executing the agreement is a member or a 
firm owning a membership on the Chicago Board of Trade. Section 4 of 
each of the market professionals agreements will be amended to include 
the liquidation provisions found in Appendix B of Part 190 of the 
regulations of the Commodity Futures Trading Commission (``CFTC'') \7\ 
and to provide that claims against a clearing member will be 
subordinated to all other customers as provided in subchapter III of 
Chapter 7 of the U.S. Bankruptcy Code.\8\ The current market 
professionals agreements used for OCC/BOTCC cross-margining do not 
follow the liquidation distribution scheme of Appendix B of Part 190 of 
the CFTC's regulations. Section 5 of the market professionals 
agreements will be amended to make clear that OCC and BOTCC have a 
joint lien on and security interest in the non-proprietary X-M 
accounts. Section 5 also will be amended to make explicit that the 
member has granted to OCC and BOTCC a right of setoff against 
collateral held with respect to the non-proprietary X-M accounts of the 
clearing member. A new section 7 will be added to each of the market 
professional agreements to provide that an executed copy of each such 
agreement is to be filed with OCC and BOTCC and that an executed market 
professionals agreement cannot

[[Page 53373]]

be modified without the approval of the clearing organization. These 
changes are intended for the protection of OCC and BOTCC. OCC has 
informed the Commission that all other changes to the market 
professionals agreements are either stylistic or nonsubstantive in 
nature.
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    \7\ 17 CFR 190, App. B.
    \8\ 11 U.S.C. 741, et seq.
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    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of section 17A of the Act because cross-
margining enhances the safety of the clearing system while providing 
lower clearing margin costs to participants.

(B) Self-Regulatory Organization's Statement on Burden of Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Section 17A(b)(3)(F) of the Act \9\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody and control of the clearing agency 
or for which it is responsible. Section 17A(a)(2)(A)(ii) of the Act 
\10\ directs the Commission to use its authority under the Act to 
facilitate the establishment of transactions in securities, securities 
options, contracts of sale for future delivery and options thereon, and 
commodity options. The Commission believes that the proposed rule 
change is consistent with these requirements under the Act.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 15 U.S.C. 78q-1(a)(2)(A)(ii).
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    Similar to other cross-margining arrangements to which OCC is a 
party, the current proposal links and coordinates the clearance and 
settlement facilities of OCC and BOTCC with respect to shared 
management of risks associated with the clearing members' intermarket 
portfolios and with respect to information sharing regarding the 
financial condition of participating joint and affiliated members. The 
Commission views cross-margining arrangements as a significant risk 
reduction method because they provide a means whereby individual 
clearing organizations do not have to manage independently the risk 
associated with some components (i.e., the futures or options 
component) of a clearing member's total portfolio. Therefore, cross-
margining programs serve to help OCC assure the safeguarding of 
securities and funds and to facilitate the establishment of linked or 
coordinated facilities for the clearance and settlement of futures and 
options, transactions in securities.
    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after publication 
of the notice of filing. The Commission finds good cause for approving 
the proposed rule change prior to the thirtieth day after publication 
of the notice of the filing because the proposed changes to the OCC/
BOTCC cross-margining program are based on the OCC/CME/CCC cross-
margining program, which the Commission has previously approved. In 
addition, the Commission does not expect to receive any adverse 
comments on the proposed rule change.

IV. 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 also will be available for 
inspection and copying at the principal office of OCC. All submissions 
should refer to File No. SR-OCC-97-14 and should be submitted by 
November 4, 1997.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-OCC-97-14) be and 
hereby is approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27052 Filed 10-10-97; 8:45 am]
BILLING CODE 8010-10-M