30544 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

9 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2The Commission has modified the text of the

summaries prepared by OCC.

III. Date of Effectiveness of the

Proposed Rule Changes and Timing for

Commission Action

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

ninety days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which DTC or NSCC consents,

the Commission will:

(A) By order approve such proposed

rule changes or

(B) Institute proceedings to determine

whether the proposed rules change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

changes are consistent with the Act.

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

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes 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 DTC and NSCC. All

submissions should refer to File Nos.

SR–DTC–98–09 and SR–NSCC–98–05

and should be submitted by June 25,

1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14829 Filed 6–3–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40042; File No. SR–OCC–

98–03]

Self-Regulatory Organizations; The

Options Clearing Corporation; Notice

of Filing of Proposed Rule Change

Relating to the Stock Loan/Hedge

Program

May 28, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

April 13, 1998, The Options Clearing

Corporation (‘‘OCC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items, I, II, and

III below, which items have been

prepared primarily by OCC. The

Commission is publishing this notice to

solicit comments from interested

persons on the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Term of Substance of

the Proposed Rule Change

The purpose of the proposed rule

change is to amend OCC’s By-Laws and

Rules governing OCC’s stock loan/

hedge program (‘‘hedge program’’)

under which OCC operates a centralized

facility for administering stock loan and

stock borrow transactions between OCC

clearing members.

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

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Overall Purpose

In general, the purpose of the

proposed rule change is to make

comprehensive amendments to OCC’s

By-Laws and Rules that govern the

hedge program. Clearing members that

are approved to participate in the hedge

program are referred to as ‘‘hedge

clearing members.’’ A clearing member

that lends stock through the hedge

program is referred to as a ‘‘lending

clearing member,’’ and a clearing

member that borrows stock is referred to

as a ‘‘borrowing clearing member.’’

Stocks that are eligible for the hedge

program are referred to as ‘‘eligible

stocks.’’

2. Summary of Primary Changes in

Program

(i) Stock Loan Initiation. Currently

under the hedge program, a stock loan

is initiated when two hedge clearing

members agree on the terms of the loan,

the lending clearing member transfers

the stock to OCC’s account at a

‘‘correspondent depository’’ (i.e., a

securities depository at which OCC has

an account), OCC directs the

correspondent depository to redeliver

the stock to the borrowing clearing

member against payment of the required

collateral amount to OCC, and OCC pays

over the required collateral amount to

the lending clearing member.

Under the revised hedge program,

OCC will have no involvement in a

stock loan until after the clearing

members that are parties to the stock

loan have completed the transaction

between themselves through the

facilities of The Depository Trust

Company (‘‘DTC’’). Upon receiving

notice of the stock loan from DTC, OCC

will verify the accuracy of the clearing

members’ account numbers and the

information supplied to OCC with

respect to the transaction. If this

information is verified, OCC will accept

the loan into the hedge program. Upon

acceptance (and only upon acceptance)

by OCC, the stock loan contract between

the stock lender and the stock borrower

will be replaced by two parallel

contracts with congruent terms: one

between the stock lender and OCC as

stock borrower and one between the

stock borrower and OCC as stock lender.

If OCC rejects a transaction, the

transaction will remain in effect

between the lending clearing member

and the borrowing clearing member but

outside the hedge program.

(ii) Universe of Eligible Stocks.

Currently, the only stocks eligible for

the hedge program are stock that are the

underlying stocks for stock option

contracts. Under the proposed rule

change, all equity securities that are

eligible for deposit at DTC will be

eligible for the hedge program (other

than any stock as to which OCC has

made a determination pursuant to

Section 2(c) of Article XXI of its ByLaws to terminate all outstanding stock

loans relating to that stock).
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30545

3Under the current hedge program, a hedge

clearing member is required to deposit margin with

OCC to cover OCC’s risk that the market will move

against the member’s stock loan and borrow

positions during a day and that the member will fail

before making the required mark-to-market payment

on the next business day. Under the proposed rule

change, a hedge clearing member will continue to

be required to deposit margin with OCC but only

with respect to ‘‘margin-eligible’’ stock loan and

borrow positions. This margin is analogous to the

‘‘additional margin’’ that OCC requires with respect

to short stock option positions, and therefore it is

referred to in OCC’s rules and in this notice as

‘‘additional margin.’’

4Under the proposed rule change, lending and

borrowing clearing members will continue to be

required to pay or be entitled to daily mark-tomarket payments to adjust the collateral held by

lending clearing members with respect to all stock

loans. The purpose of additional margin is to

protect OCC from the risk of an adverse market

move between mark-to-market payments. OCC has

concluded that the other elements of its protection

and back-up systems should be adequate to protect

it against this risk with respect to margin-ineligible

stock loan and borrow positions. Margin-ineligible

stock loan and borrow positions will be taken into

account in determining the clearing fund

contributions of hedge clearing members even

though they will not be taken into account in

margin calculations.

5OCC Rule 602 describes the calculation of

margin requirements for securities which are

neither equity securities nor based on equity

securities. This margin system is sometimes

referred to as OCC’s ‘‘NEO’’ or ‘‘non-equity option’’

margin system.

(iii) Margin-Ineligible Stock Loan and

Borrow Positions. Under the current

hedge program, all stock loan and stock

borrow positions are taken into account

in calculating each clearing member’s

obligation to deposit ‘‘additional

margin’’ with OCC3 and may generate

either an increased additional margin

requirement (if the stock loan or borrow

positions do not hedge other positions

of the clearing member) or a reduced

additional margin requirement (if the

stock loan or borrow positions do hedge

other positions of the clearing member).

Under the proposed rule change, a

clearing member will be able to

designate one or more of its accounts

with OCC as ‘‘margin-ineligible.’’ If an

account is designated as marginineligible, OCC will not include any

stock loan and stock borrow positions

carried in that account in the

calculation of the clearing member’s

additional margin obligations. Instead,

OCC will rely on the other elements of

its protection and back-up systems

(primarily its clearing fund and its

concentration monitoring surveillance

system) to mitigate the risk to OCC

created by those positions.4

(iv) Stock Loan and Borrow Baskets.

Under the proposed rule change, a

clearing member will be able to instruct

OCC to treat specified stock loan

positions in an account as constituting

a ‘‘stock loan basket’’ and may instruct

OCC to treat specified stock borrow

positions in an account as constituting

a ‘‘stock borrow basket.’’ Stock loan

baskets and stock borrow baskets will be

subject to margin under OCC’s Rule

602.5 The current hedge program has no

provisions for stock loan and borrow

baskets.

(v) Stock Loan Termination. Under

the proposed rule change, the process

for terminating stock loans will parallel

the changes to the process for initiating

stock loans. Under the current hedge

program, a stock loan is terminated

when the borrowing clearing member

transfers the stock to OCC’s account at

the correspondent depository, OCC

directs the correspondent depository to

redeliver the stock to the lending

clearing member against payment of the

collateral amount to OCC, and OCC pays

the collateral amount over to the

borrowing clearing member. Under the

proposed rule change, a stock loan will

be terminated when the borrowing

clearing member transfers the stock

directly to the account of the lending

clearing member at DTC against

payment of the collateral amount to the

DTC account of the borrowing clearing

member.

3. Section-by-Section Discussion

In Article I of OCC’s By-Laws, the

definition of the term ‘‘eligible stock’’

will be revised to include all equity

securities that are eligible for deposit at

DTC. The terms ‘‘margin-eligible,’’

‘‘margin-ineligible,’’ ‘‘stock borrow

basket,’’ and ‘‘stock loan basket’’ will be

defined for the purposes described

above.

Article VIII of OCC’s By-Laws will be

amended to include the stock loan

basket and stock borrow basket concepts

in OCC’s clearing fund. OCC’s clearing

fund is comprised of a ‘‘stock clearing

fund’’ and a ‘‘non-equity securities

clearing fund.’’ Clearing members’

contributions to each are based upon the

members’ equity option margin

requirements under rule 601 and

members’ NEO margin requirements

under Rule 602. As discussed above,

stock loan and borrow baskets will be

subject to margin in OCC’s NEO margin

system. Therefore, stock loan and

borrow baskets will be taken into

account in determining clearing

members’ contributions to the nonequity securities clearing fund. If OCC

were ever to suffer a loss attributable to

stock loan or borrow baskets, OCC’s first

recourse to the clearing fund would be

to the non-equity securities clearing

fund.

The definitions in Article XXI,

Section 1 of the By-Laws will be revised

primarily to accommodate the revisions

to the manner in which stock loans are

initiated. The definitions of the terms

‘‘collateral’’ and ‘‘loaned stock’’ will be

revised to reflect that the loaned stock

and collateral will no longer be passed

through OCC’s account at DTC. The

definition of ‘‘correspondent

depository’’ will be deleted and

replaced with the new term

‘‘depository.’’ The term ‘‘stock loan

business day’’ will be defined as a day

on which OCC and DTC are both open

for business, and this term will be used

in the Rules describing stock loan

settlement procedures.

Article XXI, Section 2 of the By-Laws

will be amended to reflect the revised

manner in which stock loans are

initiated, as described above. An

interpretation will be added to section

2 to address certain situations in which

the termination of a stock loan is

reported to OCC at a settlement price

(i.e., reflecting payment by the lending

clearing member of an amount of

collateral) which is not consistent with

OCC’s records. A similar interpretation

will be added to Rule 2209 (currently

Rule 2208) to address situations in

which OCC receives a report of the

termination either of a purported stock

loan which does not exist on OCC’s

records or of a stock loan on OCC’s

records in a quantity which does not

match the quantity in the termination

report. OCC anticipates that both of

these types of situations will be

extremely unusual. However, they are

theoretically possible because OCC will

receive reports of terminations of stock

loans only after the transactions are

final on DTC’s books. OCC’s records

will be dispositive in both of these types

of situations, and OCC will not accept

any responsibility for reconciling the

discrepancy between its records and

those of the affected clearing members.

Paragraph (d) in Article XXI, Section

5 will be deleted. This paragraph

currently limits the stock loan and

borrow positions that may be

maintained in a stock market-maker’s or

stock specialist’s account to positions

relating to the stock for which the stock

market-maker or stock specialist acts as

stock market-maker or stock specialist.

Article VI, Section 3(f) of OCC’s ByLaws restricts the options transactions

which may be conducted in a stock

market-maker’s or stock specialist’s

account to those in options on

underlying stocks for which the stock

market-maker or specialist acts as

market-maker or specialist. Section 5(d)

of Article XXI was intended to extend

that restriction to stock loan and borrow

positions. However, the purpose of the

Article VI, Section 3(f) restriction is to
30546 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

6Securities Exchange Act Release No. 22692

(December 6, 1985), 50 FR 50882 [File No. SR–

OCC–85–15].

7Rule 601 currently provides that additional

margin calculations are based in part on the ‘‘gross’’

stock loan and borrow positions of a hedge clearing

member (i.e., without regard to whether a position

on the other side of the market was carried in the

account). OCC has concluded that requiring

additional margin on the gross positions leads to

over-margining and is an unnecessary disincentive

for clearing members to use the hedge program.

8 ‘‘Margin interval’’ is the maximum daily change

in the marking price of the underlying security,

upwards or downwards, assumed by OCC for

purposes of calculating additional margin.

9OCC’s authority to determine haircuts is set

forth in OCC Rule 602(c)(1)(ii)(C)(1).

10The interests of the clearing member’s

customers are nonetheless protected because the

clearing member is required under Rule 15c3–3 of

the Act, 17 CFR 240.15c3–3, to include in its

calculations of the amount which it is required to

maintain on deposit in its Reserve Bank Account

‘‘Monies borrowed collateralized by securities

carried for the account of customers’’ (Item 2) and

‘‘Monies payable against customers’ securities

loaned’’ (Item 3). This subject is discussed in

Securities Exchange Act Release No. 39738 (March

10, 1998), 63 FR 13082 [File No. SR–OCC–97–11].

facilitate surveillance of stock marketmakers’ and specialists’ trading activity

conducted in those accounts.6 Stock

loan and borrow positions are created

by hedge clearing members and not by

the stock market-maker or specialist for

which a stock-market maker’s or

specialist’s account is established.

Therefore, the paragraph (d) restriction

is irrelevant to the surveillance purpose

of the Article VI, Section 3(f) restriction.

OCC believes that a hedge clearing

member should be permitted to carry a

stock loan or borrow position relating to

a particular stock in a stock-market

maker’s or specialist’s account that is

restricted to options transactions in a

different stock if the clearing member

wishes to do so.

A new paragraph (b)(12) will be

added to Rule 601 to state that marginineligible stock loan and borrow

positions will not be taken into account

in determining a clearing member’s

margin requirements. Rule 601(c) will

be revised to state that additional

margin on margin-eligible stock loan

and borrow positions will be based only

on the ‘‘net’’ stock loan or borrow

position in an account in a manner

analogous to the method that OCC uses

for options.7 Interpretation .06 to Rule

601 will be deleted because OCC has

determined that it is unnecessary to

have a special rule for the ‘‘margin

interval’’ 8 to be used for stock loan and

borrow positions maintained in an

account in which no options in the

same class group are being maintained.

Rule 602 will be amended to

incorporate references to stock loan

baskets and stock borrow baskets. The

definition of ‘‘class group’’ in paragraph

(b)(2) will be amended to state that OCC

will treat any stock loan basket or stock

borrow basket defined by a clearing

member as within the class group

identified by the clearing member even

if the stock loan or borrow positions

comprising the basket do not replicate

the composition or weighting of the

index group for the class group and

even if the stocks underlying the

identified stock loan or borrow

positions are not even included in the

index group. However, a stock loan or

borrow basket that does not

meaningfully replicate the composition

and weighting of the index group for a

class group will be subject to a very

large haircut when OCC takes the basket

into account in determining the

additional margin requirement for the

class group.9 OCC has developed the

systems capacity to be able to analyze

customized portfolios and assign

appropriate haircuts to them on a largevolume, overnight basis. OCC believes

that enabling hedge clearing members to

use stock loan and borrow positions in

OCC’s NEO margin system will offer

OCC additional margin in a desirable

form because the assets, unlike cash,

government securities, and letters of

credit, will ‘‘co-vary’’ to some degree

with the clearing members’ short option

positions on the opposite side of the

market. In addition, including stock

loan and borrow positions as offsets in

the NEO system will allow clearing

members to reduce their net additional

margin requirements.

Changes will be made to the

definitions of ‘‘marking price’’ in Rule

602(b)(6) and ‘‘margin interval’’ in Rule

602(b)(8) to extend these concepts to

stock loan and borrow baskets. A new

sentence will be added to Rule

602(c)(1)(ii)(A) to state that if a clearing

member defines two or more stock loan

baskets or two or more stock borrow

baskets in an account as within the

same class group, OCC will take each

basket into account separately, and

calculate a ‘‘haircut’’ for each separately

in determining additional margin for the

class group.

A new sentence will be added to Rule

602(c)(1)(ii)(B) to reflect that the daily

mark-to-market payments between

lending and borrowing clearing

members that are described in Rule

2204 (currently Rule 2203) are the

functional equivalent of premium

margin deposited with OCC with

respect to short option positions.

Changes to Rule 602(c)(1)(C) will extend

the description of the calculation of

additional margin in the NEO margin

system to stock loan and borrow

baskets. Changes to Rules 602(d) and (e)

will extend those provisions to stock

loan and borrow baskets. A new Rule

602(f)(8) will describe the way that OCC

will proceed in certain special

circumstances in which a hedge clearing

member reduces or terminates a stock

loan or borrow position which is

completely or partly included in a stock

loan basket or stock borrow basket.

Interpretations .06 and .07 to Rule 602

will be modified to extend them to stock

loan and borrow baskets.

Rule 1001 will be amended to

describe the way that stock loan and

borrow baskets will be taken into

account in determining hedge clearing

members’ contributions to the stock

clearing fund and the non-equity

securities clearing fund. These changes

will parallel the changes to Article VIII

of the By-Laws.

Rule 1104 will be amended to delete

a phrase that currently states that if a

hedge clearing member is suspended the

proceeds from the closing out of stock

loan positions and stock borrow

positions in the clearing member’s

customers’ account will be subject to the

special accounting for customer funds

that is described in the Rule. Proceeds

from the closing out of stock loan

positions and stock borrow positions are

correctly characterized as funds of the

clearing member and not funds of the

clearing member’s customers because

stock loan and borrow positions (even

those that are carried in a customers’

account so that they can provide

additional margin offsets in that

account) are correctly characterized as

positions of the clearing member and

not positions of the clearing member’s

customers.10

A new Rule 2201 will be added to

OCC’s rules. Rule 2201(a) will describe

the standing instructions regarding the

hedge program that a hedge clearing

member will be expected to maintain

with OCC. Rule 2201(b) will describe

situations under which a hedge clearing

member may provide OCC specific

instructions that override the clearing

member’s standing instructions.

Rule 2201(a)(iv) will require a hedge

clearing member to provide OCC with a

standing instruction as to the account

from and to which the clearing member

wishes its net daily mark-to-market

payments to be made. The rule will state

that the clearing member may specify

either its firm account or its combined

market-makers’ or specialists’ account

for this purpose. OCC believes that

funds deposited as collateral by a

borrowing clearing member with a

lending clearing member to secure its

obligation to return the loaned stock do

not constitute funds of the customers of
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30547

either the lending clearing member or

the borrowing clearing member

regardless of the accounts in which

stock loan and stock borrow positions

are carried. OCC believes that funds

paid to adjust the collateral also do not

constitute customer funds and therefore

that cross-account netting of mark-tomarket payments is appropriate and

permissible.

Rule 2202 (currently rule 2201) will

be rewritten to describe the new stock

loan initiation process, and in particular

to reflect the elimination of any role of

an OCC account at DTC in the stock

loan initiation process. Rule 2202(c)

(currently Rule 2201(e)) will be revised

to state that the sole obligation of the

lending clearing member with respect to

the collateral which it holds shall be to

‘‘act as agent for [OCC] in repaying an

amount equal to the Collateral * * *, or

in otherwise disposing of the Collateral

in such other manner as the Corporation

may direct in the event that the

Borrowing Clearing Member has been

suspended pursuant to Chapter XI of the

Rules, if and when the Stock Loan is

terminated as provided in the Rules.’’

This language parallels new language in

Rule 2208(c) which says that the actions

of the borrowing clearing member to

terminate a stock loan ‘‘shall be

undertaken as [OCC’s] agent, and [OCC]

shall have the authority to instruct the

Borrowing Clearing Member to proceed

in another manner in the event that the

Lending Clearing Member has been

suspended pursuant to Chapter XI of the

Rules.’’

In each case, this language is intended

to give OCC, if it must suspend a hedge

clearing member, the express authority

to instruct each hedge clearing member

on the other side of the suspended

clearing member’s stock loans not to use

the ordinary stock loan termination

procedures but instead to use the

collateral to buy in the loaned stock (if

the suspended clearing member is the

borrowing clearing member) or to sell

out the loaned stock and apply the

proceeds to the repayment of the

collateral (if the suspended clearing

member is the lending clearing

member). These statements of express

authority are necessary because under

the revised process for terminating stock

loans when neither hedge clearing

member has been suspended, the

borrowing clearing member and the

lending clearing member will return the

loaned stock and the collateral directly

to each other’s DTC account rather than

to OCC’s DTC account. In the absence of

this expressly stated authority to

instruct hedge clearing members that

have not been suspended to proceed in

another manner, it might be difficult

under the revised hedge program for

OCC to control the disposition of assets

held by clearing members on the other

side of stock loans from the suspended

clearing member.

Changes will be made to Rule 2203

(currently Rule 2202) to reflect the fact

that a hedge clearing member may

declare its stock loan and borrow

positions margin-ineligible. The

calculation of margin deposited with

OCC margin for stock loan and borrow

baskets will be described in Rule 602.

Rule 2204 (currently Rule 2203) will

be amended to provide for the netting

across all of a hedge clearing member’s

accounts of the mark-to-market

payments due to and from the clearing

member with respect to the clearing

member’s stock loan and stock borrow

positions on each business day. OCC

believes that the changes in Rule 2204

are appropriate for the same reason that

underlies the changes in Rule 1104

described above. Namely, that funds

deposited as collateral by a borrowing

clearing member with a lending clearing

member to secure its obligation to return

the loaned stock do not constitute funds

of the customers of either the lending

clearing member or the borrowing

clearing member regardless of the

accounts in which stock loan and stock

borrow positions are carried. OCC

believes that funds paid to adjust the

collateral also do not constitute

customer funds and therefore that crossaccount netting of mark-to-market

payments is appropriate and

permissible.

OCC will specify in Rule 2201(a)(iv)

that a hedge clearing member may

process the net daily payment to or from

the hedge clearing member only through

its firm account or its combined marketmakers’ or specialists’ account. This

requirement will eliminate any

possibility that a net mark-to-market

payment due from a hedge clearing

member to OCC (which does not

constitute customer funds) will be

netted against funds such as premiums

being paid to writers of options which

are due from OCC to the hedge clearing

member’s customers’ account (and

which do constitute customer funds).

Rules 2208 and 2209 (currently Rules

2207 and 2208, respectively) will be

rewritten to reflect the changes in the

procedures for terminating stock loans

that are described above.

Rule 2210(a) [currently Rule 2209(a)]

will be rewritten to state that if DTC

suspends one of the parties to a stock

loan prior to the time at which OCC

would have otherwise accepted a stock

loan into the hedge program, OCC will

not accept the stock loan. The rule also

will state that OCC will accept any stock

loan which complies with the

completeness and accuracy

requirements of Rule 2202(b) even if

OCC suspends one of the hedge clearing

members which is a party to the stock

loan prior to the time at which OCC

accepts the stock loan.

Rule 2210(b) [currently Rule 2209(b)]

will be rewritten for two purposes: (1)

To clarify that OCC contemplates that

the buy-in and sell-out procedures

described in Rule 2211 (currently rule

2210) generally will be used to close out

the stock loan and borrow positions of

a suspended clearing member unless

OCC determines that another manner of

proceeding is more appropriate in the

circumstances and (2) to eliminate

language that states that proceeds of

stock loan and borrow positions carried

in market-maker and specialist accounts

will be accounted for separately. The

reason for these changes is the same as

the reason for the changes in Rule 1104

described above. Namely, that stock

loan and borrow positions, regardless of

the account in which they are carried,

are properly characterized as position of

the hedge clearing member and not

positions of the market-maker or

specialist for whom the account is

established.

Old Rule 2210(c) [currently rule

2209(c)] will be deleted because OCC

has concluded that it would be unlikely

ever to match up stock, loan and borrow

positions of hedge clearing members

that were formerly counter-parties of a

suspended clearing member in the

manner described in the rule.

The only substantive change in Rule

2221 (currently Rule 2210) will be to

eliminate references to the separate

treatment of stock loan and borrow

positions carried in market-maker and

specialist accounts. The reason for

eliminating this separate treatment is

described above in the discussion of

Rule 2210(b).

4. Statutory Basis for the Proposed Rule

Change

OCC believes that the proposed rule

change provides for the enhancement of

the hedge program in a number of ways

that should increase the attractiveness

of the hedge program to the stock

lending community and thereby lead to

increased use of the hedge program.

Because OCC believes that its hedge

program facilitates the prompt and

accurate clearance and settlement of

stock loans and provides enhanced

safeguarding of related securities and

funds, OCC believes that the proposed

rule change is consistent with the

requirements of the Section 17A of the
30548 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

11 15 U.S.C. 78q-1.

12 17 CAR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

Act11 and the rules and regulations

thereunder. In addition, OCC believes

that the hedge program reduces

exposure to counterparty default by

allowing for the substitution of OCC’s

AAA credit rating for that of each stock

loan counterparty, by using increased

payment netting, by reducing

duplicative collateralization

requirements, and by applying

advanced clearing and risk management

systems to the stock loan market. OCC

therefore believes that the proposed

changes are consistent with the

purposes and requirements of the Act.

(B) Self-Regulatory Organization’s

Statement on Burden on 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

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

ninety days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which OCC consents, the

Commission will:

(A) By order approve such proposed

rule change or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that bare 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, N.W.,

Washington, D.C. 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–98–03 and

should be submitted by June 25, 1998.

For the Commission by the Division of

Market Regulations, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14830 Filed 6–3–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40044; File No. SR–PCX–

98–24]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Pacific Exchange, Inc. Relating to the

Elimination of Suffixes Designating

Tier II Equity Securities

May 29, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on May 11,

1998, the Pacific Exchange, Inc. (‘‘PCX’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I and

II below, which Items have been

prepared by the Exchange. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PCX is proposing to eliminate its

current practice of affixing a suffix to

the ticker symbol for certain PCX equity

securities. This practice is currently

performed for the purpose of

designating equity securities that are

listed pursuant to the Exchange’s Tier II

requirements.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

PCX 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. PCX has prepared

summaries, set forth in Sections A, B,

and C below, of the most significant

aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

On July 22, 1994, the Commission

approved an Exchange proposal to

modify its equity listing and

maintenance criteria by adopting a

‘‘two-tiered’’ structure. While the

creation of two tiers resulted in a new

higher tier (Tier I), the Exchange did not

change its existing listing standards

(which became Tier II) or otherwise

create a lower tier of listing standards.

In its approval order, the Commission

reiterated a statement from the

Exchange’s filing regarding Tier II

securities (i.e., securities of smaller

companies with limited commercial

operations, lower capitalization, and a

lack of demonstrated earnings history)

that:

‘‘Transactions in Tier II [securities] will be

identified by a special suffix to the ticker

symbol so that these securities can be

distinguished from other securities traded on

the Exchange. The suffix will not be applied,

however, to a security listed on either the

NYSE, Amex, or NASDAQ/NMS even though

it is designated by the Exchange as a Tier II

security.’’ (Exchange Act Release No. 34429

(July 22, 1994), 59 FR 38998, 38999 (August

1, 1994).

The Exchange currently complies

with this requirement by disseminating

a ticker symbol with a ‘‘TT’’ suffix for

Tier II securities. This is sent to vendors

so that they can identify quotes and

transactions in Tier II securities. But the

Exchange now believes that it would be

appropriate and expedient to

discontinue this practice and to

eliminate the use of the ‘‘TT’’ suffix for

Tier II securities for the following

reasons:

• Different data vendors are currently

using different practices in displaying

the Exchange’s ‘‘TT’’ suffix. Some

display them in reporting quotes and

trades. Others include them only in

their symbol books, and do not include