[Federal Register Volume 66, Number 84 (Tuesday, May 1, 2001)]
[Notices]
[Pages 21796-21797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10782]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44219; File No. SR-OCC-00-02]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to OCC Clearing Members 
Pledging Long Options Positions

April 25, 2001.
    On March 6, 2000, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-00-02) 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 July 19, 2000.\2\ No comment 
letters

[[Page 21797]]

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. 43029 (July 12, 2000), 
65 FR 44844.
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I. Description

    The proposed rule change expands the categories of accounts from 
which clearing members may pledge long options positions to third party 
lenders and expands the categories of permitted pledgees. The proposed 
rule change is intended to reflect liberalizing amendments to 
Regulation T (12 CFR 220) and Regulation U (12 CFR 221) made by the 
Board of Governors of the Federal Reserve System (``Fed Board'').
    Options have traditionally had no loan value under the Fed Board's 
margin regulations. The only relevant exception was for ``special 
purpose credit'' extended to broker-dealers.\3\ A bank or another 
broker-dealer could extend credit on long options carried for the 
accounts of market makers and specialists to secure credit for 
financing their market making functions. Accordingly, when OCC adopted 
Rule 614, which allowed long options to be pledged to a bank or another 
broker-dealer, OCC specified that options could only be pledged from 
clearing members' market-maker and specialist accounts.\4\ In addition, 
the permitted pledgees under Rule 614 were limited to banks and broker-
dealers as these were the only categories of lenders from which a 
broker-dealer such as a clearing member or market maker was permitted 
to borrow.\5\
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    \3\ Long options may also be given value in a customer's margin 
account when used to offset margin otherwise required on short 
option positions and are in turn given margin credit in the clearing 
member's account at OCC. However, that use of long option value does 
not involve the pledging of options to third party lenders, and Rule 
614 therefore has no application to such use.
    \4\ In recognition of the ability of a clearing member to pledge 
long options to a commodity clearing organization for the purpose of 
securing obligations to such clearing organization on related 
futures and futures option contracts, OCC later amended Rule 614 to 
permit this particular form of pledge. In 1999, OCC also amended its 
rules to permit pledging of long positions to third party lenders 
from a non-proprietary cross-margining account. Securities Exchange 
Act Release No. 41883 (September 17, 1999), 64 FR 51819 (September 
24, 1999).
    \5\ As noted in the footnote above, the rule was later amended 
to permit pledging of long options to a commodity clearing 
organization.
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    In 1996, the Fed Board eliminated the general prohibition against 
extending credit on long options and instead deferred to the rules of 
the options exchanges regarding option loan value by incorporating 
those rules by reference into Regulation T.\6\ Although exchange margin 
rules then in effect also prohibited extensions of credit against long 
options, these rules have subsequently been amended to permit broker-
dealers to extend credit on certain long option positions in a customer 
margin account.\7\
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    \6\ Fed Board Release, 61 FR 20385 (May 6, 1996).
    \7\ See, e.g., Securities Exchange Act Nos. 41658 (July 27, 
1999), 64 FR 42736 (August 5, 1999)[SR-CBOE-97-67] and 42011 
(October 14, 1999), 64 FR 57172 (October 22, 1999) [SR-NYSE-99-03].
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    In 1998, the Board amended the Supplement to Regulation U to allow 
lenders other than broker-dealers to extend 50 percent loan value 
against all long positions in listed options.\8\ The Fed Board also 
modified the margin regulations to reflect amendments to the Act. The 
National Securities Markets Improvement Act of 1996 (``NSMIA'') 
repealed section 8(a) of the Act which, among other things, had 
prohibited broker-dealers from obtaining credit against the collateral 
of exchange-traded equity securities from lenders other than broker-
dealers and certain banks. For that reason, the Fed Board deleted 
provisions of Regulations T and U that implemented section 8(a) of the 
Act.
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    \8\ Fed Board Release, 63 FR 2806 (January 16, 1998).
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    As a result of all of the foregoing statutory and regulatory 
changes, credit may now be extended by broker-dealers, banks, and other 
lenders against long option positions whether carried for the account 
of a market-maker or specialist, another broker-dealer, a public 
customer, or for the clearing member's own proprietary account. This 
renders the provisions of Rule 614, restricting the types of OCC 
accounts from which long options may be pledged and the kind of 
entities that may be pledgees obsolete. In recognition of this fact, 
OCC proposed to amend Rule 614 to delete the obsolete restrictions.
    Of course, Regulations T and U continue to impose certain 
restrictions on extensions of credit secured by OCC-issued options. For 
example, the 50 percent loan limit would generally be applicable with 
certain exceptions such as when the credit is extended to an ``exempted 
borrower.'' \9\ As is the case with other securities credit 
transactions, lenders and borrowers who use the OCC pledge program are 
obligated to comply with the Fed Board's margin regulations.
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    \9\ Exempted borrower is defined in Section 220.2 of Regulation 
T and in Section 221.2 of Regulation U.
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    OCC also proposed to make certain technical amendments to Rule 614. 
These reflect, among other things, revisions to Sections 8 and 9 of the 
Uniform Commercial Code adopted since Rule 614 was originally drafted. 
Conforming changes are being made to Rules 601, 602, 1105, and 1106.

II. Discussion

    In Section 17A, Congress stated its finding that the development of 
uniform standards and procedures for clearance and settlement will 
reduce unnecessary costs and increase the protection of investors and 
persons facilitating transactions by and acting on behalf of investors. 
The Commission believes that the approval of OCC's rule change is in 
line with this finding and directive of Congress. The proposed rule 
change is intended to reflect liberalizing amendments to Regulation T 
(12 CFR 220) and Regulation U (12 CFR 221) made by the Fed Board. Due 
to those amendments, credit may now be extended by broker-dealers, 
banks, and other lenders against long options positions whether carried 
for the account of a market-maker or specialist, another broker-dealer, 
a public customer, or for the clearing member's own proprietary 
account. This renders the provisions of Rule 614, restricting the types 
of OCC accounts from which long options may be pledged and the kinds of 
entities that may be pledgees, obsolete. In recognition of this fact, 
OCC is amending Rule 614 to delete the obsolete restrictions. As a 
result, OCC's rules governing the pledging of long options positions 
will be consistent with those of the options exchanges and with the Fed 
Board's Reg T and Reg U.

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-00-02) 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. 01-10782 Filed 4-30-01; 8:45 am]
BILLING CODE 8010-01-M