[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Notices]
[Pages 67005-67006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31307]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36606; International Series Release No. 905; File No. 
SR-CC-95-11]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Modifying the Capital 
Computation Formula and Reporting Requirements Applicable to Canadian 
Clearing Members of The Options Clearing Corporation

December 20, 1995.
    On July 13, 1995, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-95-11) pursuant to Section 19(b)(1) of the 
Securities and Exchange Act of 1934 (``Act'').\1\ Notice of the 
proposal was published in the Federal Register on September 13, 
1995.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is granting approval of the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 36197, International 
Series Release No. 850 (September 7, 1995), 60 FR 47633.
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I. Description of the Proposal

    OCC is modifying its rules concerning the financial requirements of 
Canadian clearing members, including the capital computation formula 
and reporting requirements applicable to Canadian clearing members, to 
reflect revisions to the capital computation and reporting standards 
recently adopted by various Canadian regulatory authorities. OCC's 
rules allow Canadian clearing members to submit required financial 
reports in accordance with the accounting and reporting standards of 
their appropriate self-regulatory body.\3\ In monitoring Canadian 
clearing members' compliance with OCC financial requirements, OCC 
converts this financial information into a form consistent with Rule 
15c3-1 under the Act.\4\

    \3\ OCC By-law, Article I.N. (2) employs the term ``appropriate 
self-regulatory body'' as defined in the Supplementary Instructions 
re Completion of the Joint Regulatory Financial Questionnaire to 
refer to the government agency or self-regulatory authority 
primarily responsible for regulating the activities of a Canadian 
Clearing Member.
    \4\ 17 CFR 240.15c3-1.
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    The capital formula applied under Canadian securities regulations 
to Canadian securities firms has been revised and incorporated into a 
new standard report format. The prior capital formula applied a minimum 
capital requirement, as assessed by a working capital computation 
(i.e., total capital less nonallowable assets), based upon volume of 
business determined by a percentage of adjusted liabilities. The new 
capital formula continues to be based on a working capital computation 
minus certain charges, including charges that reflect the risk of 
proprietary securities held in inventory. However, the new capital 
formula replaces the concept of adjusted liabilities with revised 
definitions of allowable assets and margin charges that are intended to 
reflect the credit worthiness of counterparties and the economic 
substance of transactions.
    The report format used by Canadian securities firms to report their 
capital computation also has been revised. Accordingly, OCC is changing 
its financial requirements and reporting rules to conform them to the 
revised capital formula and reporting format.
    Specifically, the prior Interpretations and Policies 
(``Interpretation'') .01 to OCC Rule 301, regarding initial financial 
requirements, provided that a Canadian clearing member that commenced 
doing business as a broker or dealer within twelve months prior to its 
admission to OCC clearing membership must have maintained ``initial net 
free capital,'' as defined in the Supplementary Instructions re 
Completion of the Joint Regulatory Financial Questionnaire 
(``Supplementary Instructions''),\5\ of not less than ten percent of 
such clearing member's ``adjusted liabilities,'' as defined in the 
Supplementary Instructions, until the later of (i) three months after 
its admission to OCC clearing membership or (ii) twelve months after it 
commenced doing business as a broker or dealer. Interpretation .01 to 
OCC Rule 302, regarding minimum net capital requirements, provided that 
a Canadian clearing members must have maintained net free capital, as 
defined in the Supplementary Instructions, of not less than the amount 
of net free capital that would be required of such clearing member 
under Section 100.2 of the By-Laws of the Investment Dealers 
Association of Canada (``IDAC'') if the clearing member was a member of 
the IDAC.

    \5\ The Supplementary Instructions are issued by the Investment 
Dealers Association of Canada and provide additional guidance for 
securities firms in connection with the preparation of the Joint 
Regulatory Financial Questionnaire and Report.
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    As amended, Interpretation .01 to Rule 301 requires a Canadian 
clearing member to maintain an initial ``early warning reserve,'' as 
determined in accordance with the Joint Regulatory Financial 
Questionnaire and Report (``JRFQ&R)''),\6\ of not less than $1, 000,000 
(U.S.) for the same period as previously required. The amended 
Interpretation .01 to Rule 302 will provide that the minimum net 
capital requirement of a Canadian clearing member is the early warning 
reserve, as determined under the JRFQ&R, in an amount not less than the 
greater of $750,000 (U.S.) or 2% of such Canadian clearing member's 
total margin requirements as determined in accordance with the JRFQ&R. 
Application of the early warning reserve as determined under the JRFQ&R 
also replaces the use of the net free capital formula as determined 
under the Interpretations to OCC Rules 303 and 304, regarding early 
warning notice and restrictions on distributions.

    \6\ The JRFQ&R is a financial reporting form which Canadian 
securities firms are required to prepare and submit to appropriate 
Canadian regulatory authorities and provincial exchanges to advise 
them of such firms' financial condition.
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    Finally, in connection with OCC's financial reporting requirements, 
each Canadian clearing member now is required to file its JRFQ&R with 
OCC on a monthly basis except as provided in the Interpretations to 
Rule 306. The JRFQ&R replaces the Joint Industry Monthly Financial 
Report which was previously required under the 

[[Page 67006]]
Interpretations to OCC's financial reporting rule.

II. Discussion

    Section 17A(b)(3)(F) \7\ of the Act requires the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible and to foster cooperation and coordination 
with persons engaged in the clearance and settlement of securities 
transactions. The Commission believes OCC's proposed rule change is 
consistent with the requirements of Section 17A(b)(3)(F) because the 
proposal conforms OCC's rules pertaining to Canadian clearing members 
to the revised capital computation and reporting standards adopted by 
various Canadian regulatory authorities. OCC allows Canadian clearing 
members to submit required financial reports to OCC in accordance with 
the accounting and reporting standards of their appropriate Canadian 
self-regulatory body. OCC then converts this financial information into 
a form consistent with Rule 15c3-1 under the Act \8\ in order to 
monitor Canadian clearing member compliance with OCC financial 
requirements. As a result of this monitoring scheme, conformity of OCC 
rules to the current computation and reporting standards of Canadian 
regulatory authorities is critical to the efficient and proper 
monitoring of Canadian clearing members' compliance with OCC financial 
requirements. The Commission believes the proposed rule change should 
provide consistency between OCC's rules concerning Canadian clearing 
members' financial requirements and the capital computation and 
reporting standards adopted by Canadian regulatory authorities and 
thereby should help assure the safeguarding of securities and funds 
which are in the custody or control of OCC or for which it is 
responsible and should foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions.

    \7\ 15 U.S.C. 78q-1(b)(3)(F) (1988).
    \8\ 17 CFR 240.15c3-1.
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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-95-11) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31307 Filed 12-26-95; 8:45 am]
BILLING CODE 8010-01-M