Federal Register / Vol. 61, No. 117 / Monday, June 17, 1996 / Notices 30647

Article III of the GATT 1994 provides,

among other things, that the products of

the territory of one WTO member

imported into the territory of another

WTO member shall not be subject to

internal taxes or other charges of any

kind in excess of those applied, directly

or indirectly, to like domestic products.

WTO members are also prohibited from

applying internal taxes or internal

charges to imported or domestic

products so as to afford protection to

domestic production. Turkey’s

imposition of a tax on box office

revenues that is applied only to

revenues generated by foreign films, and

not to revenues generated by domestic

films, would appear to be inconsistent

with the obligations set forth in Article

III of the GATT 1994.

Investigation and Consultations

As required in section 303(a) of the

Trade Act, the USTR has requested

consultations with the Government of

Turkey regarding the issues under

investigation. The request was made

pursuant to Article 4 of the WTO

Understanding on Rules and Procedures

Governing the Settlement of Disputes

(DSU) and Article XXII of the GATT

1994. If the consultations do not result

in a satisfactory resolution of the matter,

the USTR will request the establishment

of a panel pursuant to Article 6 of the

DSU.

Under section 304 of the Trade Act,

the USTR must determine within 18

months after the date on which this

investigation was initiated, or within 30

days after the conclusion of WTO

dispute settlement procedures,

whichever is earlier, whether any act,

policy, or practice or denial of trade

agreement rights described in section

301 of the Trade Act exists and, if that

determination is affirmative, the USTR

must determine what action, if any, to

take under section 301 of the Trade Act.

Public Comment: Requirements for

Submissions

Interested persons are invited to

submit written comments concerning

the acts, policies and practices of

Turkey which are the subject of this

investigation, the amount of burden or

restriction on U.S. commerce caused by

these acts, policies and practices, and

the determinations required under

section 304 of the Trade Act. Comments

must be filed in accordance with the

requirements set forth in 15 CFR

2006.8(b) (55 FR 20593) and must be

filed on or before noon on Monday, July

22, 1996. Comments must be in English

and provided in twenty copies to: Sybia

Harrison, Staff Assistant to the Section

301 Committee, Room 223, Office of the

U.S. Trade Representative, 600 17th

Street, NW, Washington, D.C. 20508.

Comment will be placed in a file

(Docket 301–106) open to public

inspection pursuant to 15 CFR 2006.13,

except confidential business

information exempt from public

inspection in accordance with 15 CFR

2006.15. Confidential business

information submitted in accordance

with 15 CFR 2006.15 must be clearly

marked ‘‘BUSINESS CONFIDENTIAL’’

in a contrasting color ink at the top of

each page on each of 20 copies, and

must be accompanied by a

nonconfidential summary of the

confidential information. The

nonconfidential summary shall be

placed in the file that is open to public

inspection. An appointment to review

the docket (Docket No. 301–106) may be

made by calling Brenda Webb (202)

395–6186. The USTR Reading Room is

open to the public from 10:00 a.m. to 12

noon and 1:00 p.m. to 4:00 p.m.,

Monday through Friday, and is located

in Room 101.

Irving A. Williamson,

Chairman, Section 301 Committee.

[FR Doc. 96–15306 Filed 6–14–96; 8:45 am]

BILLING CODE 3190–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–22012; File No. 812–9954–01]

ITT Hartford Life and Annuity

Insurance Company, et al.

June 11, 1996.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’).

ACTION: Notice of Application for an

Order under the Investment Company

Act of 1940 (‘‘1940 Act’’).

APPLICANTS: ITT Hartford Life and

Annuity Insurance Company (‘‘ILA’’),

ICMG Registered Variable Life Separate

Account One (‘‘Separate Account’’), and

Hartford Equity Sales Company

(‘‘HESCO’’).

RELEVANT 1940 ACT SECTIONS: Order

requested under Section 6(c) of the 1940

Act granting exemptions from Section

27(c)(2) of the 1940 Act and Rule 6e–

3(T)(c)(4)(v) thereunder.

SUMMARY OF APPLICATION: Applicants

request an order permitting the Separate

Account and other separate accounts

established in the future by ILA to

support certain group flexible premium

variable life insurance policies to

deduct from premium payments an

amount that is reasonably related to the

increased federal tax burden of ILA

resulting from the application of Section

848 of the Internal Revenue Code of

1986, as amended.

FILING DATE: The application was filed

on October 30, 1995. An amended

application was filed on May 29, 1996.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the Commission orders a

hearing. Interested persons may request

a hearing on this application by writing

to the Secretary of the Commission and

serving Applicants with a copy of the

request, personally or by mail. Hearing

requests must be received by the

commission by 5:30 p.m. on July 8,

1996, and should be accompanied by

proof of service on Applicants in the

form of an affidavit or, for lawyers, by

certificate. Hearing requests should state

the nature of the interest, the reason for

the request, and the issues contested.

Persons may request notification of a

hearing by writing to the Secretary of

the Commission.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, N.W., Washington, DC 20549.

Applicants, c/o Scott K. Richardson,

Esq., Assistant Counsel, ITT Hartford

Life Insurance Companies, P.O. Box

2999, Hartford, CT 06104–2999.

FOR FURTHER INFORMATION CONTACT:

Patrice M. Pitts, Special Counsel, Office

of Insurance Products (Division of

Investment Management) at (202) 942–

0670.

SUPPLEMENTARY INFORMATION: Following

is a summary of the application. The

complete application is available for a

fee from the Public Reference Branch of

the Commission.

Applicants’ Representations

1. ILA is a stock life insurance

company engaged in the business of

writing both individual and group life

insurance and annuity policies in the

District of Columbia and in all states

except New York. ILA was

redomesticated from Wisconsin to

Connecticut on May 1, 1996. ILA is a

wholly-owned subsidiary of Hartford

Life Insurance Company.

2. The Separate Account was

established by ILA under the laws of the

state of Connecticut, and is registered as

a unit investment trust under the 1940

Act. The assets of the Separate Account

are not chargeable with liabilities

arising out of any other business which

ILA may conduct. Income and realized

and unrealized capital gains and losses

of the Separate Account will be credited

to the Separate Account without regard

to any of ILA’s other income or realized

and unrealized capital gains and losses,

or the income, gains and losses of other

ILA separate investment accounts.
30648 Federal Register / Vol. 61, No. 117 / Monday, June 17, 1996 / Notices

1 In determining the targeted rate of return on

invested capital used in arriving at this discount

rate, ILA first identified a reasonable risk-free rate

of return that can be expected to be earned over the

long term. ILA then determined the premium it

needs to earn over that risk-free rate of return

because of the nature of the products it sells.

Applicants represent that such factors are

appropriate to consider in determining ILA’s

targeted rate of return on invested capital.

3. The Separate Account presently

consists of twelve investment divisions,

each of which invests exclusively in the

shares of investment options available

through seven open-end management

investment companies.

4. In the future, the board of directors

of ILA may establish other separate

accounts (‘‘Future Accounts’’) which

may serve as funding vehicles for other

variable life insurance policies issued

by ILA. The Future Accounts will be

organized as unit investment trusts, and

will file registration statements under

the 1940 Act and the Securities Act of

1933.

5. HESCO will serve as the principal

underwriter for certain group flexible

premium variable life insurance policies

(‘‘Policies’’) and any other variable life

insurance policies (‘‘Future Policies’’)

issued in the future by ILA through the

Separate Account or Future Accounts.

HESCO is registered as a broker-dealer

under the Securities Exchange Act of

1934, and is a member of the National

Association of Securities Dealers.

6. In 1990, Congress amended the

Internal Revenue Code of 1986 (‘‘Code’’)

by, among other things, enacting Section

848 thereof. Section 848 changed the

federal income taxation of life insurance

companies by requiring them to

capitalize and amortize over a period of

ten years part of their general expenses

for the current year. Under prior law,

those expenses were deductible in full

from the gross income of the current

year.

7. The amount of expenses that must

be capitalized and amortized under

Section 848 generally is determined

with reference to premiums for certain

categories of life insurance contracts

(‘‘specified contracts’’). More

specifically, an amount of expenses

equal to a percentage of the premiums

for the current year (i.e., gross premiums

minus return premiums and reinsurance

premiums) must be capitalized and

amortized for each specified contract.

The percentage varies, depending upon

the type of specified contract in

question, in accordance with a schedule

set forth in Section 848.

8. In effect, Section 848 accelerates

the realization of income from certain

insurance contracts and, accordingly,

the payment of taxes on the income

generated by those contracts. Taking

into account the time value of money,

Section 848 increases the tax burden of

an insurance company because the

amount of general expenses that must be

capitalized and amortized is measured

by the premiums received under certain

insurance contracts.

9. The Policies and Future Policies to

which a charge for the federal tax

burden related to deferred acquisition

costs (‘‘tax burden charge’’) will be

applied are/will be among the specified

contracts. They fall/will fall into the

category of life insurance contracts

under Section 848 for which 7.7% of net

premiums received must be capitalized

and amortized.

10. The increased tax burden resulting

from the application of Section 848 may

be quantified as follows. For each

$10,000 of net premiums received by

ILA under the Policies, ILA may

capitalize $770.00 (i.e., 7.7% of

$10,000). $38.50 of that amount may be

deducted in the current year, leaving

$731.50 (i.e., $770 minus $38.50)

subject to taxation at the corporate tax

rate of 35 percent. This works out to an

increase in tax for the current year of

$256.03 (i.e., 0.35 × $731.50). This

increased federal income tax burden

will be partially offset by deductions

allowed during the next ten years as a

result of amortizing the remainder of the

$770—$77 in each of the following nine

years, and $38.50 in year ten.

11. To the extent that capital must be

used by ILA to satisfy its increased tax

burden under Section 848, such profits

are not available to ILA for investment.

ILA submits that the cost of capital used

to satisfy its increased federal income

tax burden under Section 848 is, in

essence, its targeted rate of return on

invested capital. Because ILA seeks a

targeted rate of return on its invested

capital of 10 percent,1 ILA submits that

a discount rate of 10% is appropriate for

use in calculating the present value of

its future tax deductions resulting from

the amortization described above.

12. Using a corporate tax rate of 35

percent, and assuming a discount rate of

10 percent, the present value of the

federal income tax effect of the

increased deductions allowable in the

following ten years is $160.40. Because

this amount partially offsets the

increased tax burden, Section 848

imposes an increased tax burden on ILA

equal to a present value of $95.63

($56.03 minus $160.40) for each $10,000

of net premiums received under the

Policies.

13. ILA does not incur incremental

federal income tax when it passes on

state premium taxes to contract owners

because premium taxes are deductible

when computing federal income taxes.

The same is not true for federal income

taxes. Therefore, to offset fully the

impact of Section 848, ILA must impose

an additional charge that would make it

whole not only for the $95.63 additional

tax burden attributable to Section 848,

but also for the tax on the additional

$95.63 itself. This additional charge can

be computed by dividing $95.63 by the

complement of the 35% federal

corporate income tax rate (i.e., 65%),

resulting in an additional charge of

$147.12 for each $10,000 of net

premiums, or 1.47% of net premiums.

14. Based on its prior experience, ILA

expects that all of its current and future

deductions will be fully taken. ILA

submits that a charge of 1.25% of net

premium payments would reimburse it

for the impact of Section 848, taking

into account the benefit to ILA of the

amortization permitted by Section 848

and the use by ILA of a discount rate of

10% (which is equivalent to its targeted

rate of return) in computing the future

deductions resulting from such

amortization.

Applicants’ Legal Analysis

1. Section 6(c) of the 1940 Act

provides, in pertinent part, that the

Commission, by order upon application,

may exempt any person, security or

transaction (or any class or classes of

persons, securities or transactions) from

provisions of the 1940 Act or any rules

thereunder, if and to the extent that the

exemption is necessary or appropriate

in the public interest and consistent

with the protection of investors and the

purposes fairly intended by the policy

and provisions of the 1940 Act.

2. Applicants request an order of the

Commission pursuant to Section 6(c)

exempting them from the provisions of

Section 27(c)(2) of the 1940 Act and

Rule 6e–3(T)(c)(4)(v) thereunder to

permit ILA to deduct from premium

payments received in connection with

Policies and Future Policies an amount

that is reasonable in relation in ILA’s

increased federal income tax burden

related to the receipt of such premiums.

Applicants further request an exemption

from Rule 6e–3(T)(c)(4)(v) to permit the

proposed deductions to be treated as

other than ‘‘sale load’’ for the purposes

of Section 27 of the 1940 Act and the

exemptions from various provisions of

that Section found in Rule 6e–

3(T)(b)(13) under the 1940 Act.

3. Section 27(c)(2) of the 1940 Act

prohibits the sale of periodic payment

plan certificates unless the proceeds of

all payments (excepts such amounts as

are deducted for sales load) are held

under an indenture or agreement

containing in substance the provisions

required by Sections 26(a)(2) and
Federal Register / Vol. 61, No. 117 / Monday, June 17, 1996 / Notices 30649

26(a)(3) of the 1940 Act. Sections

27(a)(1) and 27(h)(1), in effect, limit

sales load on periodic payment plan

certificates to 9% of total payments.

4. Certain provisions of Rule 6e–3(T)

provide a range of exemptive relief for

the offering of flexible premium variable

life insurance policies such as the

Policies and Future Policies. For

example, subject to certain conditions,

Rule 6e–3(T)(b)(13)(iii) provides

exemptions from Section 27(c)(2) that

include permitting the payment of

certain administrative fees and

expenses, the deduction of a charge for

certain mortality and expense risks, and

‘‘[t]he deduction of premium taxes

imposed by any state or other

governmental entity.’’

5. Rule 6e–3(T)(c)(4) defines ‘‘sales

load’’ charged during a contract period

as the excess of any payments made

during the period over the sum of

certain specified charges and

adjustments, including ‘‘[a] deduction

for and approximately equal to state

premium taxes[.]’’ Applicants submit

that the proposed tax burden charge is

akin to a state premium tax charge in

that it is an appropriate charge related

to ILA’s tax burden attributable to

premiums received under the Policies

and Future Policies.

6. Applicants represent that the

requested exemptions from Rule 6e–

3(T)(c)(4)(v) are necessary in connection

with Applicants’ reliance on certain

provisions of Rule 6e–3(T)(b)(13),

particularly on subparagraph (b)(13)(i),

which provides exemptions from

Sections 27(a)(1) and 27(h)(1) of the

1940 Act. Issuers and their affiliates

may rely on Rule 6e–3(T)(b)(13)(i) if

they meet the Rule’s alternative

limitations on ‘‘sales load,’’ as defined

in Rule 6e–3(T)(c)(4). Applicants

acknowledge that a deduction for an

insurance company’s increased federal

tax burden does not fall squarely within

any of the specified charges or

adjustments which are excluded from

the definition of ‘‘sales load’’ in Rule

6e–3(T)(c)(4). Nevertheless, Applicants

submit that there is no public policy

reason for treating such increased

federal tax burden as sales load.

7. Applicants assert that the public

policy which underlies Rule 6e–

3T(b)(13)(i), like that which underlies

Sections 27(a)(1) and 27(h)(1), is to

prevent excessive sales loads from being

charged in connection with the sale of

periodic payment plan certificates.

Applicants submit that the treatment of

a federal income tax charge attributable

to premium payments as sales load

would in no way further this legislative

purpose because such a deduction bears

no relation to the payment of sales

commissions or other distribution

expenses. Applicants assert that the

Commission has concurred in this

conclusion by excluding deductions for

state premium taxes from the Rule 6e–

3(T)(c)(4) definition of ‘‘sales load.’’

8. Applicants submit that Rule 6e–

3(T)(c)(4) tailors the general terms of

Section 2(a)(35) of the 1940 Act to

variable life insurance contracts.

Applicants further submit that, just as

the percentage limits of Sections

27(a)(1) and 27(h)(1) depend on the

definition of ‘‘sales load’’ in Section

2(a)(35) for their efficacy, the percentage

limits in Rule 6e–3(T)(b)(13)(i) depend

on Rule 6e–3(T)(c)(4). Applicants

submit that Rule 6e–3(T)(c)(4) does not

depart, in principal, from Section

2(a)(35).

9. Applicants assert that Section

2(a)(35) excludes from ‘‘sales load’’

expenses or fees ‘‘not properly

chargeable to sales or promotional

activities.’’ Because the proposed tax

burden charge will be used to

compensate ILA for its increased federal

tax burden attributable to the receipt of

premiums, and such cost is not properly

chargeable to sales or promotional

activities, Applicants submit that not

treating the proposed tax burden charge

as sales load is consistent with the

policies of the 1940 Act.

10. Applicants further assert that

Section 2(a)(35) excludes from the

definition of ‘‘sales load’’ deductions for

premiums for ‘‘issue taxes.’’ Applicants

submit that the exclusion of charges for

expenses attributable to federal taxes

from sales load (as defined in Section

2(a)(35)) is consistent with the policies

of the 1940 Act. By extension,

Applicants submit, it is equally

consistent to exclude such charges,

including the proposed tax burden

charge, from the definition of ‘‘sales

load’’ in Rule 6e–3(T)(c)(4).

11. For these reasons, Applicants

submit that deducting a charge from

variable life insurance contract

premium payments for an insurer’s tax

burdens attributable to its receipt of

such payments, and excluding that

charge from sales load, is consistent

with the policies of the 1940 Act.

Applicants assert that this is because

such a deduction is an appropriate

charge related to the insurer’s tax

burden attributable to the premium

payments received.

12. Applicants seek the relief

requested herein with respect to the

Policies and Future Policies. Without

the requested relief, ILA would have to

request and obtain exemptive relief for

each Future Contract to be issued. Such

additional requests for exemptive relief

would present no issues under the 1940

Act not already addressed in this

request for exemptive relief.

13. Applicants submit that the

requested relief would promote

competitiveness in the variable life

insurance market by eliminating the

need for them to file redundant

exemptive applications, thereby

reducing ILA’s administrative expenses

and maximizing efficient use of its

resources. Applicants further submit

that the delay and expense involved in

having to seek exemptive relief

repeatedly would impair ILA’s ability to

take advantage of business opportunities

as they arise. Moreover, if Applicants

were required to seek exemptive relief

repeatedly with respect to the issues

addressed in this application, investors

would not receive any benefit or

additional protection thereby, and might

be disadvantaged as a result of increased

overhead expenses for ILA. For these

reasons, Applicants assert that the

requested relief is appropriate in the

public interest and consistent with the

protection of investors.

Conditions for Relief

Applicants agree to comply with the

following conditions for relief.

1. ILA will monitor the

reasonableness of the tax burden charge.

2. The registration statement for the

Policies and Future Policies under

which the tax burden charge is

deducted will: (a) disclose the charge;

(b) explain the purpose of the charge;

and (c) state that the charge is

reasonable in relation to ILA’s increased

federal tax burden under Section 848

resulting from the receipt of premiums.

3. The registration statement for any

Policies of Future Policies under which

a tax burden charge is deducted will

contain as an exhibit an actuarial

opinion as to: (a) the reasonableness of

the charge in relation to ILA’s increased

federal tax burden under Section 848

resulting from the receipt of premiums;

(b) the reasonableness of the targeted

rate of return used in calculating such

charge; and (c) the appropriateness of

the factors taken into account by ILA in

determining the targeted rate of return.

Conclusion

For the reasons and upon the facts set

forth above, Applicants submit that the

requested exemptions from Section

27(c)(2) of the 1940 Act and Rule 6e–

3(T)(c)(4)(v) thereunder—to permit the

deduction of 1.25% of premium

payments under the Policies and any

Future Policies—would be appropriate

in the public interest and consistent

with the protection of investors and the

purposes fairly intended by the policy

and provisions of the 1940 Act.
30650 Federal Register / Vol. 61, No. 117 / Monday, June 17, 1996 / Notices

1 15 U.S.C. § 78s(b)(1) (1988).

2A copy of the executed Third Restated

Agreement is attached as Exhibit A to OCC’s and

to NSCC’s filings. A copy of each of the filings and

all exhibits is available for copying and inspection

in the Commission’s Public Reference Room or

through OCC or NSCC, respectively.

3OCC has provided Stock Clearing Corporation of

Philadelphia (‘‘SCCP’’) with a Third Restated

Agreement which has terms substantially parallel to

the terms of the Third Restated Agreement between

OCC and NSCC. OCC has advised SCCP that it is

prepared to execute a Third Restated Agreement

with SCCP if and when SCCP wishes to do so.

Because Midwest Clearing Corporation (‘‘MCC’’)

has withdrawn from the clearance and settlement

business, OCC plans to propose entering into a

termination agreement with MCC to formally

terminate the Second Restated Agreement between

OCC and MCC.

4The Commission has modified the text of the

summaries prepared by OCC and NSCC.

5The three Second Restated Agreements were

filed by OCC with the Commission in Amendment

No. 2 to File No. SR–OCC–92–5, and also were filed

by NSCC, SCCP, and MCC in amendments to File

No. SR–NSCC–91–7, File No. SR–SCCP–92–01, and

File No. SR–MCC–92–02, respectively.

6Securities Exchange Act Release No. 33543

(January 28, 1994), 59 FR 5639 [File Nos. SR–OCC–

92–05, SR–NSCC–91–07, SR–SCCP–92–01, and SR–

MCC–92–02].

7 In the Third Restated Agreement, the term

common member refers to an OCC clearing member

that also is an NSCC member and that has

designated NSCC as its designated clearing

corporation for purposes of effecting settlement of

its E&A activity. Under the Third Restated

Agreement, like the Second Restated Agreement,

three alternatives are available to a clearing member

that does not want to become a member of NSCC

or SCCP but wants to settle its E&A activity through

another entity which is a member of NSCC or SCCP.

A clearing member may appoint (1) another OCC

clearing member (an ‘‘appointed clearing member’’),

(2) a member of NSCC (a ‘‘nominated

correspondent’’), or (3) if the OCC clearing member

is a Canadian clearing member, the Canadian

Depository for Securities. These three alternative

settlement arrangements are described in detail in

Amendment No. 2 to File No. SR–OCC–92–5. This

notice of filing describes the provisions of the Third

Restated Agreement with respect to an OCC clearing

member that is a common member, but the

provisions of the Third Restated Agreement are

designed to apply to each of the alternative

settlement arrangements.

For the Commission, by the Division of

Investment Management, by delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–15275 Filed 6–14–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37298; File Nos. SR–OCC–

96–04 and SR–NSCC–96–11]

Self-Regulatory Organizations; The

Options Clearing Corporation; National

Securities Clearing Corporation;

Notice of Filing of Proposed Rule

Changes Relating to an Amended and

Restated Options Exercise Settlement

Agreement Between the Options

Clearing Corporation and the National

Securities Clearing Corporation

June 10, 1996.

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

Securities Exchange Act of 1934

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

February 6, 1996, and April 6, 1996, The

Options Clearing Corporation (‘‘OCC’’)

and the National Securities Clearing

Corporation (‘‘NSCC’’), respectively,

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule changes (File Nos. SR–

OCC–96–04 and SR–NSCC–96–11) as

described in Items I, II, and III below,

which items have been prepared

primarily by OCC and NSCC,

respectively. The Commission is

publishing this notice to solicit

comments on the proposed rule changes

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Changes

The purpose of the proposed rule

changes is to put into effect the Third

Amended and Restated Options

Exercise Settlement Agreement (‘‘Third

Restated Agreement’’) 2 between OCC

and NSCC providing for the settlement

of exercises and assignments of equity

options.3 The proposal also seeks to

make related changes to OCC’s Rules,

primarily to Rule 601, which sets forth

the calculation of margin requirements

for equity options, and to make related

changes in NSCC’s clearing fund

formula in order to exclude from the

clearing fund calculation trades for

which NSCC has protection under the

terms of the Third Restated Agreement.

II. Self-Regulatory Organizations’

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

In their filings with the Commission,

OCC and NSCC included statements

concerning the purpose of and basis for

the proposed rule changes and

discussed any comments they received

on the proposed rule changes. The text

of these statements may be examined at

the places specified in Item IV below.

OCC and NSCC have prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.4

(A) Self-Regulatory Organizations’

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

In 1977, OCC signed an Options

Exercise Settlement Agreement with

Stock Clearing Corporation (NSCC’s

predecessor), with MCC, and with

SCCP. In 1991, OCC and NSCC, MCC,

and SCCP each signed a Restated

Options Exercise Agreement (‘‘Restated

Agreements’’). The Restated Agreements

never became effective because in 1993,

prior to Commission approval of

proposed rule changes pertaining to

these Restated Agreements, OCC and

NSCC, MCC, and SCCP each signed a

Second Restated Options Exercise

Agreement (‘‘Second Restated

Agreements’’).5 The Commission

approved the proposed rule changes

pertaining to the Second Restated

Agreements.6 However, after the

proposals were approved the parties to

the Second Restated Agreements agreed

to suspend the effectiveness of those

agreements because OCC’s proposed

implementation of a two product group

margin system would have caused

increases in the margin requirements far

in excess of the increases which had

been anticipated when the Second

Restated Agreements were originally

proposed. The Second Restated

Agreements never became effective.

OCC and NSCC now propose to make

effective the Third Restated Agreement

executed by them. The Third Restated

Agreement will become effective upon

approval by the Commission of the

proposed rule changes herein.

Changes Made by the Third Restated

Agreements

The Third Restated Agreement alters

the provisions of the Second Restated

Agreement between OCC and NSCC

principally to establish a two-way

guarantee between OCC and NSCC and

to change the guarantee formulas. In the

Second Restated Agreement, OCC

guaranteed compensation to NSCC for

losses incurred by NSCC in closing out

the exercise and assignment activity

(‘‘E&A activity’’) of a defaulting OCC

clearing member, and NSCC agreed to

guarantee settlement of pending stock

trades arising from E&A activity

commencing at the same time that it

guarantees regular-way settlements of

ordinary stock transactions (i.e., at

midnight of T+1). However, the Second

Restated Agreement did not require

NSCC to return to OCC any net value

remaining from the liquidation of the

E&A activity of a defaulting clearing

member. As a result, OCC provided for

a two product group margin system for

equity options to ensure that OCC gave

no margin credit for net positive values

of a clearing member’s E&A activity that

would be unavailable to OCC if NSCC

were to liquidate the clearing member’s

positions at NSCC arising from its E&A

activity.

The Third Restated Agreement

provides for a two-way guarantee

between OCC and NSCC. Thus, if NSCC

suspends a common member 7 and