Document ID: SEC-2008-1768-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to the Stock Loan/Hedge Program
Posted Date: 2008-11-17T19:34:09Z

[Federal Register: November 17, 2008 (Volume 73, Number 222)]
[Notices]               
[Page 67918-67920]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17no08-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58901; File No. SR-OCC-2008-06]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change Relating to the Stock Loan/
Hedge Program

November 5, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 25, 2008, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') and on October 7, 2008, amended 
the proposed rule change 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.
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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 would mitigate inconsistencies that may 
result under the Stock Loan/Hedge Program.

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 these 
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

    OCC has decided to take certain steps to provide for the continued 
growth and development of its Stock Loan/Hedge Program (``Program''). 
These include (1) elimination of the ability of clearing members to 
carry stock loan and borrow positions without depositing risk margin 
and (2) adjusting the amount of required risk margin where stock loan 
collateral provided by the borrower to the lender exceeds the value of 
the borrowed stock.

Background and General Description of the Proposed Rule Change.

    The Program is provided for in Article XXI of OCC's By-Laws and 
Chapter XXII of the Rules. It provides a means for OCC clearing members 
to submit certain stock loan/borrow transactions (``stock loan 
transactions'') to OCC for clearance. The stock and the stock loan 
collateral move through the facilities of The Depository Trust Company 
from the lending clearing member (``lender'') to the borrowing clearing 
member (``borrower''), and vice-versa when the stock is returned, in 
the same way that such transactions are ordinarily effected. Where the 
stock loan transaction is submitted to OCC for clearance, however, OCC 
is substituted as the lender to the borrower and the borrower to the 
lender. Thereafter, OCC guarantees performance of the stock loan 
transaction with respect to delivery and return of stock and collateral 
and the making of daily mark-to-market payments between the lender and 
borrower, which are effected through OCC's cash settlement system.
    One advantage of submitting stock loan transactions to OCC is that 
the stock loan and borrow positions then reside in the clearing 
member's options accounts at OCC and to the extent that they offset the 
risk of options positions carried in the same account, may reduce the 
clearing member's margin requirement in the account. OCC's risk is, in 
turn, reduced by having the benefit of the hedge. Nevertheless, OCC 
currently permits qualified clearing members to elect to submit stock 
loan and borrow transactions to OCC on a ``margin ineligible basis,'' 
meaning that the positions are excluded from OCC's margin calculations 
for the account containing those positions. Margin-ineligible stock 
loan and borrow positions do not reduce the margin requirement for the 
account to reflect any offsetting value they might have, nor does OCC 
collect additional margin to reflect the risk of those positions. The 
election is made by each clearing member on an account-by-account basis 
so that all stock loan and borrow positions in a particular account are 
carried on a margin ineligible basis or none are. In order to carry 
stock loan and borrow positions on a margin ineligible basis, a 
clearing member must meet heightened standards of creditworthiness as 
set forth in Interpretation and Policy .06 under Section 1 of Article V 
of OCC's By-Laws.
    While OCC believes that the current credit-based risk management 
approach has been adequate to date given historical Program activity 
levels, OCC also believes that a more conservative approach is 
warranted to provide for further growth of the Program and greater 
market volatility. OCC therefore seeks to better manage the market risk 
resulting from open stock loan and borrow positions by applying its 
standard margining approach to all such positions.
    Another potential exposure that OCC seeks to address arises from 
the stock loan market practice of requiring the borrower to 
overcollateralize a position by giving the lender cash collateral equal 
to 102% of the position's current market value. OCC's rules provide 
that OCC's guarantee of Program transactions extends to the full value 
of the collateral exchanged as part of a stock loan transaction. 
Therefore, if a lender were to fail, even if the stock could be sold 
out at 100% of the marking price, the borrower would be left with a 2% 
deficiency, for which OCC would be liable. Managing this potential 
exposure will be accomplished by (a) an additional margin charge 
applied to lenders executing stock loans at 102% in an amount equal to 
the 2% excess collateral and (b) borrowers receiving a margin credit in 
an equal amount. These new margin charges/credits are independent of, 
and in addition to, the risk margin determined by the

[[Page 67919]]

``STANS'' margining system that will be collected and maintained from 
both lenders and borrowers.
    In connection with the submission of this filing, OCC has confirmed 
with the Commission staff that the proposed rule change would not have 
adverse consequences to clearing members under Rule 15c3-1, the 
Commission's net capital rule.\3\ Specifically, where stock loan/borrow 
transactions are submitted to OCC for clearance through the Program, 
any additional amount of margin required to be deposited with OCC as a 
result of such transactions shall be treated the same as any other 
portion of the OCC margin deposit and shall therefore not constitute an 
unsecured receivable and shall not be required to be deducted from net 
capital.
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    \3\ 17 CFR 240.15c-3-1.
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    In order to minimize any potential disruptive impact associated 
with these changes in the margin treatment of stock loan and borrow 
positions, OCC would utilize two initial phase-in periods. There would 
be a one-month grace period (beginning from the date of Commission 
approval of this rule filing) before the changes are applied to any 
positions. For the next two months, all new positions must be submitted 
on a margin-eligible basis and will be subject to the 
overcollateralization provisions, but positions that were carried on a 
margin-ineligible basis as of the date of the approval order will not 
be required to be margined or subject to the overcollateralization 
provisions. After the end of that initial three-month period, all stock 
loan and borrow positions in all accounts would be carried on a margin-
eligible basis and would be subject to the overcollateralization 
provisions, regardless of when the positions were established.

Rule Amendments Applicable to Changes in the Program.

    OCC proposes the following amendments to its Rules to achieve the 
above-referenced initiative and accommodate and facilitate the 
continued growth and development of the Program.
1. Margin Requirements--Rule 601
    OCC will amend Rule 601(e) to eliminate its current category of 
``margin-ineligible'' accounts, and instead apply its standard 
margining approach to all Program positions using its ``STANS'' system. 
This change will become effective three months following the date of 
the Commission's order approving this rule filing. In addition, a new 
interpretation .06 would be added to Rule 601 setting forth the 
additional margin charges and credits, and the implementation schedule, 
applicable to stock loan and borrow positions that have collateral set 
at 102%.
2. Instructions to the Corporation--Rule 2201
    Rule 2201(a) is proposed to be amended to provide that, with 
respect to standing instructions that clearing members provide to OCC, 
the requirement to notify OCC of the fact that the clearing member is 
approved to maintain stock loan positions and stock borrow positions in 
its accounts on a non-margined basis, and the account or accounts that 
are to be margin-ineligible, shall become inapplicable three months 
from the SEC's approval order. After that time, OCC will have 
eliminated the ability to carry any stock loan or borrow positions on a 
``margin-ineligible'' basis.
3. Initiation of Stock Loans--Rule 2202
    Rule 2202(f) is proposed to be amended to specify that, one month 
after the Commission's approval order, a member shall not be able to 
submit new stock loan transactions to OCC for clearance in a margin-
ineligible account.
    OCC believes that the proposed rule change is consistent with the 
purposes and requirements of the Act because it is designed to promote 
the prompt and accurate clearance and settlement of stock loan 
transactions, to foster cooperation and coordination with persons 
engaged in the clearance and settlement of such transactions, to remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of such transactions, and, 
in general, to protect investors and the public interest. It 
accomplishes this purpose by applying margin requirements designed to 
enhance OCC's protection against the risk of carrying stock loan and 
borrow positions. The proposed rule change is not inconsistent with the 
existing rules of OCC, including any rules proposed to be amended.

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

    OCC does not believe that the proposed rule change would impose any 
material 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 the self-regulatory organization 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml) or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-OCC-2008-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2008-06. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). 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 Room, 100 F Street, NE., 
Washington,

[[Page 67920]]

DC 20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of OCC and on OCC's Web site at http://
www.theocc.com/publications/rules/proposed_changes/sr_occ_08_
06.pdf. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-OCC-
2008-06 and should be submitted on or before December 8, 2008.
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    \4\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27140 Filed 11-14-08; 8:45 am]

BILLING CODE 8011-01-P