Document ID: SEC-2009-0153-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2009-02-03T05:00Z

[Federal Register: February 3, 2009 (Volume 74, Number 21)]
[Notices]               
[Page 5958-5965]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03fe09-62]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59294; File No. SR-OCC-2008-20]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating To Establishing a Market Loan Program

January 23, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 23, 2008, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared 
primarily by OCC. The Commission is publishing this notice and order to 
solicit comments on the proposed rule change 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 create a framework for OCC to 
provide clearing services for stock loan and borrow transactions 
effected through electronic trading systems.

[[Page 5959]]

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\
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    \2\ The Commission has modified parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this proposed rule change is to revise OCC's By-Laws 
and Rules to create a framework (``Market Loan Program'') that can 
accommodate securities lending transactions proposed to be executed 
through electronic trading systems (``Loan Markets''), such as the 
market to be operated by Automated Equity Finance Markets, Inc. 
(``AQS''), a wholly-owned subsidiary of Quadriserv, Inc. The 
relationship between OCC and AQS will be governed by the Agreement for 
Clearing and Settlement Services (``AQS Agreement'') included as 
Exhibit 5 to Filing No. SR-OCC-2008-20.
    Securities lending contributes to the overall liquidity and 
efficiency of the equity and equity options markets. For options market 
participants, securities lending supports market making, arbitrage 
trading, and equity financing and assists participants in meeting 
deliveries resulting from options exercises and assignments. OCC's 
Stock Loan/Hedge Program, which allows approved Clearing Members to 
register their privately negotiated securities lending transactions 
with OCC, benefits OCC's Clearing Members and the industry by reducing 
the cost of credit, increasing operational efficiency, and providing 
stability through a central counterparty guarantee. OCC believes that 
it is important to keep pace with innovations in the securities lending 
markets and therefore proposes to launch the Market Loan Program.
    The bulk of the proposed changes are based on procedures and 
protections that OCC has utilized in the operation of the Stock Loan/
Hedge Program, with necessary modifications to account for those 
aspects of the Market Loan Program that are different from the Stock 
Loan/Hedge Program. OCC intends the provisions of its By-Laws and Rules 
governing the Market Loan Program and the provisions governing the 
Stock Loan/Hedge Program to be the same substantively except where 
differences were clearly intended or where the context requires a 
different interpretation. For example, under the Market Loan Program 
OCC would create a process by which it will accept anonymously matched 
stock loan transactions from a Loan Market and then send instructions 
to The Depository Trust Company (``DTC'') to settle the transactions. 
In comparison, under the Stock Loan/Hedge Program OCC does not 
participate in a stock loan transaction until after two clearing 
members have transferred the securities and required collateral between 
themselves through the facilities of DTC. See below for a discussion of 
such differences.

B. Overview of the Proposed Market Loan Program

    The Loan Market operated by AQS would be the first market supported 
by the proposed Market Loan Program. Additional markets that are 
operated in a manner similar to the AQS Loan Market could be included 
in the Market Loan Program in the future.
    A Loan Market would provide a centralized source for price 
discovery and trade matching of stock loan transactions, for example, 
by implementing periodic auctions throughout the trading day. In the 
case of an auction-based market, participant lenders would provide the 
Loan Market with available inventory for auction, and participant 
borrowers would ordinarily compete on rebate rates with the lowest rate 
earning the trade. Lenders and borrowers would ordinarily be matched 
based on the Loan Market's trade-matching algorithm. A Loan Market 
could also provide, as does AQS, for submission of privately negotiated 
transactions for processing through the Loan Market, including 
clearance and settlement through OCC. Such transactions will not be 
separately identified to OCC and will be treated by OCC like any other 
matched loan transactions submitted by the Loan Market.
    Clearing Members would need to meet certain requirements in order 
to be approved for participation in the Market Loan Program. For 
example, Clearing Members would need to be active subscribers to a Loan 
Market that is supported by the Market Loan Program. Clearing Members 
would also be required to set their ``Receiver Authorized Delivery'' 
(``RAD'') Limits at DTC in respect of transactions with OCC as the 
counterparty to the highest limit permitted under DTC rules.\3\ For 
tax-related reasons, OCC presently intends to permit only U.S. Clearing 
Members to participate in the Market Loan Program, at least initially. 
Clearing Members approved for participation in the Market Loan Program 
would be referred to as ``Market Loan Clearing Members.'' When 
additional markets are included in the Market Loan Program in the 
future, a separate designation will be required for a Clearing Member's 
participation in each Loan Market.
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    \3\ The RAD Limit is a risk control mechanism which allows the 
DTC participant to set individual dollar limits against each contra 
participant so that deliveries with a settlement value exceeding the 
specified limit are not processed until the participant has reviewed 
and approved them. Clearing Members participating in the Market Loan 
Program are expected to comply with the requirement of setting their 
RAD Limits against OCC to the highest level permissible under DTC 
rules. However, DTC will not be asked to monitor or enforce this 
requirement.
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    The Loan Market would submit matched loan transactions to OCC for 
clearance and settlement. OCC would then conduct routine validation 
processes before passing electronic instructions to DTC to move 
securities and cash between the Market Loan Clearing Members' accounts 
at DTC. Because a Loan Market may, as does AQS, match lenders and 
borrowers on an anonymous basis, OCC and DTC would establish an account 
structure involving the transfer of securities and cash between the 
lender and the borrower through a DTC account owned by OCC (``OCC 
Account''), thereby permitting stock loan transactions originated 
through a Loan Market to be settled in a manner that preserves 
anonymity to both the lender and borrower.
    Because OCC would substitute itself as the counterparty to all such 
DTC transactions, it is essential to OCC, from a risk management 
perspective, that there would never be a net settlement obligation 
against the OCC Account at the end of any day (i.e., OCC's obligations 
with respect to all completed DTC transactions to which the OCC Account 
was a party should net to zero both with respect to securities and 
cash). Avoidance of any net settlement obligation is essential both 
because OCC has no mechanism for funding such settlement obligations 
and for other operational reasons. In order to provide reasonable 
assurance that OCC will have no net settlement obligations, DTC will 
implement procedures intended to ensure that if one side of a loan 
transaction does not settle, the other side will be blocked as well. In 
addition, under current DTC rules, a

[[Page 5960]]

DTC participant can return a delivery of securities (``Reclaim'') to 
the original delivering party. DTC will block Reclaims against the OCC 
Account in order to prevent such Reclaims from resulting in a net 
settlement obligation in that account.\4\
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    \4\ DTC filed a proposed rule change (File No. SR-DTC-2008-15) 
with the Commission to describe proposed changes in its rules for 
purposes of supporting the Market Loan Program that is being 
approved simultaneously with this proposed rule change.
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    Upon receiving the end of the day stock loan activity file from DTC 
showing settled stock loans (i.e., transfer of the loaned securities 
against the specified collateral) originated through a Loan Market, OCC 
would perform additional validation processes to confirm that the 
transactions match the instructions given by OCC before affirmatively 
accepting settled stock loans and substituting itself as counterparty 
to these transactions (such accepted stock loan transactions are 
defined as ``Market Loans''). Upon OCC's acceptance of a Market Loan, 
the lending Market Loan Clearing Member would be a ``Lending Clearing 
Member'' and the borrowing Market Loan Clearing Member would be a 
``Borrowing Clearing Member'' in respect of that Market Loan for all 
purposes of the By-Laws and Rules. Any stock loan transactions 
identified as originated through a Loan Market that are not ultimately 
confirmed and accepted by OCC would be rejected by OCC.
    Upon acceptance of a Market Loan, OCC would create the stock loan 
position in the designated account of the Lending Clearing Member and 
the stock borrow position in the designated account of the Borrowing 
Clearing Member. Positions resulting from Market Loans would be 
maintained in the same manner as positions resulting from stock loans 
accepted by OCC under the Stock Loan/Hedge program (the latter are 
defined as ``Hedge Loans'' in the By-Laws and Rules \5\). However, 
positions resulting from Market Loans would be separately identified 
from, and would not be fungible with, positions resulting from Hedge 
Loans.
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    \5\ OCC proposes to introduce the term ``Hedge Loan'' to refer 
to stock loans accepted by OCC under the Stock Loan/Hedge Program. 
OCC proposes to amend the term ``Stock Loan'' to mean either a 
``Hedge Loan'' or a ``Market Loan'' or both as the context requires.
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    As with stock borrow or stock loan positions resulting from Hedge 
Loans, OCC would guarantee the daily mark-to-market payments generated 
by the open positions resulting from Market Loans. In addition, OCC 
would also provide a limited guaranty of payments in lieu of cash 
dividends and distributions (``dividend equivalent payments'') and 
stock loan rebates, in each case limited to the amount for which the 
Corporation has collected margins from the responsible Market Loan 
Clearing Member(s) prior to the payment date. The amount of these 
payments would be calculated by the relevant Loan Market, and OCC would 
effect the payments only as instructed by the Loan Market. OCC would 
have no responsibility to verify the accuracy of the Loan Market's 
calculations and would not be liable to Clearing Members for any errors 
in such calculations. A Market Loan Clearing Member would be required 
to maintain margin with the Corporation in respect of any scheduled 
dividend equivalent payments and accrued rebate payments that such 
Clearing Member is obligated to make.
    Termination of a Market Loan, in whole or in part, could be 
initiated by the Lending Clearing Member calling for the return of the 
loaned securities (a ``recall''), or by the Borrowing Clearing Member 
indicating its intention to return the loaned securities (a 
``return''). The Loan Market would assign (randomly or by some other 
method) the recall to a participant who borrowed the same securities or 
the return to a participant who lent the same securities. Recalls/
returns would be submitted to OCC and would be processed by OCC in the 
same manner as new stock loan transactions except that (i) the Loan 
Market would distinguish recalls/returns from new stock loan 
transactions; and (ii) if a recall/return were not settled by DTC and 
confirmed by OCC after a specified period of time, the Loan Market 
would instruct an independent broker to initiate the ``buy-in'' or 
``sell-out'' process (described in more detail in Part C below), as 
applicable, in order to complete such recall/return.
    A Loan Market would have the authority to direct OCC to terminate 
all or a portion of the outstanding Market Loans carried in the 
account(s) of a Clearing Member that were originated through that Loan 
Market. In addition, OCC would have the authority under Rule 305(a) to 
require a Clearing Member to reduce or eliminate stock loan or stock 
borrow positions, including positions resulting from Market Loans, upon 
a determination that circumstances warrant such action. In either case, 
OCC would give written notice to all affected Clearing Members 
specifying the date on which such termination would become effective. 
If any such termination were not settled by the specified time, the 
relevant Loan Market would instruct an independent broker to initiate 
the ``buy-in'' or ``sell-out'' process, as applicable, in order to 
complete the termination. Any such buy-in or sell-out would be for the 
account and liability of OCC, which would in turn have rights against 
the defaulting Market Loan Clearing Member.
    In the event that OCC, a Loan Market, or DTC suspends a Market Loan 
Clearing Member, OCC would not accept any settled stock loan 
transaction to which the suspended Clearing Member is a party as a 
Market Loan after the time at which the Clearing Member was suspended. 
Finally, OCC would take action under proposed Rule 2211A and Chapter XI 
of the rules to close out the open stock loan and stock borrow 
positions carried in the suspended Clearing Member's account(s), using 
the ``buy-in'' or ``sell-out'' process or exercising setoff rights as 
appropriate. Temporary hedging transactions would also be permitted 
under the Chapter XI rules.
    If a Market Loan Clearing Member were to believe that a Market Loan 
was executed on such Clearing Member's behalf in error or that a 
material term of the loan was erroneous, the Clearing Member would 
contact the relevant Loan Market to seek correction. Every 
determination as to whether a Market Loan was entered into in error 
would be within the sole discretion of the relevant Loan Market and 
would not be subject to review by OCC. OCC would have no liability to 
Clearing Members for any action taken, or any delay or failure to take 
any action, in reasonable reliance on information that OCC receives 
from a Loan Market or DTC.

C. Proposed Changes to the By-Laws and Rules

    In order to provide clearing services for Market Loans, OCC 
proposes to (i) add a new Article XXIA to the By-Laws and a new Chapter 
XXIIA to the Rules that would govern the clearance of Market Loans, 
(ii) introduce new terms and amend the definitions of existing terms, 
and (iii) amend a few other provisions of the By-Laws and Rules in 
connection with the introduction of Market Loans.
Changes in Terminology--Article I, Section 1; Article XXI, Section 1; 
Article XXIA, Section 1
    In Article I, Section 1, OCC proposes to introduce the terms 
``Hedge Loan,'' ``Loan Market,'' ``Market Loan,'' ``Market Loan 
Clearing Member'' and ``Market Loan Program.'' The definition of 
``Eligible Stock'' would be amended so that it will be applicable to 
the Market Loan Program. OCC also proposes to amend the term ``Stock 
Loan'' to refer to

[[Page 5961]]

a Hedge Loan or a Market Loan or both, as the context requires, except 
that the term ``Stock Loan'' is redefined in Article XXI of the By-Laws 
so that, as used there and in Chapter XXII of the Rules, the term 
refers only to ``Hedge Loans'' and not to ``Market Loans.''
    The terms ``Borrowing Clearing Member'' and ``Lending Clearing 
Member'' are amended to encompass Market Loan Clearing Members that 
borrow or lend Eligible Stocks in Market Loans. The terms ``stock 
borrow position,'' and ``stock loan position'' will, where appropriate, 
apply to positions resulting from Market Loans without amendment.
    In Article XXIA, Section 1, OCC proposes to introduce the terms 
``dividend equivalent payment,'' ``recall'' and ``return.'' The terms 
``Collateral,'' ``Loaned Stock,'' ``mark-to-market payment'' and 
``settlement price,'' which are defined in Article XXI in the context 
of the Stock Loan/Hedge Program, would be redefined in Article XXIA to 
reflect their specific application in the context of a Market Loan. 
Finally, OCC proposes to introduce the term ``rebate,'' which refers to 
a periodic payment payable by the Lending Clearing Member or the 
Borrowing Clearing Member (depending on whether the rebate rate is 
positive or negative) in respect of a Market Loan.
Article XXI, Section 5
    Paragraph (b) of Section 5 is being deleted to eliminate the 
existing requirement that a Clearing Member represent that the Loaned 
Stock does not constitute customer fully paid or excess margin 
securities. The Commission's Rule 15c3-3 requires a broker-dealer to 
maintain possession and control of customer fully-paid and excess 
margin securities. Paragraph (b)(3) of Rule 15c3-3 sets forth 
conditions (which include customer consent, provision of specified 
collateral to the customer, etc.) under which a broker-dealer may 
borrow fully paid or excess margin securities from customers for its 
own use without violating the rule's possession or control requirement. 
The deletion of paragraph (b) will maintain consistency between the 
existing Stock/Loan Hedge rules and the Market Loan rules, where no 
such representation is proposed to be required. Rules 2202(e) and 
2202A(f) require Clearing Members to represent that each stock loan is 
in compliance with Rule 15c3-3 and other customer protection rules, and 
OCC believes that this representation is sufficient without further 
specificity.
Qualifications for Designation as a Market Loan Clearing Member--
Article V, Section 1
    Interpretation .03(e) of Article V, Section 1 would be amended to 
clarify that a Clearing Member must be approved as a Market Loan 
Clearing Member before it can participate in the Market Loan Program. 
OCC proposes to add a new interpretation .06A which will set out the 
conditions that a Clearing Member must meet in order to be approved as 
a Market Loan Clearing Member.
OCC's Role With Respect to Market Loans--Article XXIA, Section 2
    Upon acceptance of a Market Loan, OCC's role with respect to such 
Market Loan would be that of a principal and OCC would have the 
position of borrower to the Lending Clearing Member and the position of 
lender to the Borrowing Clearing Member. All rights and/or obligations 
of a Clearing Member in respect of a Market Loan would be against OCC, 
including the right and/or obligation to receive or make mark-to-market 
payments, dividend equivalent payments, and rebate payments and to 
deliver or receive the Loaned Stock or Collateral.
Agreement of the Borrowing Clearing Member and the Lending Clearing 
Member in Respect of Market Loans--Article XXIA, Sections 3 and 4
    Under Section 3, the Borrowing Clearing Member would represent that 
it would fulfill its obligations to OCC in respect of a Market Loan, 
including making required margin deposits, mark-to-market payments, 
dividend equivalent payments, rebate payments (in the case of a 
negative rebate), and delivering the Loaned Stock against Collateral 
upon the termination of the Market Loan, all in accordance with the By-
Laws and Rules. The Lending Clearing Member would make reciprocal 
representations under Section 4.
Maintaining Stock Loan and Stock Borrow Positions Resulting From Market 
Loans in Accounts--Article XXIA, Section 5; Rule 2201A
    Under Article XXIA, Section 5, upon the acceptance of a Market 
Loan, OCC would create the stock loan position in the Lending Clearing 
Member's designated account and the stock borrow position in the 
Borrowing Clearing Member's designated account. OCC would aggregate, 
separately for Market Loans effected through each Loan Market, all 
stock loan positions and stock borrow positions of a Clearing Member 
resulting from such Market Loans relating to the same Eligible Stock 
for position reporting purposes and would also net all such stock loan 
positions against such stock borrow positions for purposes of 
determining the Clearing Member's margin obligations to OCC (referring 
to the margin that a Clearing Member would be required to be deposited 
with OCC to cover OCC's risk that the market might move against a stock 
loan position or a stock borrow position on any day and that the 
Clearing Member might fail before making the required mark-to-market 
payment to OCC on the next business day). Positions resulting from 
Market Loans would be maintained in Clearing Members' accounts in the 
same manner as positions resulting from Hedge Loans. However, OCC would 
separately identify stock loan and stock borrow positions resulting 
from Market Loans, and would not deem such positions to be fungible 
with positions resulting from Hedge Loans.
    Rule 2201A would require each Market Loan Clearing Member to give 
OCC standing instructions in respect of Market Loans similar to the way 
in which Rule 2201 requires a Clearing Member participating in the 
Stock Loan/Hedge Program to give standing instructions in respect of 
Hedge Loans, the differences being that Rule 2201A: (i) Would not 
include any references to margin-ineligible accounts because all 
positions resulting from Market Loans would be carried on a fully 
margined basis \6\, (ii) would not require a Market Loan Clearing 
Member to specify the Collateral requirement that will be applicable to 
its stock loan positions because such requirement will be specified by 
the relevant Loan Market when it submits the matched trades to OCC, and 
(iii) would not include any references to stock loan baskets or stock 
borrow baskets because such concepts will not apply to positions 
resulting from Market Loans.
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    \6\ The Commission has approved in a separate rule change OCC's 
proposal to eliminate Clearing Members' ability to carry stock loan 
and stock borrow positions on a margin-eligible basis. However, the 
proposal will not be fully implemented until February 1, 2009. See 
Securities Exchange Act Release 58901 (December 1, 2008).
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Initiation of Market Loans--Rule 2202A
    As described in Part B above, a Market Loan would be initiated when 
the Loan Market submits a matched trade to OCC. If the matched trade 
passes OCC's validation processes, OCC would instruct DTC to effect the 
transfer of Eligible Stock against Collateral between the accounts of 
two Market Loan Clearing Members, provided that such transfers would 
flow through

[[Page 5962]]

OCC's account at DTC in order to maintain anonymity between the lender 
and borrower.
    Only those settled stock loan transactions that are affirmatively 
accepted by OCC following receipt of the end-of-day stock loan activity 
file from DTC and OCC's validation processes would be deemed Market 
Loans. OCC would substitute itself as counterparty to the Borrowing 
Clearing Member and the Lending Clearing Member, respectively, in 
respect of each Market Loan. Any stock loan transactions purported to 
have originated through a Loan Market that are not accepted by OCC 
would be rejected by OCC and would have no further effect as regards 
OCC.
    Paragraphs (d) and (e) of Rule 2202A would clarify the Lending 
Clearing Member's rights and obligations with respect to the Collateral 
posted and the Borrowing Clearing Member's rights and obligations with 
respect to the Loaned Stock. Under paragraph (f), a Market Loan 
Clearing Member would be required to represent to OCC that the Clearing 
Member's participation in each Market Loan is in compliance, and will 
continue to comply, with all applicable laws and regulations.
Margin Deposited With OCC in Respect of Market Loans--Rule 2203A
    As mentioned in the description of proposed Article XXIA, Section 5 
above, a Market Loan Clearing Member would be required to meet its 
margin obligations to OCC with respect to its stock loan and stock 
borrow positions resulting from Market Loans. Rule 2203A would 
reiterate this obligation and clarify that margin calculation shall be 
determined pursuant to Rule 601.
Mark-to-Market Payments in Respect of Market Loans--Rule 2204A
    Rule 2204A would govern the calculation and payment of mark-to-
market payments in respect of Market Loans. Using the same calculation 
method and collection/payment procedures that OCC practices with 
respect to Stock Loans, OCC would calculate on a daily basis the net 
amount owed by or to each Market Loan Clearing Member in respect of 
stock loan and stock borrow positions resulting from Market Loans 
carried in a Clearing Member's accounts and collect such net amount 
from, or deposit such net amount to, as applicable, the Clearing 
Member's designated bank account.
Daily Reports--Rule 2205A
    As mentioned in the description of proposed Article XXIA, Section 5 
above, OCC would aggregate, separately for Market Loans effected 
through each Loan Market, all stock loan positions and stock borrow 
positions of a Clearing Member resulting from such Market Loans 
relating to the same Eligible Stock for position reporting purposes. 
Pursuant to Rule 2205A, OCC would make these position reports available 
to each Market Loan Clearing Member on a daily basis.
Dividends, Distributions and Rebates in Respect of Market Loans--Rule 
2206A
    Paragraph (a) of Rule 2206A would clarify that a Lending Clearing 
Member will be entitled to receive all dividends and distributions made 
in respect of Loaned Stock on the record dates that occur during the 
term of a Market Loan and the Borrowing Clearing Member will be 
obligated to pay or deliver all such dividends and distributions. 
Because a Market Loan Clearing Member generally would not know the 
identity of the counterparty to a Market Loan, the Loan Market and OCC 
would facilitate the payment of dividend equivalents between Market 
Loan Clearing Members. The Loan Market would be solely responsible for 
calculating the dividend equivalent amounts that each Market Loan 
Clearing Member is entitled to receive or obligated to pay. On the 
expected payment date, OCC would guarantee and effect such payments 
between Market Loan Clearing Members as instructed by the Loan Market, 
in each instance up to the amount for which the Corporation has 
collected margins from the responsible Market Loan Clearing Member(s) 
prior to the expected payment date. However, OCC would not be 
responsible for any errors in the Loan Market's calculations or 
instructions.
    OCC would add non-cash dividends and distributions to the Loaned 
Stock and transfer them to the Lending Clearing Member upon termination 
of the Market Loan if OCC determines in its sole discretion that such 
transfer is legally permissible and can be made through DTC. The Loan 
Market could also determine to fix a cash settlement value with respect 
to any non-cash dividends and/or distributions that are not added to 
the Loaned Stock, in which case the Loan Market would instruct OCC to 
effect collection and payment of such cash settlement. With respect to 
any other non-cash dividend or distribution, the Lending Clearing 
Member would receive the benefit of the dividend or distribution only 
if it recalls the Loaned Stock in time to receive such dividend or 
distribution directly.
    Paragraph (b) of Rule 2206A would govern the periodic payments of 
rebates to Market Loan Clearing Members. As in the case of dividend 
equivalent payments, the Loan Market would be solely responsible for 
calculating the amount of rebate payments that each Market Loan 
Clearing Member is entitled to receive or obligated to pay. On the 
specified settlement date, OCC would guarantee and effect such payments 
and collections as instructed by the Loan Market, in each instance up 
to the amount for which the Corporation has collected margin from the 
responsible Market Loan Clearing Member(s) prior to the specified 
settlement date. Again, OCC would not be responsible for any errors in 
the Loan Market's calculations or instructions. Rebate payments would 
be paid on at least a monthly basis. If a Market Loan Clearing Member 
were to be suspended, OCC would have the discretion to accelerate 
settlement of accrued rebate payments with respect to such suspended 
Clearing Member.
Correction of Erroneous Market Loans--Rule 2207A
    If a Market Loan Clearing Member were to believe that a Market Loan 
was executed on such Clearing Member's behalf in error or that a 
material term of the loan was erroneous, the remedy available to the 
Clearing Member would be to contact the relevant Loan Market to request 
correction. The decision to void a Market Loan would be in the Loan 
Market's sole discretion and would not be subject to review by OCC. 
Furthermore, interpretation .01 to Rule 2207A would clarify that in 
carrying out OCC's role with respect to Market Loans, OCC would be 
entitled to rely on information provided by a Loan Market or DTC and 
would not be liable to Clearing Members for any actions taken in 
reliance of such information.
Indemnification by Borrowing Clearing Member--Rule 2208A
    Rule 2208A would require a Borrowing Clearing Member in respect of 
a Market Loan to indemnify, defend, and hold harmless OCC from any 
consequences resulting from the Borrowing Clearing Member's use of the 
Loaned Stock.
Termination of Market Loans--Rule 2209A
    Rule 2209A would govern the different ways that a Market Loan may 
be terminated. In the case of a recall or a return that is the subject 
of paragraph (a) of Rule 2209A, the transaction would be submitted by 
the Loan Market to OCC and would be processed by OCC in basically the 
same manner as a new stock loan transaction. The Loan Market

[[Page 5963]]

would distinguish a recall/return from a new stock loan transaction so 
that upon OCC's confirmation that a recall/return was settled by DTC, 
OCC would extinguish the corresponding stock loan and stock borrow 
positions instead of creating new positions on its books.
    If a recall fails to settle because the Borrowing Clearing Member 
fails to return the Loaned Stock within the timeframe specified in Rule 
2209A, the relevant Loan Market would instruct an independent broker to 
initiate the ``buy-in'' process on the morning of the following stock 
loan business day. The broker would be instructed to purchase the 
Loaned Stock in a commercially reasonable manner as promptly as 
practicable (and in any event, at or prior to the time when a buy-in 
would be required under applicable regulatory requirements). The buy-in 
would be for OCC's account and liability because of OCC's role as the 
principal to each Market Loan.
    The buy-in procedures are intended to facilitate compliance by the 
Clearing Member with buy-in requirements under applicable rules of the 
Commission and self-regulatory organizations, including the 
requirements imposed by Regulation SHO. The ultimate responsibility for 
compliance with Regulation SHO rests with the Clearing Member, and OCC 
would not be liable for any Clearing Member's failure to comply with 
its obligations.
    The bought-in Loaned Stock would ultimately be delivered to the 
Lending Clearing Member's account at DTC in exchange for the 
Collateral. Any difference between (i) the amount of the Collateral and 
(ii) the price paid on the buy-in plus any other costs, fees or 
interest incurred by the broker in connection with such buy-in and any 
penalties or charges that the Loan Market may assess against the 
Borrowing Clearing Member would be credited to or debited from the 
Borrowing Clearing Member's designated bank account.
    If a return fails to settle because the Lending Clearing Member 
fails to return the Collateral within the timeframe specified in Rule 
2209A, the relevant Loan Market would instruct an independent broker to 
initiate the ``sell-out'' process on the morning of the following stock 
loan business day. The sell-out process is essentially the inverse of 
the buy-in process. The broker would be instructed to sell the Loaned 
Stock for OCC's account and liability. The sale proceeds would 
ultimately be delivered to the Borrowing Clearing Member's account at 
DTC against delivery of the Loaned Stock. Any difference between (i) 
the sale proceeds and (ii) the amount of the Collateral plus any other 
costs, fees or interest incurred by the broker in connection with such 
sell-out, and any penalties or charges that the Loan Market may assess 
against the Lending Clearing Member would be credited to or collected 
from the Lending Clearing Member's designated bank account.
    Paragraph (c) of Rule 2009A would provide that OCC would have the 
authority to terminate Market Loans in circumstances where a Loan 
Market so directs OCC or where OCC deems such action warranted. In 
either case, OCC would give written notice to all affected Clearing 
Members specifying the date on which such termination would become 
effective. As with a recall or a return, if a Market Loan termination 
initiated by a Loan Market or OCC fails to settle by the specified time 
set forth in paragraph (c), the relevant Loan Market would instruct an 
independent broker to initiate the ``buy-in'' or ``sell-out'' process, 
as applicable, in order to complete the termination.
Suspension of Market Loan Clearing Members--Rule 2210A and 2211A
    Under Rule 2210A, OCC would not accept any stock loans to which the 
suspended Clearing Member is a party as a Market Loan after the time at 
which the Clearing Member was suspended, and would instruct DTC to 
unwind any such transaction. Open stock loan and stock borrows 
positions of the suspended Clearing Member would be liquidated in 
accordance with Rule 2211A by an independent broker designated by OCC 
for such purposes.
Collection of Fees and Charges on Behalf of a Loan Market--Rule 209
    OCC proposes to amend paragraph (b) of Rule 209 so that OCC would 
have the authority to withdraw from a Market Clearing Member's bank 
account the amount of any fees or charges that the Clearing Member owes 
to a Loan Market.
Certain Conforming Changes in the By-Laws and Rules--Article XXI, 
Section 2 and 5; Rule 1103, 2201, 2202, 2204, 2205 and 2210
    Sections 2 and 5 of Article XXI of the By-Laws and Rule 1103, 2201, 
2202, 2204, 2205 and 2210 would be amended to conform to the new Market 
Loan rules as appropriate.

D. Summary of Certain Provisions of the AQS Agreement

    In connection with providing clearing and settlement services to 
AQS, OCC will enter into the AQS Agreement, which is similar in form to 
clearing agreements that OCC has entered into with futures markets. In 
addition to (i) defining each party's obligations in connection with 
the clearance and settlement of Market Loans, as discussed in Part B 
above, and (ii) identifying aspects of OCC's services that will be 
provided in accordance with the provisions of OCC's By-Laws and Rules, 
as discussed in Part C above, the AQS Agreement will set forth other 
terms and conditions that will govern the parties' relationship, 
including the following:

Regulatory Requirements

    AQS will represent that (i) it will have obtained all necessary 
registrations, memberships, approvals or other consents that are 
required to have been obtained by it from any federal or state 
regulatory agencies or any self-regulatory organizations, (ii) it will 
have procedures (as amended from time to time, the ``Market 
Procedures'') that comply with the provisions of all applicable 
regulations and will have filed with the Commission the necessary 
information with respect to the Market Procedures, and (iii) it will 
have all requisite power and authority, whether arising under 
applicable federal or state law or the rules and regulations of any 
regulatory or self-regulatory organization to which AQS is subject, to 
enter into and perform its obligations under the AQS Agreement. OCC 
will make similar representations, and in addition will clarify that 
OCC's provision of clearing services in respect of Market Loans will 
depend on the Commission's approval of this proposed rule change.
    AQS and OCC will each be required to notify the other party of any 
action taken by any regulatory body or agency that, in the judgment of 
the relevant party, has or will have a material adverse effect on such 
party's performance of its obligations under the AQS Agreement.
Fees for Clearing Services
    OCC will establish fee structures for the services it performs for 
Clearing Members consistent with the provisions of its By-Laws. Fees 
charged to subscribers of AQS for services performed by OCC under the 
AQS Agreement shall not be greater than the fees charged by OCC in 
respect of substantially similar services performed for other markets 
in connection with Market Loan transactions; provided that OCC may 
offer alternative fee structures to such markets so long as it offers 
the same alternatives to AQS on substantially the same terms and so 
long

[[Page 5964]]

as the alternative fee structure provides for the equitable allocation 
of reasonable dues, fees, and other charges among Clearing Members.
Indemnification
    AQS will indemnify and hold harmless OCC and each of its directors, 
officers, committee members, agents, employees and any person or entity 
who controls OCC (as the term ``control'' is defined in Rule 405 of the 
Securities Act of 1933, as amended) from and against any and all 
losses, damages, liabilities, judgments, claims, expenses and amounts 
incurred and/or paid in settlement (collectively referred to as 
``Losses'') arising out of or based on (i) any violation or alleged 
violation by AQS of any of the terms of the AQS Agreement or (ii) any 
violation or alleged violation by AQS of any law (including patent 
infringement or other intellectual property law violation) or 
governmental regulation. OCC will indemnify and hold harmless AQS and 
each of its directors, officers, committee members, agents, employees 
and any person or entity who controls the Market from and against any 
and all Losses arising out of or based on (i) any violation or alleged 
violation by OCC of any of the terms of the AQS Agreement, (ii) any 
alleged default by OCC in performing its obligations in accordance with 
its By-Laws and Rules in respect of any Market Loans it has accepted 
for clearing, or (iii) any violation or alleged violation by OCC of any 
law (including patent infringement or other intellectual property law 
violation) or governmental regulation. The indemnifications provided by 
each party will include indemnification against any Losses arising out 
of or based on any allegation that any termination of a Market Loan 
transaction initiated by the indemnifying party was wrongful.
Term and Termination
    The AQS Agreement may be terminated (i) by either party at any time 
upon giving a specified number of days' prior written notice to the 
other party, (ii) by a party upon giving notice to the other party if 
the other party has breached in any material respect the provisions of 
the AQS Agreement, or (iii) by OCC upon giving notice to AQS if, among 
other grounds, AQS has ceased to effect stock loan transactions or 
OCC's By-Laws or Rules have ceased to be in effect in a material 
respect. From the time that any notice of termination is given or any 
event of termination occurs until such time as all stock loan and 
borrow positions resulting from Market Loans have been closed or 
transferred to an alternative clearing organization, OCC and AQS will 
continue to provide all services and perform all of their respective 
obligations under the AQS Agreement and OCC's By-Laws and Rules to the 
extent necessary or appropriate to service open stock loan and borrow 
positions. Finally, in the event of a voluntary termination of the AQS 
Agreement, OCC will use reasonable efforts to effect transfer of the 
open positions to AQS's successor clearing organization subject to 
reasonable agreements with such successor clearing organization, AQS 
and/or Clearing Members whose positions are being transferred, as 
appropriate, that protect the interests of OCC.
Dispute Resolution
    If a dispute arises between AQS and OCC relating to the clearing 
services in respect of Market Loans, the AQS Agreement will provide 
that senior officers of AQS and OCC will endeavor in good faith to 
resolve the dispute and to mitigate its deleterious effects and will 
confer with each other to those ends.
Certain Loan Market Obligations
    Schedule B of the AQS Agreement sets forth certain specific 
services that the Loan Market is required to perform to facilitate the 
performance by OCC of its obligations under its By-Laws and Rules. With 
respect to such obligations, the AQS Agreement provides that the Loan 
Market will be bound by the provisions of OCC's By-Laws and Rules to 
the extent that they impose obligations on the Market.
    The proposed changes to OCC's Rules are consistent with the 
purposes and requirements of Section 17A of the Act because they are 
designed to promote the prompt and accurate clearance and settlement of 
stock loan transactions executed on an electronic marketplace, and 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. The proposed 
rule change accomplishes these purposes by expanding the number of 
securities lending transactions that will be cleared and settled by 
OCC, which, in turn, benefits OCC's Clearing Members and the industry 
by reducing the cost of credit, increasing operational efficiency, and 
providing stability through a central counterparty guarantee by 
applying many of the same rules and procedures to these transactions as 
OCC applies to the Hedge Loan transactions. 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 
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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
17A(b)(3)(F).\7\ Section 17A(b)(3)(F) requires, among other things, 
that the rules of a clearing agency be designed to remove impediments 
to and perfect the mechanism for a national system for the prompt and 
accurate clearance and settlement of securities transactions and 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. The proposed rule change is consistent with these 
requirements because while it allows OCC to expand its existing Stock 
Loan/Hedge Program to accommodate securities lending transactions 
executed through electronic trading systems, it addresses the 
differences between the Stock Loan/Hedge Program and the new Market 
Loan program by amending several provisions of OCC's Rules and entering 
into the AQS Agreement, both of which are designed to assure that OCC 
and its members comply with Commission rules and to reduce the risk of 
operational disruption or financial loss to OCC or to its members.
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    \7\ 15 U.S.C. 78q-1(b)(3)(I).
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    OCC has requested that the Commission approve this rule change 
prior to the thirtieth day after the date of publication of notice of 
the filing. The Commission finds good cause for approving the proposed 
rule change prior to the thirtieth day after publication of notice 
because by so approving, OCC may begin providing

[[Page 5965]]

clearing services for stock loan and borrow transactions effected 
through the AQS Loan Market in time for its anticipated launch date of 
January 31, 2008.

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-2008-20 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2008-20. 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 Section, 100 F Street, 
NE., Washington, 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_20.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-
2008-20 and should be submitted on or before February 24, 2009.

V. 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 with the requirements of Section 17A of the Act and the 
rules and regulations thereunder applicable.\8\
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    \8\ In approving the proposed rule changes, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2008-20) be, and hereby 
is, approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-2204 Filed 2-2-09; 8:45 am]

BILLING CODE 8011-01-P