Document ID: SEC-2013-0892-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2013-05-14T04:00Z

[Federal Register Volume 78, Number 93 (Tuesday, May 14, 2013)]
[Notices]
[Pages 28267-28269]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11366]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69534; File No. SR-OCC-2013-03]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Add Provisions to the By-Laws 
To Facilitate the Use of the Stock Loan/Hedge Program by Canadian 
Clearing Members

May 8, 2013.

I. Introduction

    On March 8, 2013 The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2013-03 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal

[[Page 28268]]

Register on March 26, 2013.\3\ The Commission received no comment 
letters. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-69188 (March 20, 
2013), 78 FR 18382 (March 26, 2013).
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II. Description of the Proposed Rule Change

    The purpose of the proposed rule change is to add provisions to the 
By-Laws governing the OCC's Stock Loan/Hedge Program to facilitate the 
use of the Stock Loan/Hedge Program by Canadian Clearing Members.
    OCC's Stock Loan/Hedge Program is provided for in Article XXI of 
the By-Laws and Chapter XXII of the Rules, and provides a means for OCC 
clearing members to submit broker-to-broker stock loan transactions \4\ 
to OCC for clearance.\5\
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    \4\ Broker-to-broker transactions are independently-executed 
stock loan transactions that are negotiated directly between two OCC 
clearing members.
    \5\ Where a stock loan transaction is submitted to, and accepted 
by, OCC for clearance, OCC substitutes itself as the lender to the 
borrower and the borrower to the lender, thus serving a function for 
the stock loan market similar to the one it serves within the listed 
options market. OCC thereby guarantees the future daily mark-to-
market payments between the lending clearing member and borrowing 
clearing member, which are effected through OCC's cash settlement 
system, and the return of the loaned stock to the lending clearing 
member and the collateral to the borrowing clearing member, upon 
close-out of the stock loan transaction. OCC leverages the 
infrastructure of the DTC to transfer loaned stock and collateral 
between OCC clearing members.
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    Currently, for OCC clearing members to participate in OCC's Stock 
Loan/Hedge Program, they must be members of the Depository Trust 
Company (``DTC'') and maintain accounts to facilitate Delivery Orders 
(``DOs'') to approved counterparties for stock loan transactions. 
Canadian Clearing Members (who are otherwise eligible to participate in 
the Stock Loan/Hedge Program) are not participants of DTC. For purposes 
of settling transactions in U.S. equity securities, Canadian Clearing 
Members ordinarily rely on the services of CDS Clearing and Depository 
Services Inc. (``CDS''),\6\ which provides a cross-border service to 
clear and settle trades with U.S. counterparties.\7\
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    \6\ CDS is Canada's national securities depository, processing 
over 413 million trades annually. One of CDS's services enables its 
Canadian participants to clear and settle trades (which would 
include stock loan and borrow transactions) with U.S. counterparties 
through affiliations with DTC and the National Securities Clearing 
Corporation (``NSCC''). Under current OCC Rules 901(a) and (g), 
Canadian Clearing Members are able to effect settlement of deliver/
receive obligations arising from exercised or assigned stock options 
and matured stock futures by appointing CDS to act as their agent 
through the arrangements with DTC and NSCC.
    \7\ OCC is not a party to such cross-border service 
arrangements.
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    OCC is amending Interpretation .07 to Section 1 of Article V of the 
By-Laws to allow participation by Canadian Clearing Members in the 
Stock Loan/Hedge Program by permitting them to appoint CDS to act as 
their agent in effecting DOs for stock loan transactions through DTC 
under arrangements similar to those used for deliveries under options 
and futures.\8\ Upon such an appointment, a sponsored sub-account will 
be established on behalf of the Canadian Clearing Member in a CDS 
participant account at DTC, through which the Canadian Clearing Member 
can obtain access to similar DTC services used by U.S. clearing members 
who maintain participant accounts at DTC in respect to stock loan 
transactions. Through their identified sub-accounts within a CDS 
participant account at DTC, Canadian Clearing Members will be able to 
effect DOs for stock loan transactions to other DTC participants in the 
same manner as U.S. clearing members. The cross-border service offered 
by DTC and CDS will enable Canadian Clearing Members to transfer 
securities between their accounts held at CDS and the identified sub-
accounts carried on their behalf in CDS participant accounts held at 
DTC to effect DOs for stock loan transactions.
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    \8\ Unlike settlement of deliver/receive obligations in respect 
of stock options and stock futures, stock loan and borrow 
transactions do not involve NSCC.
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    Under the amended Interpretation .07 to Section 1 of Article V of 
the By-Laws, a Canadian Clearing Member that appoints CDS to act for it 
in connection with the Stock Loan/Hedge Program will be required to 
agree with OCC that the clearing member remains responsible to OCC in 
respect of its stock loan and borrow positions regardless of any non-
performance by CDS, that OCC may treat any failure of CDS to complete 
delivery or payment required to close an open stock loan or borrow 
position as a failure by such Canadian Clearing Member, thereby 
triggering OCC's buy-in and sell-out procedures and such other 
procedures and remedies as are provided under OCC's Rules, including 
recourse to the collateral deposited by the clearing member. 
Accordingly, OCC believes that it will have no credit exposure to CDS 
as the result of a failure by CDS to perform. OCC will seek 
acknowledgement of CDS and DTC with respect to these arrangements. If, 
for any reason, CDS ceases to act for one or more Canadian Clearing 
Members,\9\ OCC will have authority to require clearing members to 
close out open stock loan and borrow positions through buy-in and sell-
out procedures, or any other procedures provided in the By-Laws or 
Rules, if necessary.
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    \9\ A Canadian Clearing Member will be obligated, under amended 
Interpretation .07 to Section 1 of Article V of the By-Laws, to 
promptly notify OCC in writing if it knew or reasonably expected CDS 
to cease acting on its behalf, or if CDS had ceased acting on its 
behalf, with respect to effecting DOs for stock loan and stock 
borrow transactions.
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    In order to accommodate the participation by Canadian Clearing 
Members in the Stock Loan/Hedge Program, OCC will make certain 
conforming changes to its Non-U.S. Clearing Member Agreement.\10\ OCC 
also will make certain technical changes to its Non-U.S. Clearing 
Member Agreement for clarity and consistency with its U.S. Clearing 
Member Agreement.
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    \10\ As part of the application process to become a clearing 
member of OCC, any non-U.S. applicant must execute a copy of OCC's 
Non-U.S. Clearing Member Agreement. In the agreement, the applicant 
makes certain representations with respect to, among other things, 
the types of transactions it will engage in as a Non-U.S. Clearing 
Member.
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    Finally, for ease of reference throughout the proposed addition to 
Interpretation .07 to Section 1 of Article V of the By-Laws, OCC is 
amending Section 1 of Article I of the By-Laws to define a Canadian 
Clearing Member approved to participate in the Stock Loan/Hedge Program 
as a ``Canadian Hedge Clearing Member.''

III. Discussion

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. Section 17A(b)(3)(F) of the Act \12\ 
requires, among other things, that the rules of a clearing agency are 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions and foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    By facilitating the inclusion of Canadian Clearing Members in OCC's 
Stock Loan/Hedge Program, the rule change serves to broaden the scope 
of OCC clearing members that are able to participate in stock loan 
transactions and thereby further promotes the prompt and accurate 
clearance and settlement of stock loan transactions, and also fosters 
cooperation and coordination with persons engaged in the clearance and 
settlement of stock loan transactions. The rule change achieves these 
objectives while also

[[Page 28269]]

continuing to protect the clearing system against risk.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \13\ and the 
rules and regulations thereunder.
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    \13\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-OCC-2013-03) be and 
hereby is APPROVED.\15\
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11366 Filed 5-13-13; 8:45 am]
BILLING CODE 8011-01-P