Document ID: SEC-2012-0546-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2012-04-06T04:00Z

[Federal Register Volume 77, Number 67 (Friday, April 6, 2012)]
[Notices]
[Pages 20861-20863]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8270]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66715; File No. SR-OCC-2012-04]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Stock Loan Buy-In 
and Sell-Out Rules

April 2, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on March 22, 2012, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as 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 on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    The proposed rule change would make procedural changes to certain 
stock loan buy-in and sell-out rules.

[[Page 20862]]

II. Self-Regulatory Organization's Statement of 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.

A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    As described below, OCC is proposing three procedural changes to 
certain rules relating to the Market Loan Program \3\ and the Stock 
Loan/Hedge Program.\4\
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    \3\ The Market Loan Program, governed by Article XXIA of OCC's 
By-Laws and Chapter XXIIA of OCC's Rules, provides a framework that 
accommodates securities lending transactions executed through 
electronic trading systems (``Loan Markets'').
    \4\ The Stock Loan/Hedge Program, governed by Article XXI of 
OCC's By-Laws and Chapter XXII of OCC's Rules, allows approved 
clearing members to register their privately negotiated securities 
lending transactions with OCC.
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    First, OCC proposes to amend the buy-in and sell-out processes 
under the Market Loan Program. Under existing Rules, buy-in and sell-
out transactions under the Market Loan Program would be executed by the 
relevant Loan Market using an independent broker. However, Clearing 
Members participating in the Market Loan Program have requested that 
the execution of such buy-in or sell-out transactions be left to the 
discretion of Lending Clearing Member or Borrowing Clearing Member, as 
applicable. OCC understands that Automated Equity Finance Markets, Inc. 
(``AQS''), the operator of the Loan Market supported by the Market Loan 
Program, supports the requested change and believes that allowing 
participants in the Market Loan Program to manage the buy-in and sell-
out processes in the manner that they are accustomed to will foster the 
development of its marketplace. To accommodate such request, OCC 
proposes to amend Rule 2209A and Rule 2211A to update the buy-in and 
sell-out processes described therein and to redefine the respective 
rights, obligations, and responsibilities of OCC, Clearing Members and 
the relevant Loan Market in connection therewith.
    More specifically, under existing rules where the Borrowing 
Clearing Member fails to return the specified quantity of loaned stock 
(or where the Lending Clearing Member fails to pay the settlement price 
with respect to the specified quantity of loaned stock), the relevant 
Loan Market will instruct an independent broker to execute a buy-in (or 
sell-out) of the loaned stock, and OCC will determine in its sole 
discretion, as between OCC and the clearing members, whether the costs 
of the transaction are reasonable. Under the proposed rules, as is the 
more common practice in connection with securities lending, instead of 
an independent broker the Lending Clearing Member (or the Borrowing 
Clearing Member) would determine if and when to execute a buy-in (or 
sell-out) of the loaned stock. Because the Clearing Member would have 
sole discretion with respect to execution of the buy-in (or sell-out) 
transaction, such Clearing Member would be required to defend the 
timeliness of the transaction and the reasonableness of the costs if 
such matters were challenged. OCC would have no responsibility with 
respect to the resolution unless OCC had suspended the Clearing Member. 
In connection with the foregoing proposed changes, OCC and AQS would 
amend and restate the Agreement for Clearing and Settlement Services 
between the parties (``AQS Agreement''). A copy of the amended and 
restated AQS Agreement is attached to the proposed rule change.\5\
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    \5\ Attached to the proposed rule change as Exhibit 5A is a 
marked copy showing the changes between the original and amended and 
restated AQS Agreement. These supporting changes to the AQS 
Agreement principally are technical in nature. Technical changes 
also have been made to reflect the use of DTC's Dividend Service to 
effect settlement of certain cash dividends. See Exchange Act 
Release No. 34-60881 (October 26, 2009), 74 F.R. 56253 (October 30, 
2009) [SR-OCC-2009-16].
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    Second, OCC proposes to amend the Rules governing the Stock Loan/
Hedge Program to add a sell-out process. Currently, Rule 2209, which 
governs regular termination of stock loans under the Stock Loan/Hedge 
Program, does not describe a sell-out process. Although a sell-out 
process is described in Rule 2211, the scope of its application is 
limited by the context of Rule 2211, which specifically governs the 
close-out of stock loan positions of suspended Clearing Members. 
Therefore, OCC proposes to amend Rule 2209 to add a sell-out process 
that would apply in the context of regular termination of stock loans 
and to amend Rule 2211 to update the buy-in and sell-out processes 
described therein and to redefine the respective rights, obligations, 
and responsibilities of OCC and Clearing Members in connection 
therewith. Rule 2209 would also be amended to clarify when stock loans 
are terminated, including codifying a long standing process which has 
permitted Clearing Members to a stock loan to certify to OCC that they 
have terminated the stock loan and transferred the settlement price 
between themselves.
    Third, OCC proposes to amend the Rules governing the Stock Loan/
Hedge Program to add a cash settlement process. Under the Market Loan 
Program, if the Lending Clearing Member is unable to complete a buy-in, 
OCC has the discretion to fix a cash settlement value for the quantity 
of the loaned stock not returned to the Lending Clearing Member, 
thereby facilitating the termination of the relevant stock loan [see 
Rule 2209A(b)(3)]. However, currently OCC does not have the same option 
available under the Stock Loan/Hedge Program. Therefore, OCC proposes 
to amend Rule 2209 and Rule 2211, as appropriate, to include a cash 
settlement process identical to the process available under the Market 
Loan Program.
    Finally, in addition to the procedural changes described above, OCC 
proposes to amend Rule 2202(b) to clarify that with respect to a stock 
loan that has been novated by OCC under the Stock Loan/Hedge Program, 
any terms of the original stock loan (other than terms that establish 
congruence) and any representations, warranties, and covenants made by 
the parties to the original stock loan with respect to such loan, to 
the extent that they do not conflict with OCC's By-Laws and Rules, 
shall remain in effect as between such parties. This change clarifies 
that, for example, the agreements of the parties to the original stock 
loan transaction with respect to dividend and rebate payments (which 
are not guaranteed by OCC in the Stock Loan/Hedge Program) are not 
affected by the provisions of OCC's By-Laws and Rules.
    The proposed changes to OCC's By-Laws and Rules are consistent with 
the purposes and requirements of Section 17A of the Act, as amended, 
because they are designed to promote the prompt and accurate clearance 
and settlement of stock loans by permitting Clearing Members to manage 
the buy-in and sell-out processes in the manner that they are 
accustomed to and by providing OCC with the additional option of 
closing out stock loans through a cash settlement process, thereby 
fostering cooperation and coordination with persons engaged in the 
clearance and settlement of stock loans, and removing impediments to 
and perfecting the mechanism of a national system for the prompt and

[[Page 20863]]

accurate clearance and settlement of stock loans. The proposed rule 
change is not inconsistent with any 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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove the 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 may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an email to rule-comments@sec.gov. Please include 
File No. SR-OCC-2012-04 on the subject line.
     Paper comments should be sent 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-2012-04. This 
file number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 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 filings will also be available for 
inspection and copying at the principal office of OCC and on OCC's Web 
site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_04.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-2012-04 and should be submitted on or before April 
27, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-8270 Filed 4-5-12; 8:45 am]
BILLING CODE 8011-01-P