Document ID: SEC-2007-0648-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Options Clearing Corp.
Posted Date: 2007-05-08T04:00Z

[Federal Register: May 8, 2007 (Volume 72, Number 88)]
[Notices]               
[Page 26191-26192]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my07-116]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55686; File No. SR-OCC-2006-21]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to 
Membership Requirements

May 1, 2007.

I. Introduction

    On November 15, 2006, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 \1\ and Rule 19b-4 
thereunder \2\ a proposed rule change to modify certain OCC By-Laws and 
Rules relating to membership requirements. The proposed rule change was 
published for comment in the Federal Register on January 12, 2007.\3\ 
No comment letters were received. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 55047 (Jan. 5, 2007), 72 
FR 1571.

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[[Page 26192]]

II. Description of the Proposal

1. Interpretation and Policy .03

    Prior to this rule change, Interpretation and Policy .03 to Article 
V, Section 1, of OCC's By-Laws required applicants for membership to 
employ two key operations employees on a full-time basis. This 
requirement was intended to ensure that an applicant maintains 
sufficient staff to fulfill its obligations as a clearing member. 
However, several recent applicants for clearing membership have had 
difficulty meeting this requirement because their entire staff was 
employed by an affiliate of the applicant (i.e., a parent or related 
organization) rather than by the applicant itself. While these 
applicants entered into employee leasing arrangements in order to 
comply with OCC's policy, OCC decided to reevaluate the policy in light 
of the fact that it had proved burdensome to a number of applicants.
    OCC understands that it is not uncommon for some entities of an 
affiliated corporate group to outsource certain or all functions to 
another entity of the corporate group and let the latter be the sole 
employer of the people who perform those functions. In situations of 
that nature, OCC concluded that there is not the same reason to be 
concerned about whether the applicant will have adequate staffing as in 
cases where the applicant relies on an unaffiliated third party for 
staffing. OCC therefore is modifying its policy in order to provide 
greater flexibility to recognize this alternative employment structure 
by amending Interpretation and Policy .03 to Article V, Section 1, to 
permit the Membership/Risk Committee (``Committee'') to waive the 
requirement that an applicant employ two key operations employees on a 
full-time basis if the daily operations of the applicant are conducted 
by staff employed on a full-time basis by an entity affiliated with 
such applicant. OCC believes that the Committee's authority to waive 
such requirement is consistent with its existing authority to waive the 
requirement that an applicant employ at least one full-time person who 
is registered as a ``Limited Principal--Financial and Operations'' or 
comparable registration requirement, as applicable.

2. Rule 309

    OCC is also amending Rule 309 by adding new paragraph (f) to 
clarify that if an operationally capable clearing member proposes to 
become a managed clearing member (i.e., outsource certain of its 
obligations as a clearing member to another clearing member [``managing 
clearing member'']), the applicant must obtain prior approval from the 
Committee. Prior to this rule change, Interpretation and Policy .04 to 
Rule 309 primarily contemplated the use of facilities management 
agreements by applicants for membership rather than by existing 
clearing members. Nonetheless, OCC has always interpreted its By-Laws 
and Rules as requiring prior Committee review and approval of all 
facilities management agreements, including those proposed to be 
entered into by operationally capable clearing members. The amendment 
to Rule 309 makes this interpretation explicit.

3. Rule 901

    OCC is amending Rule 901 to provide that a clearing member's 
appointment of another clearing member or CDS Clearing and Depository 
Services Inc. (``CDS'') \4\ for purposes of effecting settlements of 
exercised or matured cleared securities may not be terminated until 
after the 30th calendar day following notice to OCC of such 
termination.\5\ Prior to this rule change, clearing members were 
required to provide three business days notice of terminating such 
appointments. However, OCC concluded that three business days was 
insufficient time for OCC to determine whether or not the clearing 
member has made appropriate alternative settlement arrangements. 
Accordingly, OCC is changing the notice period to be consistent with 
the notice period required to advise OCC of the termination of a 
facilities management agreement.\6\
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    \4\ CDS is the successor organization to Canadian Depository for 
Securities Ltd. OCC's By-Law definition of CDS is being amended to 
reflect this organizational change.
    \5\ OCC surveyed appointed clearing members that effect NSCC 
settlements for nonaffiliated clearing members and CDS to ascertain 
their views regarding the proposed change in the notice period for 
terminating such appointments. There were no objections to the 
proposed change.
    \6\ Conforming changes have been made to the related appointment 
forms, which are attached as Exhibits 5A and 5B to the proposed rule 
filing.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a registered clearing agency. In particular, 
the Commission believes the proposal is consistent with the 
requirements of Section 17A(b)(3)(F),\7\ which, among other things, 
requires the rules of a clearing agency to assure the safeguarding of 
securities and funds that are in the custody or control of the clearing 
agency or for which it is responsible. Although OCC is giving the 
Membership/Risk Committee the ability to waive the requirement that an 
applicant employ two key operations employees on a full-time basis, the 
revised requirement that allows an applicant to have full-time 
operational staff employed by an affiliate of the applicant should 
provide OCC with the practical flexibility to permit such arrangements 
and still have reasonable assurance that its members are operationally 
sound. Moreover, specifying that a clearing member's appointment of 
another clearing entity to effect settlement on its behalf can not be 
terminated until after the 30th calendar day following notice to OCC of 
such termination should provide OCC with an appropriate amount of time 
in which to determine that the clearing member has made alternative 
settlement arrangements.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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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 \8\ and the 
rules and regulations thereunder.
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    \8\ 15 U.S.C. 78q-1.
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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-2006-21) be, and hereby 
is, approved.\9\
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    \9\ 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 Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-8735 Filed 5-7-07; 8:45 am]

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