[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82431-82432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33120]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43755; File No. SR-OCC-00-12]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Relating to The Creation of a
Program to Relieve Strains on Clearing Members' Liquidity in Connection
With Settlements
December 20, 2000.
Pursuant to 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ notice is hereby given that on November 27, 2000, 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 parties.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organizations Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change proposes a program to relieve strains on
clearing members' liquidity in heavy expiration months by reducing
inefficiencies in the exercise settlement process.\2\
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\2\ A copy of the text of OCC's proposed rule change and the
attached exhibits are available at the Commission's Public Reference
Section or through OCC.
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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.\3\
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\3\ 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
1. Background
Under the Third Amended and Restated Options Exercise Settlement
Agreement (the ``Accord'') dated February 16, 1995, between OCC and
National Securities Clearing Corporation (``NSCC''), OCC and NSCC each
guarantee that if the other sustains a loss on liquidity of a common
member \4\ with pending settlement activity at NSCC resulting option
exercises and assignments, it will make a payment to the other in an
amount (which may be zero) determined by a formula set forth in the
Accord.\5\
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\4\ The Accord also covers situations where an OCC clearing
member that is not a NSCC member settles option exercises and
assignments through an NSCC member.
\5\ For a description of the Accord's formula, refer to
Securities Exchange Act Release No. 37731 (September 26, 1996), 61
FR 51731.
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Under the Accord, NSCC has until 6:00 a.m. Central Time on the day
after an option exercise settlement date (E+4) to notify OCC that is
has ceased to act or may cease to act for a common member. If NSCC
fails to give such notice by that time, OCC is released from its
guarantee obligation with respect to transactions for which E+3 was the
settlement date. Because OCC is not released from its guarantee
obligation until the morning of E+4, it must continue to hold margin on
assignments settling on E+3 until E+4. This means that assets that a
clearing member has deposited with OCC as margin for pending
assignments cannot be used to settle or to finance settlement of those
assignments. Instead, the clearing member must find other sources of
financing and that can strain some clearing members' liquidity in
months with heavy exercise and assignment activity.
2. The Proposed Rule Change
In an effort to reduce the strains on liquidity resulting from the
after-the-fact release of margin on pending assignments, OCC, in
conjunction with NSCC and The Depository Trust Company (``DTC''), has
worked out a program to allow OCC clearing member to withdraw equity
securities \6\ deposited with OCC as margin and pledge them to DTC
participant banks as collateral for loans. The proceeds of such loans
would be disbursed by the bank directly to OCC and used to discharge
settlement obligations of the clearing member at NSCC that were
guaranteed by OCC. OCC's liability exposure to NSCC under the Accord
would be correspondingly reduced as would OCC's need to continue to
hold margin until E+4.
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\6\ OCC plans to allow the use of Government securities as well
once the necessary systems are developed. At December 31, 19999,
OCC's margin deposits included over $36 billion in equities compared
to $9 billion Governments.
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The program would work as follows:
On the morning of E+3, a clearing member would determine
from OCC the amount of the loan that it could collateralize with
securities held by OCC as a margin. That amount would be no less than
the value assigned by OCC to such securities for margin purposes \7\
and would be no more than the lesser of (i) the margin requirement for
the account from which the securities were to be withdrawn \8\ and (ii)
the amount of OCC's guarantee exposure to NSCC (assuming that the
clearing member's NSCC positions liquidated to a deficit).\9\
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\7\ For example, if the clearing member had equity securities
with a market value of $10 million on deposit in an account with OCC
as margin (which OCC would value at $7 million for margin purposes),
the amount of the bank loan collateralized by those securities would
have to be no less than $7 million. If the loan amount were, for
example, $6 million, OCC would be exchanging $7 million worth of
margin for a reduction of only $6 million in its guarantee exposure
to NSCC,
\8\ If, in the preceding example, the margin requirement in the
relevant account were only $6 million, the loan would be limited to
that amount and OCC would only release equity securities with a
market value of $8.57 million ($6 million in margin value). The
remaining $1.43 million of securities would be excess margin, which
the clearing member would be free to withdraw and pledge separately.
\9\ If, in the preceding examples, OCC's guarantee exposure to
NSCC were only $5 million, the loan would be limited to that amount
and OCC would only release equity securities with a value of $7.14
million ($5 million in margin value). If the loan amount were in
excess of $5 million, OCC would be releasing margin worth more than
$5 million for a reduction of only $5 million in its guarantee
exposure.
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The clearing member would then contact its bank and
arrange for the loan. When the terms of the loan were agreed upon, the
clearing member would use a new Participant Terminal System screen
developed by DTC to confirm both to the bank and to OCC the amount of
the loan and the quantity and description of the securities to be
withdrawn from OCC and pledged to the bank as collateral. The bank and
OCC would use that information to validate the loan request.
When both the bank and OCC approved the loan, DTC would
transfer the securities from a ``pledged to OCC'' field in the clearing
member's DTC account to a special OCC account at DTC. From that
account, the securities would be pledged to the bank against receipt of
the loan proceeds. The proceeds would thus be paid directly to OCC
without passing through the hands of the clearing member.
Upon receipt in the special OCC account, the loan proceeds
would automatically be paid over to NSCC for the benefit of the
clearing member resulting in a corresponding reduction in OCC's
guarantee exposure to NSCC under the Accord.
[[Page 82432]]
At the end of the day, DTC would automatically transfer
the securities from a ``pledged to bank'' field in the special OCC
account to a ``pledged to bank'' field in the clearing member's DTC
account, leaving the clearing member in the same position as if it had
been able to pledge the securities to the bank without OCC's
intermediation.
Upon allowing securities to be withdrawn and pledged under the
program, OCC would reduce its margin requirement in the account from
which the securities were withdrawn by an amount equal to the value
assigned to the securities for margin purposes. The account would,
however, be required to be fully margined the next morning.
Initially, clearing members will be permitted to withdraw and
pledge securities held by OCC as margin only on settlement dates for
exercises of expiring equity options. OCC may at a future date decide
to make it available on other exercise settlement dates as well.
3. Timing
Historically, the heaviest volume of option expirations, and hence
exercises, occurs in January. In January 2000, 26,099,346 option
contracts expired, accounting for 41.9% of total open interest. Open
interest as of November 21, 2000, included 26,378,070 contracts
expiring in January 2001 (43.2% of total open interest). OCC believes
that it is important to have the new program in place in time for the
January 2001 expiration to help relieve potential strains on liquidity
resulting from the large volume of exercise activity expected to occur
at that time.
The proposed rule change is consistent with the requirements of
section 17A of the Act \10\ and the rules and regulations thereunder
applicable to OCC because it would reduce inefficiencies in the
exercise settlement process and relieve strains on clearing members'
liquidity in heavy expiration months thereby promoting the safeguarding
of securities and funds.
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\10\ 15 U.S.C. 78q-1.
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(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 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of OCC. All submissions
should refer to File No. SR-OCC-00-12 and should be submitted by
January 18, 2001.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33120 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M