[Federal Register Volume 66, Number 167 (Tuesday, August 28, 2001)]
[Notices]
[Pages 45351-45356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21652]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44727; File No. SR-OCC-2001-07]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Amendments and Order Granting Accelerated Approval of a
Proposed Rule Change Relating to Clearing Security Futures
August 20, 2001.
I. Introduction
On June 29, 2001, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-OCC-2001-07 pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and on July 9,\2\ August
13, and 17, 2001, amended the proposed rule change. Notice the proposal
was published in the Federal Register on August 3, 2001.\3\ No comment
letters have been received to date. For the reasons discussed below,
the Commission is granting accelerated approval of the proposed rule
change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ The purpose of the July 9 Amendment was to correct citations
to the Act.
\3\ Securities Exchange Act or Release No. 44610, (July 27,
2001), 66 FR 40766.
---------------------------------------------------------------------------
II. Description
A. Introduction
On June 15, 2001, the Commission approved amendments to OCC's By-
Laws specifying the types of markets for which OCC would clear security
futures and describing the general terms on which it would clear for
those markets.\4\ This order approves a comprehensive
[[Page 45352]]
set of rule changes under which OCC will be permitted to clear and
settle transactions in security futures.
---------------------------------------------------------------------------
\4\ Securities and Exchange Act Release No. 44434 (June 15,
2001), 66 FR 33283 [SR-OCC-2001-05].
---------------------------------------------------------------------------
These rules are intended to be as generic as possible to cover any
security futures product that may be developed by the markets clearing
through OCC. Nevertheless, it may be necessary in the future for OCC to
amend or supplement these rules to accommodate specific products that
are developed by the markets.
B. Overview of Security Futures Rules
Amendments to the By-Laws and Rules are in the same general format
that has previously been used for new products. The proposed rules will
provide for clearance and settlement of nearly the full range of
security futures products that can be traded under the Commodity
Futures Modernization Act (``CFMA''). These include physically-settled
futures on individual stocks as well as cash-settled futures on
individual stocks and on narrow-based stock indices. A further rule
change would be required in order for OCC to clear options on security
futures.
The security futures provided for in this rule filing will have the
same basic terms as futures contracts trading in the traditional
futures markets under the jurisdiction of the CFTC. A futures contract
is entered into at a ``contract price'' agreed upon between the buyer
and seller in the futures market. The contract price represents the
notional price or value at which the underlying stock or index will be
purchased and sold at ``maturity'' of the contract if the contract has
not been offset through an earlier closing transaction. The contracts
will be marked to the daily closing price of the futures contract
through ``variation payments'' that are passed through OCC from the
buyer to the seller or vice versa depending upon the direction of the
market movement. Intraday variation settlements are also provided for
although it is OCC's present intention to effect intraday variation
settlements only on an exception basis when market conditions or other
factors make such settlements necessary or desirable. A deposit of
``original'' or ``risk'' margin will be required from both purchasers
and sellers to cover the maximum anticipated variation payment that
would likely be required based on the clearing member's positions. This
calculation will be made based upon all of the positions in the
particular account of the clearing member using OCC's TIMS system for
portfolio margining.
At maturity of the contract, a ``final variation payment'' will be
determined based on a ``final settlement price.'' The final settlement
price will be the price or level of the underlying security at a
specified point or interval in time, which could be either the closing
price or a volume-weighted average price on the last day of trading of
the futures contract or an opening price on the following day. In the
case of cash-settled futures, all rights and obligations under the
contract will be satisfied by the final variation payment. In the case
of physically-settled security futures, delivery of and payment for the
underlying stock will be effected pursuant to the same basic rules
currently applicable to settlement of stock option exercises. The price
to be paid by the purchaser is referred to as the ``aggregate purchase
price'' and is equal to the final settlement price times the number of
shares to be delivered. Effectively, delivery occurs at the current
market price of the stock, but the net of the variation payments paid
and received over the period that the futures contract was held puts
the buyer and seller in the economic position of having purchased and
sold the security at the original contract price.
Because a security future is both a ``security'' as defined in the
Act and a ``contract for sale of a commodity for future delivery'' as
defined in the Commodity Exchange Act (``CEA''), security futures are
subject to the joint jurisdiction of the Commission and the CFTC. One
result of this novel arrangement is that security futures may in
certain circumstances be carried by clearing members for their
customers in futures ``customer segregated funds'' accounts subject to
the CEA and rules thereunder, and in other circumstances they may be
carried in securities accounts subject to the Securities Investor
Protection Act and Commission Rule 15c3-3 as well as other customer
protection rules under the Act. When security futures are carried in
segregated funds accounts at the member firm level, OCC has assumed
that the CFTC will require that they also be carried in segregated
funds accounts at the clearing level. Accordingly, OCC is adding a
``customer segregated funds'' account to the types of accounts that a
clearing member is able to carry at OCC.
OCC also is permitting futures clearing organizations (``derivative
clearing organizations'' registered as such under the CEA) to carry
omnibus accounts at OCC for the purpose of clearing transactions in
security futures on behalf of their clearing members that are not
clearing members of OCC. A futures clearing organization could
establish one such account for clearing its members' proprietary
transactions and a second segregated funds account for members'
customer transactions.
Set forth below is a more detailed description of specific changes
and additions to the By-Laws and Rules. Some changes, however, seemed
sufficiently obvious in their purpose and effect so that no further
explanation has been provided.
C. Summary of By-Law Changes
1. Definitions
Because the various terms needed to describe security futures are
used throughout the By-Laws and Rules, OCC is including all necessary
new definitions in Article I of the By-Laws. Necessary terms have been
adopted and defined to correspond as closely as possible to the
terminology used in the existing futures markets while also being
consistent with terminology in OCC's rules. Certain terms were included
in SR-OCC-2001-05 and are referred to above. Others are added by this
rule change, and various existing definitions are amended so that they
apply to security futures as well as options. Most of these definitions
are self-explanatory, but a few terms that are of particular
significance are described below. Certain defined terms are discussed
later in connection with the substantive provisions of the rules where
they are used.
The terms ``class'' and ``series'' are amended in order to apply to
futures even though such terms are not widely used, if at all, in the
futures industry. Such terms are consistent with securities terminology
and OCC's existing rules. As in the case of options, the term
``series'' is used to define a set of security futures contracts that
are mutually identical and therefore fungible. The term ``series
marker'' is used to describe a unique identifier that may be assigned
to the particular market on which a series is traded. Because the
series marker is considered a term of the security future, the effect
of the marker is that contracts of a series bearing that unique series
marker are not fungible with contracts traded on another exchange even
if those contracts have otherwise identical terms. Whether or not a
series of security futures will bear a series marker is a decision to
be made by the market that trades the series.
The term ``contracts'' has been made lowercase to reflect a more
generic definition. It is now used to refer to any ``cleared
security,'' which includes security futures as well as broad-based
index futures that are included in cross-margining arrangements. This
broad usage is reflected primarily in the
[[Page 45353]]
margin rules in Chapter VI of OCC's Rules.
The definitions of ``nominated correspondent'' and ``nominating
clearing member'' are being deleted as this particular agency
relationship is no longer used. References to these terms are deleted
throughout the By-Laws and Rules.
2. Clearing Members Qualifications
The Interpretations and Policies following Article V, Section 1 of
the By-Laws are amended to adapt those requirements to clearing members
that clear security futures. Because some of those clearing members may
be futures commission merchants (``FCMs'') primarily regulated as such
and only notice-registered as broker-dealers under Section 15(b)(11)(A)
of the Act, it is necessary to provide alternative membership
requirements in certain cases. For example, in the area of experience
and competence, OCC has proposed to retain some flexibility in this
regard by saying that such clearing members must meet ``such other non-
discriminatory standards of experience and competence as the
Corporation may prescribe.'' In addition, interpretation .06 under
Section 1 provides that OCC may give expedited review and may waive
certain non-financial criteria where appropriate in order to admit
affiliates of existing clearing members for the sole purpose of
clearing security futures. Some clearing members do their futures
business through affiliates, and OCC believes that it is appropriate to
give special consideration to such affiliates to the extent that their
affiliation with an existing clearing member provides access to
competent and experienced personnel able to assist the affiliate if
necessary to enable the affiliate to meet OCC's operational
requirements.
3. Accounts for Clearing Security Futures.
OCC is amending Article VI, Section 3 of the By-Laws to provide an
additional account, the segregated futures account, for the clearance
of transactions of ``futures customers,'' which are defined in Article
I to mean persons whose positions are carried by an FCM in a futures
account required to be segregated under Section 4d of the CEA. A
clearing member might carry customer security futures positions in a
futures account rather than a securities account either because it is
primarily regulated as a FCM and does not carry securities accounts it
is a dual registrant (fully registered both as an FCM and a broker-
dealer) and the clearing member, or the clearing members and its
customer, choose to carry security futures in a futures account.
The segregated futures account is essentially like a combined
market-maker account in that the positions of different futures
customers are commingled in it, and OCC's lien extends to all
positions, margin, and other assets in the account. OCC can liquidate
the account to a single net debt or credit in the event of a clearing
member default and can therefore margin it on a net basis as it does a
combined market-marker account. Unlike the regular customers' account,
which is a securities account, there is no need to hold ``fully paid
and excess margin securities'' free of any liens because the
customers's futures account at the clearing firm level is not subject
to Commission Rule 15c3-3.
4. General Clearance Rules
Provisions of Article VI, Section 3 relating to the ``firm
account'' have been modified to provide that it may only be used for
transactions of the firm itself and persons who are not customers
either for purposes of the CEA and CFTC regulations or for purposes of
the securities laws and regulations, principally Rule 15c3-3 and the
hypothecation rules.\5\ In addition to the foregoing changes, and
largely unrelated to security futures, OCC is amending Section 3 to
eliminate references to ``specialists,'' which references are rendered
unnecessary by changes in the Article I definition of ``market-maker''
to include specialists. In addition, OCC is proposing to eliminate the
stock specialist and registered trader accounts because such accounts
are no longer used. The definition of a ``market-maker'' has been
expanded to include all types of proprietary trading done pursuant to
rules that are intended to ensure that such trading serves a market
function. This change will allow positions of stock specialists and
registered traders to be carried in a market-maker account.
---------------------------------------------------------------------------
\5\ 17 CFR 240.8c-1, 15c2-1.
---------------------------------------------------------------------------
Sections 4 through 9 of Article VI of the By-Laws are amended to
make them applicable to security futures and to eliminate certain
redundancies and unnecessary material. A new paragraph (4) has been
added to Section 10, which relates to the establishment of terms of
cleared securities and the opening of new series, in order to provide
for security futures. In addition, the provisions setting deadlines for
the various markets to notify OCC of the opening of new series in any
cleared security have been updated and consolidated in a new paragraph
(e), which permits OCC to announce such deadlines from time to time.
The advance notice that is actually currently required by OCC is
generally much shorter than the deadlines specified in Section 10 as a
result of improvements in efficiency that make the longer notice
periods unnecessary. Sections 11 through 18 are amended to apply to
security futures.
Section 19 of Article VI, which relates to shortages of underlying
securities, makes parallel provisions for physically-settled security
futures. It is worth noting that in the case of security futures the
economic result of the futures contract is primarily realized through
the stream of variation payments and that the stock is delivered
against current market value at maturity of the future. Accordingly, if
a shortage of underlying securities makes delivery impossible or unduly
burdensome, OCC may elect simply to terminate delivery and payment
obligations and let the final variation payment completely satisfy all
rights and obligations under the contract. If, for some reason, the
circumstances suggest that the final settlement price should be
adjusted in any way to reflect that no delivery will occur, the
provisions of amended Section 19 give OCC the authority to do so.
5. New Article XII of the By-Laws
This article sets out some basic provisions for security futures,
including both physically-settled and cash-settled security futures.
The general rights and obligations of buyers and sellers of security
futures, including the obligation to make and the right to receive
variation payments, are set forth here.
Section 3 pertains to adjustments of the terms of outstanding
security futures in response to certain events affecting the underlying
securities that make adjustments necessary or appropriate in the
interest of fairness to buyers and sellers. Section 3 sets out detailed
adjustment rules for security futures while the detailed provisions for
adjustment of narrow-based index futures are set forth in Section 4.
Adjustments to security futures will be necessary from time to time
to reflect certain corporate events affecting the underlying stock.
Such adjustments will be determined by OCC rather than by an
``adjustment panel'' under the provisions of existing Article VI,
Section 11 of the By-Laws. However, the adjustment rules for security
futures are substantially parallel to the adjustment rules for stock
options, and the adjustment rules for stock options, and the adjustment
rules in Section 4 for
[[Page 45354]]
narrow-based index futures are parallel to the adjustment rules for
index options. OCC anticipates a policy of coordinating discretionary
adjustment determinations for consistency between adjustments of
security futures and option contracts on the same underlying stock to
the fullest extent practicable.
Futures contracts are ordinarily like European-style options in the
sense that there is no opportunity to ``exercise'' or terminate the
contract prior to its expiration or maturity date (other than through
closing transactions in the market). There are currently no European-
style options on individual stocks, and security futures may therefore
be adjusted differently than options on the same securities. For
example, where a warrant or right is distributed that expires before
the maturity date of a security future or expiration date of a stock
option, the security future may not be adjusted to reflect that
distribution whereas an American-style option on the same security
ordinarily would be adjusted.
Where the adjustment rules call for adjustment in the exercise
price of an option, the corresponding adjustment rules for futures
contracts call for a one-time-only adjustment in the last settlement
price established before the adjustment is effective for use in
determining the correct daily variation payment for the adjusted
contracts. Cash-settled security futures ordinarily will be adjusted in
accordance with the same rules as physically-settled security futures
and options. Where physically-settled contracts are adjusted by
adjusting the underlying to include distributed property, the
appropriate adjustment to the cash-settled contract could be different
if there is no public market in which the distributed property will be
traded for purposes of establishing market values thereafter.
Article XII, Section 5, which anticipates situations in which a
market price for an underlying stock or a current value of an
underlying index might be unavailable or inaccurate, is essentially
parallel to the provisions of Article XVII, Section, 4 which applies to
index options. The rule applies not only to narrow-based index futures
but also to cash-settled and physically-settled security futures. The
reason for this is that security futures, unlike stock options, require
a determination of ``final settlement price'' at maturity. Whereas
settlement of an exercised stock option is effected by delivery of the
stock against the exercise price of the option, settlement at maturity
of a security futures involves a final variation payment based on the
final settlement price, which is also the price against which the
underlying stock is delivered if the future is physically-settled.
Section 6 of Article XII provides that the final settlement price
for any security future at maturity is determined by a method approved
by the market listing the security future. It could be based on a price
or level of the underlying interest at a point in time, such as a
closing value or opening value for a stock or index on the maturity
date or the following business day, or it could be based on an average
of prices, such as the volume-weighted average price for an underlying
stock on the maturity date.
D. Rules
1. Financial Requirements for Clearing Members
Financial requirements are substantially the same for all clearing
members, whether or not they clear transactions in security futures.
However, because OCC will admit clearing members that are merely notice
registered as broker-dealers under Section 15(b)(11)(A) of the Act and
are primarily regulated as FCMs under the CEA and the rules of the
CFTC, OCC financial requirements in Rule 301 that are based on
Commission financial requirements are being supplemented to provide
appropriate references to corresponding CFTC requirements. It will be
OCC's policy as nearly as practicable to provide substantively
identical requirements for all clearing members whether their primary
regulator is the Commission or the CFTC.
2. Trade Reporting and Matching
Trade reporting and matching will occur for security futures in
essentially the same way as for options. Rule 401 sets forth the
information required to be specified in matched trade reports. As noted
above, such information in the case of security futures may include, if
a market so elects, a series marker that prevents contracts traded on
that market from being treated as fungible (except for margin and
expiration settlement purposes) with otherwise identical futures
contracts traded on other markets cleared by OCC. Following the
practice in the futures markets, OCC will not require that matched
trade information submitted by a market identify each trade as opening
or closing. OCC understands that some markets may not have systems
capable of making such identifications. If a market elects to submit
trade information without identification as whether the transaction is
opening or closing, OCC will treat all transactions a opening
transactions. Each clearing member must then submit gross position
adjustment information at the end of the day to reduce its positions to
reflect the actual open interest in accounts carried by the clearing
member. Those procedures are consistent with current practice on many
futures exchanges.
3. Variation Settlement
Daily variation settlements and final variation settlements will be
netted by account with other daily cash settlements and settled in
accordance with OCC's usual cash settlement procedures. Chapter V of
OCC's rules is being renamed. ``Daily Premium and Futures Variation
Settlement.'' The rules in Chapter V are being modified as necessary to
include futures variation payments.
4. Margins
Rules 601 and 602 are being amended to include security futures in
the calculation of the ``risk margin'' required for each account of a
clearing member. The term ``risk margin'' is replacing the term
``additional margin'' for options as well as security futures because
OCC believes it is more descriptive. Risk margin, which is sometimes
known as ``initial margin'' in the futures markets, is the margin
intended to cover one day's anticipated market movement. Security
futures (whether physically-settled or cash-settled) will be margined
under Rule 601, which is applicable to equity options. Narrow--based
futures will be margined under Rule 602, which is applicable to index
options and other non-equity options. Because OCC's margin systems
already provide for risk-based margining of index futures contracts in
cross-margining accounts, accordingly this rule change merely extends
the margin rules to cover security futures and makes other minor
changes to adapt the rule to security futures. There is no substantive
change in the way in which margin will be calculated. Minor changes in
other rules in Chapter VI are being made to adapt the rules for
security futures.
OCC will not, at least initially, accept escrow deposits of
underlying securities to collateralize positions in security futures.
OCC has no present plans to include security futures in any cross-
margining arrangement or to allow security futures to be pledged under
Rule 614.
Because each long and short position in a futures contract
represents both an asset and a liability, futures contracts should
never be deemed to be ``fully
[[Page 45355]]
paid securities'' or ``excess margin securities'' within the meaning of
Commission Rule 15c3-3. Therefore, neither long nor short positions in
security futures will be required to be ``segregated'' under OCC Rule
611.\6\
---------------------------------------------------------------------------
\6\ Rule 611 allows clearing members to comply with Commission
Rule 15c3-3 by holding customers' fully paid long option positions
free of OCC's lien. (The rule allows clearing members to
``unsegregate'' long positions that are component of customer
spreads, which has the effect of pledging those positions of OCC in
exchange for reduced margin.)
---------------------------------------------------------------------------
5. Delivery of and Payment for Underlying Stock
The provisions of Chapter IX of OCC Rules relating to delivery and
settlement in connection with exercises of stock options are being made
applicable to physically-settled security futures without substantive
change. As in the case of stock option exercises, delivery, and
settlement of security futures will ordinarily take place through the
National Securities Clearing Corporation (``NSCC''). The only
significant difference is that in the case of security futures the
stock will settle at the NSCC against the final settlement price, which
will be essentially the current Market value of the stock as of the
date when the futures contract matures. Because option exercises settle
at the exercise price, which can be deep in the money, settlement of
option exercises imposes risks on NSCC that have been covered in an
elaborate collateral sharing arrangement known as the ``NSCC Accord.''
OCC anticipates that it will have a much simpler agreement with NSCC
for stock settlements arising from security futures contracts. Delivery
obligations arising from security futures will be netted, but they will
not be netted with exercise settlements of option contracts because of
the differences in the arrangement with NSCC under which the two types
of transactions are settled.
The provisions in Chapter IX relating to stock settlements that
cannot be completed through NSCC have been adapted to apply to
settlements arising from security futures as well. Similarly, the same
basic buy-in and sell-out rules have also been made applicable.
6. Clearing Fund Contributions
Security futures will be covered by the same clearing fund that
stands behind all options cleared by OCC. Contributions of individual
clearing members to the fund are based on the proportion that their
average daily margin requirement bears to the average daily margin
requirements of all clearing members, subject to a minimum contribution
of $150,000. A special provision is being added to Rule 1001, however,
to provide that an affiliate of an existing clearing member that
becomes a clearing member of OCC for the purpose of clearing
transactions in security futures will not be subject to the $150,000
minimum clearing fund contribution as long as the existing clearing
member is in compliance with OCC clearing fund requirements and the
affiliate is in compliance with its calculated clearing fund
requirement. OCC believes that it would be inappropriate to require an
additional $150,000 payment merely because a clearing member chooses,
or may be forced because of systems or for other reasons, to clear
security futures through an affiliate.
7. Suspension of Clearing Members and Liquidation of Accounts
The provisions of Chapter XI of OCC's rules will apply to clearing
members carrying positions in security futures in essentially the same
way as they apply to clearing members carrying positions in options.
Security futures will be liquidated subject to the same basic rules as
options. The proposed changes in the rules are intended to apply as
precisely as possible the logic of the existing rules to the
liquidation of security futures. This task is complicated by the fact
that security futures are quite different from options in ways that
have important consequences for the structure of these rules. For
example, a security future is both an asset and a liability, and
accordingly the ``seller'' of a security future, unlike the writer of
an option, may be making rather than receiving a payment. Both short
positions and long positions in security futures are treated as
``securities'' under these rules, and hence the proceeds from positions
in security futures, whether resulting from a closing transaction or
from a variation payment, are treated like premiums received on the
closing sale of an option. Since, as noted above, futures in the
(securities) customers' account are always ``unsegregated'' (for
purposes of Rule 611), there is no need for rules relating to the
disposition of ``segregated'' security futures.
OCC is also taking this opportunity to clarify in Rule 1105(d)
that, where a charge is appropriately made against a market maker
account, it will be made against that account and only any shortfall is
to be charged against the Liquidating Settlement Account. This is not a
substantive change as the rules and the provisions of the market maker
account agreements have always been interpreted in this way.
8. New Chapter XIII
Following past practice for new products, OCC is adding a new
chapter to its Rules relating to security futures. Rule 1301 sets forth
the method for determining the amount of variation payments, including
the final variation payment. It is anticipated that variation
settlement will be affected only once each business day and that OCC
would respond to unusually large intraday price moves by requiring
additional risk margin. However, the proposed rules will give OCC the
flexibility to effect an additional, intraday variation settlement if
OCC deems such payments to be appropriate in unusual market conditions
or to allow OCC to coordinate its actions with those of other clearing
organizations.
Rule 1302 provides for delivery of stocks underlying physically-
settled security futures that have reached maturity. This is
accomplished primarily by cross-reference to the rules in Chapter IX.
Rule 1303 provides that ``associate clearinghouses'' may clear
transactions in security futures through OCC on an omnibus basis on
behalf of their members that are not clearing members of OCC. Associate
clearinghouses will be treated like any other clearing member for most
purposes under the rules. OCC anticipates that one or more futures
clearing organizations will become associate clearinghouses of OCC. The
agreements under which these associate clearinghouses will operate have
not yet been negotiated. There is precedent for such arrangements,
however, in that OCC had such a relationship with the clearinghouse for
the European Options Exchange (``EOE'') as a time when OCC-issued
options were traded on EOE.\7\
---------------------------------------------------------------------------
\7\ Securities Exchange Act Release No. 24832 (August 21, 1987),
52 FR 32377. The Commission notes that the order required OCC to
file with the Commission under Rule 19b-4 of the Act any new
international market agreement. The Commission expects OCC to
undertake the same obligation with regard to future operating
agreements it makes with any associate clearinghouse.
---------------------------------------------------------------------------
E. Amendments
1. August 13, 2001, Amendment Submission
On August 13, 2001, OCC filed with the Commission several
amendments to its proposed rule changes. OCC proposed changes to some
definitions and added a new section to its By-Laws in effort to address
risks related to clearing ``exchange for physical'' (``EFP'')
transactions. OCC is reserving the right to reject such transactions in
the event a clearing member that is a party to an EFP trade defaults on
its
[[Page 45356]]
obligation to meet its initial variation payment on the contract.
A number of provisions are being added to provide for flexibly
structured security futures, including a definition of ``flexibly
structrued'' in Article I of OCC's By-Laws. The definition of ``index
value determinant'' is modified to cover index futures as well as index
options and is therefore relocated to Article I of the By-Laws.
OCC added a provision to Article V, Section 1 of the By-Laws
stating that a clearing member registered as a broker-dealer under the
notice registration provisions of Section 15(b)(11) of the Act may not
clear transactions or carry positions in cleared securities other than
securities futures.
OCC added an interpretation following Article V, Section 1 to
reflect OCC's policy to allow stock clearing members to clear
physically settled stock futures and index clearing members to clear
cash-settled stock futures and index futures without further conditions
if they have such status on the day that OCC commences clearing
security futures. OCC believes that this ``grandfathering'' is an
appropriate accommodation to such clearing members and that additional
requirements are not needed.
OCC amended the new Sectio 3(f) of Article VI, Section 3 of the By-
Laws to make explicit that funds and assets held by OCC with respect to
the segregated futures account will be held in accordance with
applicable provisions of the CEA and regulations of the CFTC
thereunder.
At the request of the CFTC, OCC also added an interpretation
following Rule 301. The interpretation merely notes applicable
requirements under the CEA and does not represent any substantive
change.
Rule 401 is being amended to provide that an exchange transaction
in security futures may be identified by a security futures market in a
report of matched trades as constituting a block trade or an EFP. The
purpose of identifying trades in this way is to permit the security
futures markets and clearing members to comply with the applicable
provisions of the CEA and CFTC regulations and the rules of the
security futures markets.
Included within its amendments, OCC filed with the Commission the
security futures clearing agreement it proposes to enter into with the
Nasdaq LIFFE, LLC (``NLX''). The agreement is functionally similar to
the Restated Participant Exchange Agreement entered into between OCC
and the exchanges that clear options through OCC, but it omits
requirements relating to options registration and disclosure that do
not apply to security futures. OCC anticipates that it will enter into
substantially similar agreements with other markets for which it clears
securities futures transactions and will file these agreements with the
Commission when they have been negotiated.
OCC also filed with the Commission a revised form for use by an
appointing clearing member that wants to appoint or that has an
appointed clearing member to act for it in effecting settlements of
underlying securities. OCC also filed a revised form for use by a
Canadian clearing member that wants to appoint or that has appointed
the Canadian Depository for Securities, Limited to act for it in
effecting settlements of underlying securities. These forms have been
amended merely to make them applicable to security futures.
2. August 17, 2001, Amendment Submission
On August 17, 2001, OCC filed with the Commission a third amendment
to its proposed rule change. The main purpose of this amendment is to
allow OCC to treat block trades in the same manner as it does EFP
transactions due to the similar risks that both types of transactions
present to OCC. Block trades are now referenced in OCC's definition of
``commencement time,'' and OCC will be allowed to reject a block trade
in the event a clearing member that is a party to a block trade on its
obligation to meet its initial variation payment on the contract. In
addition, the amendment corrected certain non-substantive marking
errors that were contained in OCC's original filing.
III. Discussion
Section 19(b)(2)(B) of the Act 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. For the reasons set forth below, the Commission believes
that OCC's proposed rule change is consistent with OCC's obligations
under Section 17A(b)(3)(F) which requires that the rules of a clearing
agency be designed to promote the prompt and accurate clearance and
settlement of securities transactions.\8\
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In SR-OCC-2001-05 the Commission approved OCC's proposed rule
change amending its By-Laws to allow it to clear and settle security
futures effected on any national securities exchange or association
registered under Section 6(a) or 15A(a) of the Act or on any
``designated contract market'' that is registered as a national
securities exchange under Section 6(g) of the Act. The Commission's
order stated that OCC would need to file a complete set of rules for
clearing security futures before providing clearance and settlement
services for those markets when trading in security futures begins on
August 21, 2001. OCC's current proposed rule change is that complete
set of rules.
The Commission believes OCC's proposed rule change is consistent
with Section 17A(b)(3)(F) of the Act in that it should facilitate the
prompt and accurate clearance and settlement of transactions in
security futures by providing an efficient and reliable clearing
facility with a comprehensive set of rules governing the clearance and
settlement of these instruments.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of the filing because approval prior to the thirtieth day after
the date of publication of the notice of the filing will permit OCC to
be ready to clear security futures on August 21, 2001, the date that
principal-to-principal trading of security futures can begin under the
CFMA. The Commission is approving the proposed rule change prior to the
expiration of the comment period in order to permit OCC to be ready to
clear security futures on August 21, 2001, the date that principal-to-
principal trading of security futures can begin under the CFMA.
IV. 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 Section 17A of the Act and the rules and regulations
thereunder.
It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-2001-07) be and hereby
is approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
---------------------------------------------------------------------------
\9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21652 Filed 8-27-01; 8:45 am]
BILLING CODE 8010-01-M