[Federal Register: December 3, 2007 (Volume 72, Number 231)]
[Notices]
[Page 67992-67994]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03de07-127]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56846; File No. SR-OCC-2007-11]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to Expanding Sub-Accounts
November 27, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on September 28, 2007, 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. OCC filed the proposed rule change pursuant to
section 19(b)(3)(A)(iii) of the Act \2\ and Rule 19b-4(f)(4)
thereunder,\3\ so that the proposal was effective upon filing with the
Commission. 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\ 15 U.S.C. 78s(b)(3)(iii).
\3\ 17 CFR 240.19b-4(f)(4).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change would expand the functions associated with
sub-accounts.
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 such
statements.\4\
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\4\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The proposed rule change allows clearing members to maintain sub-
accounts for certain types of accounts for position reporting, margin,
collateral, and settlement purposes.\5\ These sub-accounts would be
gradually rolled out to interested clearing members and would be
available for firm lien accounts, customers' accounts, customers' lien
accounts, and customer segregated funds accounts. Clearing members
could continue to be allowed to maintain sub-accounts for combined
market-makers' accounts only for position reporting purposes although,
as described below, OCC's system sub-accounting function would also be
used to enable clearing members to maintain three separate combined
market-maker account types under the same clearing member number and to
have each account treated as a separate account for all purposes under
OCC's By-laws and Rules. Sub-accounting would not be available for
separate market-maker's accounts, firm non-lien accounts, or cross-
margin accounts other than the OCC internal cross-margin accounts,
which are segregated funds accounts in which OCC-cleared securities
options may be cross-margined with OCC-cleared futures products.
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\5\ In File No. SR-OCC-2005-14, OCC established an
interpretation to Article VI, Section 3 of OCC's By-Laws under which
clearing members may maintain sub-accounts with respect to any
account for position reporting purposes. However, this functionality
is currently available only with respect to combined market makers'
accounts.
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All sub-accounts for eligible accounts would be enabled to carry
positions in OCC-cleared contracts. However, as described in more
detail below, margin, collateral, and settlement functions could be
turned on or off at the clearing member's election except in combined
market-makers' accounts. A sub-account would have to be margin-enabled
in order to be collateral enabled and collateral-enabled in order to be
settlement-enabled.
If a sub-account is not ``margin enabled,'' the positions in the
sub-account will simply be included in the parent account for purposes
of calculating the margin requirement except that if a short option
position in the sub-account is covered by an escrow deposit or a
specific deposit or if the short position has been properly identified
in a spread instruction, the short position will not be included in the
margin calculation for the parent account. If a sub-account is margin
enabled, OCC will calculate and report to the clearing member a
separate margin requirement considering only the positions in the sub-
account. However, if the account is not collateral enabled or
settlement enabled, any margin deficiency will be added to the margin
requirement of the parent account. Any excess long option or other
asset value in a margin enabled sub-account will not be applied against
a margin deficit in the parent account. The provision of OCC Rule
604(b)(4), under which equity and debt issues of a single issuer may
not be valued in excess of 10% of the margin requirement of the account
in which the securities are deposited, will be separately applied to
sub-accounts that are margin enabled.
If a sub-account is ``margin and collateral enabled,'' collateral
deposited by a clearing member to satisfy its margin requirements can
be identified as being in the particular sub-account at the direction
of the clearing member. If the account lacks sufficient excess
collateral or has no excess, any margin deficiency will be added to the
margin requirement of the parent account. Accordingly, a clearing
member may withdraw collateral from the sub-account even if it has a
margin deficiency or a margin deficiency would be created provided that
the parent account has sufficient excess.
If a sub-account is ``margin, collateral, and settlement enabled,''
OCC will make separate daily cash settlement with respect to the sub-
account. The clearing member may but does not have to designate a bank
account for such settlements that is different from the bank accounts
used for other settlements. If there is a margin deficiency in the sub-
account, OCC will draft the clearing member's bank account for the
deficit without regard to any margin excess in the parent account.
Escrow deposits and specific deposits with respect to positions in a
sub-account must specify the sub-account regardless of whether the sub-
account is margin enabled. Similarly, spread instructions with respect
to any position carried in a sub-account must identify the sub-account
and will be given no effect unless both legs of the spread are in the
same sub-account regardless of whether the sub-account is margin
enabled.
The new sub-accounts are not intended as a mechanism for
identifying
[[Page 67993]]
positions or other property as belonging to individual customers of a
clearing member or as a substitute for a clearing member's own books
and records. Rather they are intended primarily to allow clearing
members more flexibility in structuring the interface between the data
they receive from OCC and their own systems. The new sub-accounts are
not intended to have any effect on the way in which clearing member
accounts would be liquidated in the event of the clearing member's
insolvency, and they will not impose any limits on OCC's use of
proceeds of collateral or positions that are credited to a particular
sub-account. For these purposes, each sub-account is simply a part of
the parent account to which it is attached, and proceeds will be pooled
and netted as and to the extent that they would be if the sub-accounts
did not exist and all positions and collateral were commingled and
carried in the parent account. Interpretation and Policy .02 to Article
VI, section 3 of OCC's By-Laws, which is not being amended, together
with Interpretation and Policy .03 to Article VI, section 3, which is
not being amended in relevant part, make this clear. Accordingly, the
sub-accounts are not intended to provide any segregation or separation
of property to satisfy legal requirements such as the customer
protection rules of the Commission or Commodities Futures Trading
Commission although, as noted, sub-accounts may be used within a
segregated account for purposes of convenience.
The ability of clearing members to use sub-accounts for margin,
collateral, and settlement purposes is operational and will not result
in lessened margin requirements. In fact, the use of the margin
enabling function could result in a higher margin requirement for
clearing members because positions in sub-accounts may not be offset
against positions in other sub-accounts for purposes of calculating a
clearing member's margin requirement, and a margin excess in one sub-
account may not be applied against a margin requirement in another sub-
account or in the parent account.
In addition to the expansion of functions of sub-accounts, OCC is
proposing to use the sub-account capability to facilitate clearing
members' ability to maintain separate types of combined market makers'
accounts. Under the existing account structure for market-maker
accounts, collateral can only be deposited with respect to an entire
range of market-maker accounts, including individual market-maker
accounts, all combined market-makers' accounts, and any sub-accounts.
If a clearing member wishes to clear market-maker business and carry
accounts for proprietary market-makers, associated market-makers, and
independent market-makers, OCC generally requires that the clearing
member open separate clearing member numbers so that proprietary,
associated, and independent market-maker collateral can be separated
under different clearing numbers. OCC is proposing to allow
proprietary, associated, and independent collateral with respect to
combined market-makers' accounts to be separated under the same
clearing member number. In addition, margin requirements would be
calculated separately with regard to the three account types. The
account types for proprietary, associated, and independent market-
makers would be treated as separate accounts in the event of a
liquidation. Other than with respect to this separation of proprietary,
associated, and independent market-maker accounts, use of the sub-
account capability with respect to market maker accounts would be
permitted only for position reporting purposes.
OCC proposes to expand Interpretation and Policy .03 under Article
VI, Section 3, which already addresses the sub-accounts available to
clearing members with respect to combined market-makers' accounts to
describe the expanded uses of sub-accounts and the accounts for which
they are available. This Interpretation and Policy would also be
expanded to require clearing members to specify the sub-accounts with
respect to which escrow and specific deposits, segregation
instructions, and pledges of securities are made. In addition, the
portion of the Interpretation and Policy clarifying that sub-accounts
will be disregarded in connection with the liquidation of a clearing
member would be simplified. OCC is proposing to add Interpretation and
Policy .04 under Article VI, Section 3 to explain the manner in which
the sub-account capability can be used to separate proprietary,
associated, and independent market-maker accounts under the same
clearing member number and to clarify that these three account types
would be treated as separate for all purposes under OCC's By-laws and
Rules. Interpretation and Policy .04 would also clarify that while
clearing members may deposit collateral with respect to all combined
market-maker account types under the same clearing member number,
collateral deposited for this purpose would be proprietary collateral
and would be treated as such for all purposes under the By-laws and
Rules.
OCC is proposing to add an Interpretation and Policy under Rule
501, which would also be applicable to Rules 502 and 503, to make it
clear that daily cash settlement amounts will be calculated separately
for sub-accounts that are settlement enabled. A similar Interpretation
and Policy would be added under Rule 601, and be applicable to all of
Chapter VI, to clarify the manner in which margin is calculated with
respect to sub-accounts and their parent accounts. OCC also proposes to
add an Interpretation and Policy to Rule 604 stating that the 10%
concentration limit of Rule 604(b)(4) would be separately applied to
sub-accounts that are margin enabled.
An Interpretation and Policy would be added under Rule 803, which
would relate to assignment of exercise notices to clearing members,
stating that where an account is divided into sub-accounts assignment
of exercise notices will be made to specific sub-accounts. OCC is also
proposing to add an Interpretation and Policy under Rule 804, which
would relate to allocation of exercises by clearing members to specific
short positions, under which clearing members would be required to
allocate exercises by sub-account in accordance with OCC's assignment
procedures described in the Interpretation and Policy to Rule 803.
The proposed rule change is consistent with the purposes and
requirements of Section 17A of the Act because it is designed to
promote the prompt and accurate clearance and settlement of
transactions in options and futures, and to foster cooperation and
coordination with persons engaged in the clearance and settlement of
such transactions, to remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of such transactions, and, in general, to protect investors
and the public interest. The proposed rule change accomplishes this
purpose by permitting clearing members to establish sub-accounts within
certain of the OCC account types in order that clearing members may
identify positions or property belonging to individual customers for
the clearing members' internal purposes while having no adverse impact
on OCC's to maintain adequate security for clearing members'
obligations under OCC's By-laws and Rules.
[[Page 67994]]
(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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(iii) of the Act \6\ and Rule 19b-4(f)(4) \7\ promulgated
thereunder because the proposal effects a change in an existing service
of OCC that (A) does not adversely affect the safeguarding of
securities or funds in the custody or control of OCC or for which it is
responsible and (B) does not significantly affect the respective rights
or obligations of OCC or persons using the service. At any time within
sixty days of the filing of the proposed rule change, the Commission
could have summarily abrogated such rule change if it appeared to the
Commission that such action was necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Act.
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\6\ 15 U.S.C. 78s(b)(3)(A)(iii).
\7\ 17 CFR 240.19b-4(f)(4).
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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
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-OCC-2007-11 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2007-11. This file
number should be included on the subject line if e-mail 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 inspection and
copying 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 filing also will be available for
inspection and copying at the principal office of OCC. 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-2007-11 and should be
submitted on or before December 24, 2007.
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\8\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
Nancy M. Morris,
Secretary.
[FR Doc. E7-23320 Filed 11-30-07; 8:45 am]
BILLING CODE 8011-01-P