[Federal Register: July 22, 2005 (Volume 70, Number 140)]
[Notices]
[Page 42403-42404]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22jy05-108]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52035; File No. SR-OCC-2002-16]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of a Proposed Rule Change Relating to
Unsegregation of Long Option Positions
July 14, 2005.
I. Introduction
On July 9, 2002, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-OCC-2002-16 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ On December 12, 2002, and
January 11, 2005, OCC amended the proposed rule change. Notice of the
proposal was published in the Federal Register on March 14, 2005.\2\ No
comment letters were received. For the reasons discussed below, the
Commission is granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 51331, (March 8, 2005),
70 FR 12525.
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II. Description
OCC Rule 611 permits a clearing member to issue instructions to OCC
to release from segregation a long position in options contracts
carried in a customers' account or firm non-lien account provided that
the clearing member is simultaneously carrying in such account for such
customer a short position in option contracts and the margin
requirement of the customer has been reduced as a result of carrying
the long option position. The proposed rule change amends Rule 611(c)
to permit a clearing member to issue such instructions where one leg of
the spread is a long option position and the other is a long or short
position in a security futures contract.
The proposed rule change was submitted in light of joint margin
rules that were adopted by the Commission and by the Commodity Futures
Trading Commission (``CFTC'') on August 1, 2002,\3\ pursuant to Section
7(c)(2) of the Act and related provisions of the Commodity Exchange Act
governing the setting of margin requirements for security futures. The
proposed rule is drafted in such a way that its operation is dependent
on the joint margin rules and the rules of the exchanges and security
futures markets adopted thereunder. Only if a particular spread
position involving a long option qualifies for reduced margin treatment
under those rules could the option be unsegregated pursuant to Rule
611. With approval of this proposed rule change, consistency between
the joint margin rules and Rule 611(c) will be assured.\4\
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\3\ Securities Exchange Act Release No. 46292, 67 FR 53146
(August 14, 2002) [File No. S7-16-01].
\4\ OCC has requested a no action position from the Commission's
Division of Market Regulation that a clearing member that gives an
instruction to unsegregate long option positions pursuant to this
amended rule will not be deemed to be in violation of Rules 15c3-3,
8c-1, and 15c2-1 under the Act. Supra, note 12.
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Section 7(c)(2)(B) of the Act requires that the margin requirements
for security futures products be consistent with the margin
requirements for comparable options contracts traded on any exchange
registered pursuant to section 6(a) of the Act.\5\ Clearing members are
permittedunder the joint margin rules \6\ and exchange and
[[Page 42404]]
security futures market rules adopted thereunder \7\ to reduce a
customer's margin requirement when the customer has offsetting
positions in security futures and options on the same underlying
interest. Accordingly, OCC is amending its Rule 611(c) to also allow a
clearing member to unsegregate long option positions in a customers'
account or in a firm non-lien account when the customer holds an
offsetting long or short security futures position and the clearing
member has reduced the customer's margin requirement in recognition of
the spread.\8\
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\5\ 15 U.S.C. 78g(c)(2)(B)(iii)(I).
\6\ Supra, note 3.
\7\ See, e.g., Securities Exchange Act Release Nos. 47460 (March
6, 2003), 68 FR 12123 (March 13, 2003) [File No. SR-NYSE-2003-05],
47541 (March 20, 2003), 68 FR 14725 (March 26, 2003) [File No. SR-
CBOE-2002-67], and 47550 (March 20, 2003), 68 FR 15015 (March 27,
2003) [File No. SR-NASD-2003-45 (Orders approving amendments to NYSE
Rule 431, CBOE Rule 12.3, and NASD Rule 2520 relating to margin
requirements for security futures contracts.)
\8\ Under OCC Rule 611(a), all positions in security futures are
deemed to be unsegregated because a futures contract, which
represents a potential liability as well as a potential asset, is
never deemed to be fully-paid or to represent excess margin
securities. Accordingly, this rule filing addresses only the case
where long put or call options are spread against long or short
futures contracts.
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Rule 15c3-3 under the Act requires broker-dealers to maintain
physical possession or control of customer fully-paid and excess margin
securities.\9\ Rules 8c-1 and 15c2-1 under the Act, which govern
hypothecation of customer securities, also place limitations on broker-
dealers' rights to encumber customer securities.\10\ In order to permit
compliance by clearing members with Rule 15c3-3 and with the
hypothecation rules, OCC's Rule 611(a) presently provides that long
option positions in a customers' account established under Article VI,
Section 3(e) of OCC's By-Laws are deemed to be segregated and therefore
not subject to OCC's lien except to the extent that the clearing member
gives contrary instructions to OCC in accordance with the rule.\11\
Under Rule 611(c), a clearing member is entitled to give an instruction
to unsegregate such a long position if the long position constitutes
the long leg of a spread position, the short leg that constitutes the
short leg of the spread position is held by the same customer, and the
customer's margin requirement has been reduced to reflect the net risk
of the spread position. OCC has requested and has been granted no
action relief from the Commission's Division of Market Regulation
regarding the proposed rule change with respect to Rules 8c-1, 15c2-1
and 15c3-3 of the Act.\12\
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\9\ 17 CFR 240.15c3-3(b).
\10\ 17 CFR 240.8c-1 and 15c2-1.
\11\ The provisions of Rule 611 also apply to long option
positions of certain ``non-customers'' carried in a ``firm non-lien
account'' under Article VI, Section 3(a) of OCC's By-Laws. At
present, no clearing member carries such an account.
\12\ Letter from Bonnie Gauch, Attorney, Division of Market
Regulation to William H. Navin, General Counsel, OCC (July 14,
2005). Specifically, the letter states that the Division will not
recommend to the Commission that enforcement action be taken
pursuant to Exchange Act Rules 8c-1, 15c2-1, and 15c3-3 if, in
accordance with the amendments to Rule 611, a broker-dealer releases
from segregation or permits to remain unsegregated, a customer long
option position if (1) the broker-dealer is simultaneously carrying
in that customer's account an offsetting security future contract,
and (2) the margin required to be deposited by the customer with
respect to the security future contract has been reduced as a result
of the carrying of the long option position.
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III. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions and to assure the
safeguarding of securities and funds which are in the clearing agency's
custody or control or for which it is responsible.\13\ The purpose of
OCC's Rule 611(c) is to provide consistency between the clearing level-
margin requirement under OCC's rules and the customer-level margin
requirement under applicable exchange rules. The joint margin rules and
the customer margin rules adopted by the security exchanges and the
security futures markets permit reduced customer margin levels for
specific offsetting positions in options and security futures. By
allowing clearing members to issue instructions to unsegregate long
option positions in order to take advantage of the offsets allowed at
the customer level, the proposed rule change eliminates a disparity in
the customer-level and clearing-level margin requirements and thereby
reduces the likelihood that clearing members will experience a
financial ``squeeze'' resulting because the amount of clearing-level
margin the member is required to deposit with OCC is greater than the
amount of customer-level margin the member collects from its
customers.\14\
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\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ The Commission has previously approved similar amendments
to Rule 611(c). See, e.g., Securities Exchange Act Release No. 31626
(December 21, 1992), 57 FR 62588 (December 31, 1992) [File No. SR-
OCC-92-14] (Order approving a proposed rule change that eliminated
the requirement that spread positions be carried for the same
customer and be on a contract-for-contract basis. The rule change
gave clearing-level spread margin treatment to pairs of positions
where the customer's margin requirement had been reduced in
accordance with applicable exchange margin rules).
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As a consequence of the proposed rule change, OCC will collect less
margin from its clearing members than it does under current Rule
611(c). However, this result is consistent with the joint margin rules
and with the exchange and security futures market rules which were
approved by the Commission. Furthermore, because the proposed rule
change requires that anylong options position that is used to offset a
security futures position will be unsegregated and therefore subject to
OCC's lien, OCC and its members will be protected from financial loss
in the event an OCC member fails to meet its obligations with respect
to such short security futures position. Accordingly, because the
proposed rule change is designed so that it provides consistent
treatment between OCC's rules, the joint margin rules, and the margin
rules of the exchanges and the security futures markets without
jeopardizing the adequacy of collateral available to OCC, the proposed
rule change should promote the prompt and accurate clearance and
settlement of securities transactions and should help assure the
safeguarding of securities and funds which are in OCC's custody or
control or for which OCC is responsible.
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-2002-16) be and hereby
is approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3914 Filed 7-21-05; 8:45 am]
BILLING CODE 8010-01-P