[Federal Register Volume 76, Number 3 (Wednesday, January 5, 2011)]
[Notices]
[Pages 602-604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-33304]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63623; File No. SR-OCC-2010-19]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Relating to Stock Loan
Programs
December 30, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on December 16, 2010, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission the proposed rule change as described in Items I
and II 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 persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The proposed rule change would provide OCC's clearing members with
clarification regarding the regulatory treatment under Rule 15c3-1 \2\
of collateral and margin posted by clearing members participating in
stock loan transactions through OCC's Stock Loan/Hedge Program or
Market Loan Program.
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\2\ 17 CFR 240.15c3-1.
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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 such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to provide OCC's
clearing members with clarification regarding the regulatory treatment
under Rule 15c3-1 of collateral and margin posted by clearing members
participating in stock loan transactions through OCC's Stock Loan/Hedge
Program or Market Loan Program.
1. Background
OCC's Stock Loan/Hedge Program, provided for in Article XXI of
OCC's By-Laws and Chapter XXII of OCC's Rules, provides a means for OCC
clearing members to submit broker-to-broker stock loan transactions to
OCC for clearance. Broker-to-broker transactions are independently-
executed stock loan transactions that are negotiated directly between
two OCC clearing members. OCC's Market Loan Program, provided for in
Article XXIA of OCC's By-Laws and Chapter XXIIA of OCC's Rules,
accommodates securities loan transactions executed through electronic
trading platforms that match lenders and borrowers on an anonymous
basis.
[[Page 603]]
Anonymous stock loan transactions are initiated when a lender or
borrower, which is either an OCC clearing member participating in the
Market Loan Program or a non-clearing member that has a clearing
relationship with an OCC clearing member participating in the Market
Loan Program, accepts a bid/offer displayed on a trading platform. A
clearing member participating in the Market Loan Program will be
obligated to OCC as principal with respect to transactions effected by
its customers that are non-clearing members of a trading platform.
When a stock loan transaction is submitted to and accepted by OCC
for clearance, OCC substitutes itself as the lender to the borrower and
the borrower to the lender thus serving a function for the stock loan
market similar to the one it serves within the listed options market.
OCC guarantees the future daily market-to-market payments, which are
effected through OCC's cash settlement system, between the lending
clearing member and borrowing clearing member and guarantees the return
of the loaned stock to the lending clearing member and the collateral
to the borrowing clearing member upon close-out of the stock loan
transaction.\3\ One advantage of submitting stock loan transactions to
OCC is that the stock loan and stock borrow positions then reside in
the clearing member's options account at OCC and, to the extent that
they offset the risk of options positions carried in the same account,
may reduce the clearing member's margin requirement in the account.
OCC's risk is, in turn, reduced by having the benefit of the hedge.
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\3\ With respect to both the Stock Loan/Hedge Program and the
Market Loan Program, the loaned securities are moved to the account
of the borrower against cash collateral (normally 102%) through the
facilities of The Depository Trust Company (``DTC''), and DTC
notifies OCC that the movement has occurred at the time the
transaction is submitted for clearance. The securities are returned
to the lender against return of the cash collateral through the same
mechanism.
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One of the tools that OCC uses to manage its exposure to stock loan
transactions is the margin that OCC calculates and collects with
respect to each account of a clearing member.\4\ Such margin consists
of a mark-to-market component that is based on the net asset value of
the account (i.e., the cost to liquidate the account at current
prices). A second component of such margin is the risk component
(``Risk Margin'') determined under OCC's proprietary margin system on
the basis of the net risk of all open positions carried in the account,
including stock loan positions as well as options positions.\5\ An
additional margin requirement (``Additional Margin''), which is solely
applicable to stock loan transactions, arises where the collateral
provided by the borrowing clearing member is greater than the current
market value of the loaned stock. For example, where in a stock loan
transaction the borrowing clearing member is required to provide
collateral equal to 102% of the current market value of the loaned
stock, OCC will charge the corresponding lending clearing member an
Additional Margin amount equal to the 2% excess collateral and credit
the borrowing clearing member an equal amount. These Additional Margin
charges/credits are designed to provide OCC with resources to fully
compensate a party to a stock loan transaction in the event that the
counterparty defaults and the loaned stock or collateral held by the
non-defaulting party is less than the value of the collateral or loaned
stock exchanged.
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\4\ This OCC margin requirement is in addition to the cash
collateral that is transferred to the stock lender and may be
deposited in any form constituting acceptable collateral under OCC
Rule 604.
\5\ OCC does not calculate risk margin on stock loan positions
and stock borrow positions separately from risk margin on options
positions carried in the same account.
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2. Description of Rule Change
In December 2008, the Commission approved an OCC proposed rule
change that memorialized OCC's understanding that where stock loan
transactions are submitted to OCC for clearance through the Stock Loan/
Hedge Program, any Additional Margin that a clearing member is required
to deposit with OCC will be treated the same as any other portion of
the OCC margin deposit requirement and therefore will not constitute an
unsecured receivable that would otherwise be required to be deducted
from such clearing member's net capital for purposes of Rule 15c3-1.\6\
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\6\ Securities Exchange Act Release No. 59036 (Dec. 1, 2008), 73
FR 74554 (Dec. 8, 2008).
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Under the current proposed rule change, OCC would expand the prior
interpretive relief so that: (i) clearing members also would not be
required to take a net capital deduction with respect to any excess of
the collateral over the market value of the loaned stock and (ii) such
expanded interpretive relief would apply to stock loan transactions
submitted to OCC for clearance through the Market Loan Program. As
explained above, any over-collateralization of the loaned stock would
be secured and offset by Additional Margin charges/credits applied by
OCC. Therefore, any such excess collateral on loaned stock also would
not be deemed to constitute an unsecured receivable for purposes of
Rule 15c3-1.
OCC believes that providing such relief from Rule 15c3-
1(c)(2)(iv)(B) is within the policy objectives of the rule.
Specifically, while the intent behind the capital charges is to protect
the stock borrower against credit exposure to the lender, the borrower
has no such credit exposure where OCC is substituted as the central
counterparty. Furthermore, under the Market Loan Program, whereby stock
loan transactions are effected through an electronic trading platform,
it is literally impossible for the clearing member to look through OCC
and treat another clearing member as its counterparty.
In connection with the above-referenced initiatives, OCC proposes
to amend interpretation .05 to OCC Rule 601 to reflect the regulatory
treatment under Rule 15c3-1 of collateral and margin posted by clearing
members participating in stock loan transactions through the Stock
Loan/Hedge Program and/or Market Loan Program.\7\
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\7\ The text of the proposed amendment to interpretation .05 can
be found at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_10_19.pdf.
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OCC states that the proposed change to OCC's Rules is consistent
with the purposes and requirements of Section 17A of the Act \8\
because it is designed to promote the prompt and accurate clearance and
settlement of stock loan transactions, 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. OCC further states that the proposed rule
change is not inconsistent with the existing rules of OCC including any
rules proposed to be amended.
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\8\ 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
OCC did not solicit or receive written comments with respect to the
proposed rule change. OCC will notify the Commission of any written
comments it receives.
[[Page 604]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 90 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 or disapprove 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. Comments may be submitted by any of
the following methods:
Electronic comments may be submitted by using the
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an e-mail to [email protected]. Please include
File No. SR-OCC-2010-19 on the subject line.
Paper comments should be sent in triplicate to Elizabeth
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington DC 20549-1090.
All submissions should refer to File No. SR-OCC-2010-19. 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 Web site viewing and
printing 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 OCC's principal office and OCC's Web site
(http://www.theocc.com/about/publications/bylaws.jsp). 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
submission should refer to File No. SR-OCC-2010-19 and should be
submitted within January 26, 2011 days after the date of publication.
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\9\ 17 CFR 200.30-3(a)(12).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-33304 Filed 1-4-11; 8:45 am]
BILLING CODE 8011-01-P