[Federal Register Volume 76, Number 69 (Monday, April 11, 2011)]
[Notices]
[Pages 20063-20065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8473]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64181; File No. SR-OCC-2010-19]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change Relating to Stock Loan Programs
April 5, 2011.
I. Introduction
On December 16, 2010, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission a proposed rule
change pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'').\1\ The proposed rule change clarifies 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. The proposed rule
change was published for comment in the Federal Register on January 5,
2011.\3\ No comment letters were received. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.15c3-1.
\3\ Securities Exchange Act Release No. 63623 (Dec. 30, 2010),
76 FR 0602.
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II. Description of the Proposal
A. Background
OCC's Stock Loan/Hedge Program, provided for in Article XXI of
OCC's By-
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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.
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.\4\
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\4\ A clearing member participating in the Market Loan Program
is obligated to OCC as principal with respect to transactions
effected by its customers that are non-clearing members of a trading
platform.
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When a stock loan transaction is submitted to and accepted by OCC
for clearance, OCC substitutes itself as the lender to the borrower and
as the borrower to the lender thus serving a function for the stock
loan market similar to the one it serves for the listed options market.
OCC guarantees the future daily mark-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 return of
the collateral to the borrowing clearing member upon close-out of the
stock loan transaction.\5\ 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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\5\ 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''). 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.\6\ 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 by OCC's proprietary margin system based
on the net risk of all open positions carried in the account, including
stock loan positions as well as options positions.\7\ 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, in a stock loan transaction where 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 will credit the borrowing
clearing member an equal amount. The Additional Margin charge/credit is
designed to provide OCC with resources so it can fully compensate a
party to a stock loan transaction in the event of a counterparty
default where the loaned stock or collateral held by the non-defaulting
party is worth less than the value of the collateral or loaned stock
exchanged.
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\6\ 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 margin collateral
under OCC Rule 604.
\7\ 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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B. 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.\8\
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\8\ Securities Exchange Act Release No. 59036 (Dec. 1, 2008), 73
FR 74554 (Dec. 8, 2008).
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Pursuant to this rule change, OCC is expanding the prior
interpretive relief to make clear that: (i) clearing members are not
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) the
interpretive relief also applies to stock loan transactions submitted
to OCC for clearance through the Market Loan Program. As explained
above, any over-collateralization of the loaned stock will 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.
In connection with the above-referenced initiatives, OCC will 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.\9\
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\9\ 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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III. Discussion
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to assure the safeguarding
of securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\10\ OCC's rule change
to provide additional interpretive relief with respect to the net
capital treatment of stock loan transactions extends OCC's previous
changes to its Stock Loan/Hedge Program \11\ and is similarly designed
to enhance OCC's ability to assure that it has collected sufficient
margin from its members in relation to such members' activity. The new
interpretive relief should continue to provide OCC with the ability to
manage the risk of a clearing member's stock loan activity and should
continue to enable OCC to protect itself and its members from potential
losses associated with the stock loan program. Accordingly, the
Commission finds that the proposed rule change is designed to assure
the safeguarding of securities and funds which are in OCC's custody or
control or for which OCC is responsible.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ Supra note 8.
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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 \12\ and the rules and regulations
thereunder.
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\12\ 15 U.S.C. 78q-1.
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[[Page 20065]]
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-OCC-2010-19) be and
hereby is approved.\14\
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\13\ 15 U.S.C. 78s(b)(2).
\14\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8473 Filed 4-8-11; 8:45 am]
BILLING CODE 8011-01-P