Self-Regulatory Organizations; The Options Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to Amendments to the Pledge Program

[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51819-51820]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24914]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41883; File No. SR-OCC-99-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to 
Amendments to the Pledge Program

September 17, 1999.
    On March 5, 1999, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-OCC-99-04) pursuant to Section 19(b)(1) of the 
Securities Exchange Act

[[Page 51820]]

of 1934 (``Act'').\1\ Notice of the proposal was published in the 
Federal Register on June 17, 1999.\2\ No comment letters were received. 
For the reasons discussed below, the Commission is approving the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 41507 (June 10, 1999) 64 
FR 32600.
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I. Description

    The rule change permits OCC clearing members to pledge long 
positions in non-proprietary cross margin accounts through OCC's pledge 
program. In addition, the rule change updates OCC's rules to reflect 
the way that the pledge program currently operates.
    OCC designed its market maker pledge program to allow its clearing 
members to finance their positions by permitting them to pledge excess 
long market maker options as collateral to obtain loans from banks or 
from other clearing members.\3\ Current eligible account types include, 
among others, a combined market-makers' account and a separate market-
maker's account.
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    \3\ For a detailed description of the pledge program, refer to 
Securities Exchange Act Release No. 19956 (July 19, 1983), 48 FR 
33956 [File No. SR-OCC-82-25] (order approving proposed rule 
change).
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    The rule change amends OCC rule 614 to add non-proprietary cross 
margin accounts to the list of accounts that are eligible for the 
pledge program.\4\ The rule change also revises Rule 614 to reflect the 
current operation of the pledge program because some of the practices 
described in the rule are no longer used. For example, OCC's system 
does not ``transfer'' pledged cleared securities into a separate 
``pledge account'' as suggested by the rules. Rather, OCC identifies 
within the ``primary'' account those long positions in a cleared 
security that a clearing member has instructed OCC that it desires to 
pledge. In addition, certain instructions and reports are not submitted 
or distributed in hard copy form but are electronically inputted or 
disseminated through OCC's C/MACS system. (Hard copy forms are used as 
acceptable backups should C/MACS be unavailable.) As a result, the rule 
change eliminates references to ``transfers,'' ``Transfer Day,'' 
``Primary Accounts,'' and certain ``forms,'' and substitutes where 
appropriate terms like ``identifying'' cleared securities to be 
pledged. ``Activity Day,'' ``Eligible Account,'' ``pledged and 
unpledged cleared securities,'' and ``instructions.'' The rule change 
further amends Rule 614 to reflect that clearing member designations 
among pledgees can be carried out electronically or through use of the 
pledgee designation form.
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    \4\ Market-makers, specialists, and registered traders are the 
categories of market professionals that re eligible to have their 
positions included in a clearing members' non-proprietary cross 
margin account, and many such market professionals participate in 
cross margining.
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    The rule change eliminates references to lock box distribution of 
reports. Clearing members receive OCC reports electronically through C/
MACS, and other pledges receive reports by electronic format from OCC 
or have other arrangements with OCC for purposes of receiving reports. 
Under the rule change, report distribution will be accomplished in 
accordance with procedure agreed to between OCC and each pledge.
    Finally, under the rule change OCC is changing the time at which 
the release of a pledged cleared security is effective. Previously, 
Rule 614 provided that the release was deemed to be effective as of 
9:00 a.m. (central time) on the transfer day and that all rights of a 
pledgee as to such released cleared security were terminated at that 
time. However, this effective time comes after OCC nightly processing 
is completed. During nightly processing, the long positions in cleared 
securities are released from pledge, included in marginable positions, 
and used to offset short positions as described in Rules 601 and 602. 
Pledgee banks have the understanding that when they execute the 
instructions to release pledged positions, they release their rights in 
the long positions and take appropriate measures to ensure that the 
loan is repaid or otherwise secured. As a result, the rule change 
provides that when a pledgee releases a pledged position, the position 
is deemed to be released as of the cutoff time for submitting the 
instructions to release the positions on the day that the instructions 
are received.
    In addition to the amendments described above, the rule change 
makes conforming changes to Rules 601, 602, 1105, and 1106 and to the 
pledge account agreement.\5\
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    \5\ OCC attached a copy of the amended pledge account agreement 
as Exhibit A to its filing, which is available for inspection and 
copying in the Commission's public reference room and through OCC.
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II. Discussion

    Section 17A(b)(3)(F) of the Act \6\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody and control of the clearing agency 
or for which it is responsible. The Commission believes that the 
proposed rule change is consistent with OCC's obligations under Section 
17A(b)(3)(F) because the rule change should increase the ability of 
OCC's clearing members to finance their positions through the use of 
OCC's pledge program without impairing OCC's overall protection against 
member default.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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III. 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 with 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. OCC-99-04) be and hereby is 
approved.

    For the Commission by the Division of Market Regulations, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24914 Filed 9-23-99; 8:45 am]
BILLING CODE 8010-01-M