[Federal Register Volume 78, Number 10 (Tuesday, January 15, 2013)]
[Notices]
[Pages 3051-3052]
[FR Doc No: 2013-00609]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68602; File No. SR-OCC-2012-22]

Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change To Clarify the Use of Certain
Amounts Credited to the Liquidating Settlement Account To Settle Mark-
to-Market Payments Arising From Stock Loan and Borrow Positions Carried
in the Customers' Account

January 9, 2013.

I. Introduction

    On November 13, 2012, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change SR-OCC-2012-22 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change was published
for comment in the Federal Register on November 30, 2012.\3\ The
Commission received no comment letters. This order approves the
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68288 (November 26,
2012), 77 FR 71466 (November 30, 2012).
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II. Description of the Proposed Rule Change

    The purpose of the proposed rule changes is to eliminate potential
ambiguity as to OCC's right to use margin and other amounts credited to
the Liquidating Settlement Account pursuant to OCC Rule 1104 to settle
mark-to-market payments arising from stock loan and borrow positions
carried in the clearing member's customers' account even though such
payments are required by OCC's Rules to be settled in the clearing
member's firm account or its combined market makers' account. In
addition, a proposed amendment to Rule 1104 provides that any proceeds
from stock loan and borrow positions carried in the customers' account
could be applied only to obligations arising in such account as is the
case with margin assets deposited in respect of that account.

Background

    OCC's By-Laws currently provide that stock loan and borrow
positions (collectively, ``Stock Loan Positions'') may be carried at
OCC in any eligible account of a clearing member, including the firm,
market-maker, and customers' accounts. More specifically, under Section
5 of Articles XXI and XXIA of the OCC By-Laws, and notwithstanding the
provisions of Section 3 of Article VI of the OCC By-Laws (requiring
separation of firm and customer positions), clearing members have
discretion as to which Stock Loan Positions may be carried in which
eligible accounts, subject only to the clearing member's general
representations under OCC Rules 2202(e) and 2202A(f) that the clearing
member's participation in the lending and borrowing activity is in
compliance with all applicable laws and regulations. However, Rules
2201(a) and 2201A(a) provide that a clearing member must designate
either its firm account or its combined market-makers' account as the
account to or from which all stock loan mark-to-market payments are to
be made, regardless of the account in which particular Stock Loan
Positions may be held.
    OCC Rule 1104 generally provides that, upon suspension of a
clearing member, OCC shall promptly liquidate, in the most orderly
manner practicable, all margins deposited with OCC by such clearing
member in all accounts (excluding securities held in a specific deposit
or escrow deposit) and all of such clearing member's contributions to
the clearing fund, subject to certain conditions. Under Rule 1104, in
general, these and all other funds of the suspended clearing member
subject to the control of OCC (except proceeds of segregated long
positions, funds disposed of pursuant to Rules 1105 through 1107, and
funds held in or payable to a segregated futures account) shall be
credited by OCC to a special account, to be known as the Liquidating
Settlement Account, in the name of the suspended clearing member, for
the purposes specified in Chapter 11.
    Under Rule 1104, therefore, in general, proceeds of all margin
(other than margin held in segregated futures accounts) including
margin in a clearing member's securities customers' account, are
credited to the Liquidating Settlement Account. However, for purposes
of administration of the liquidation, the margin does not lose its
identity as being derived from the customers' account. Rules 2210 and

2210A (relating to the Stock Loan/Hedge Program and Market Loan
Program, respectively) provide that net proceeds from, or amounts due
in respect of, the termination of Stock Loan Positions shall be
credited to or withdrawn from the Liquidating Settlement Account. The
Liquidating Settlement Account will include any mark-to-market payments
received that day. In addition, Rule 1104 provides that the proceeds
from the liquidation of securities, or from drawing on letters of
credit, held as margin in a restricted lien account (such as the
customers' account) may be withdrawn and applied to the closing out of
pending transactions, open positions, and exercised or matured
contracts in such accounts pursuant to Rules 1105, 1106, and 1107,
respectively.\4\ To the extent that the proceeds derived from assets
maintained in accounts subject to OCC's restricted lien exceed the
proceeds used from such accounts for that purpose, such proceeds must
be remitted by the Corporation to the suspended clearing member or its
representative for distribution to the persons entitled thereto in
accordance with applicable law.
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    \4\ The term ``restricted lien account'' is defined in Article
I, Section 1 of OCC's By-Laws as follows: ``Any account of a
Clearing Member with the Corporation over which the Corporation has
a restricted lien with respect to specified assets (including any
proceeds thereof) in such account.'' The term ``restricted lien'' is
defined in Article I, Section 1 of OCC's By-Laws as follows: ``A
security interest of the Corporation in specified assets (including
any proceeds thereof) in an account of a Clearing Member with the
Corporation as security for the Clearing Member's obligations to the
Corporation arising from such account or, to the extent so provided
in the By-Laws or Rules, a specified group of accounts that includes
such account including, without limitation, obligations in respect
of all Exchange transactions effected through such account or group
of accounts, short positions maintained in such account or group of
accounts, and exercise notices assigned to such account or group of
accounts.''
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Description of Rule Change

    For the avoidance of doubt, OCC proposes to insert an
interpretation indicating that when mark-to-market payments are owed
with respect to Stock Loan Positions maintained in a clearing member's
customers' account, proceeds of margin and unsegregated long positions,
and all other amounts credited to the Liquidating Settlement Account in
respect of the customers' account, may be used to satisfy the mark-to-
market obligations arising from the Stock Loan Positions in such
customers' account, even though such mark-to-market payments may settle
in the clearing member's firm account or its combined market makers'
account.
    OCC's By-Laws clearly provide that Stock Loan Positions may be
included in the customers' account and that such positions will be
margined in that account along with positions in options and other
cleared contracts in the account. It would therefore be inconsistent to
conclude that margin required under OCC's Rules to be deposited in the
customers' account to margin Stock Loan Positions cannot be used to
settle mark-to-market payments in respect of those positions if the
clearing member is suspended. OCC intends that the proposed rule
changes are to eliminate any doubt in this regard.
    In addition, as noted above, the liquidation rules for Stock Loan
Positions in Rules 2210 and 2210A provide that any net proceeds of
closing out Stock Loan Positions shall be credited to the Liquidating
Settlement Account and that any net amounts payable in respect of such
close-outs may be withdrawn from such account. However, Rule 1104 as
currently drafted does not limit the use of proceeds of Stock Loan
Positions carried in a restricted lien account to obligations arising
from that restricted lien account as it does in the case of proceeds
from a restricted lien account that are credited pursuant to Rules 1105
through 1107. While such a restriction might be implied from the fact
that the Stock Loan Positions themselves are subject to a restricted
lien and not a general lien pursuant to Section 3(e) of Article VI of
the By-Laws, OCC believes that Rule 1104 should be amended to make this
restriction explicit. Because margin and other proceeds from a
restricted lien account that are credited to the Liquidating Settlement
Account may be applied to mark-to-market payments owed in respect of
Stock Loan Positions in the restricted lien account, any proceeds of
such positions should be subject to the same restriction applicable to
proceeds from other positions in the restricted lien account that are
credited to the Liquidating Settlement Account. They should be applied
only to obligations arising from that restricted lien account. OCC
therefore also proposes to amend Rule 1104 to include references to
Rules 2210 and 2210A to clearly provide that margin and other proceeds
from the customers' account that are credited to the Liquidating
Settlement Account may be applied to amounts payable with respect to
Stock Loan Positions in the customers' account and that proceeds from
Stock Loan Positions in such customers' account may be applied only to
obligations arising in that account.

III. Discussion

    Section 17A(b)(3)(F) of the Act \5\ requires that, among other
things, that the rules of a clearing agency are designed to safeguard
securities and funds in its custody or control or for which it is
responsible and to protect investors and the public interest. The
proposed rule change will further these ends by clarifying OCC's use
collateral held. Specially the proposal clarifies that OCC may, in
connection a clearing member's suspension, use the collateral that it
holds in a clearing member's customers' account to settle mark-to-
market payments arising from Stock Loan Positions carried in the
clearing member's customers' account (notwithstanding that such
payments are required by OCC's Rules to be settled in the clearing
member's firm account or its combined market makers' account requiring
a minimum clearing fund size that is designed to enable OCC to draw in
full on its committed credit facilities that are secured by the
clearing fund).
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    \5\ 15 U.S.C. 78q-1(b)(3) (F).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \6\ and the
rules and regulations thereunder.
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    \6\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the proposed rule change (File No. SR-OCC-2012-22) be and
hereby is approved.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 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).
    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\9\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00609 Filed 1-14-13; 8:45 am]
BILLING CODE 8011-01-P