

[Federal Register: December 3, 2007 (Volume 72, Number 231)]
[Notices]               
[Page 67992-67994]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03de07-127]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56846; File No. SR-OCC-2007-11]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Expanding Sub-Accounts

November 27, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 28, 2007, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by OCC. OCC filed the proposed rule change pursuant to 
section 19(b)(3)(A)(iii) of the Act \2\ and Rule 19b-4(f)(4) 
thereunder,\3\ so that the proposal was effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(iii).
    \3\ 17 CFR 240.19b-4(f)(4).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would expand the functions associated with 
sub-accounts.

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.\4\
---------------------------------------------------------------------------

    \4\ The Commission has modified parts of these statements.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The proposed rule change allows clearing members to maintain sub-
accounts for certain types of accounts for position reporting, margin, 
collateral, and settlement purposes.\5\ These sub-accounts would be 
gradually rolled out to interested clearing members and would be 
available for firm lien accounts, customers' accounts, customers' lien 
accounts, and customer segregated funds accounts. Clearing members 
could continue to be allowed to maintain sub-accounts for combined 
market-makers' accounts only for position reporting purposes although, 
as described below, OCC's system sub-accounting function would also be 
used to enable clearing members to maintain three separate combined 
market-maker account types under the same clearing member number and to 
have each account treated as a separate account for all purposes under 
OCC's By-laws and Rules. Sub-accounting would not be available for 
separate market-maker's accounts, firm non-lien accounts, or cross-
margin accounts other than the OCC internal cross-margin accounts, 
which are segregated funds accounts in which OCC-cleared securities 
options may be cross-margined with OCC-cleared futures products.
---------------------------------------------------------------------------

    \5\ In File No. SR-OCC-2005-14, OCC established an 
interpretation to Article VI, Section 3 of OCC's By-Laws under which 
clearing members may maintain sub-accounts with respect to any 
account for position reporting purposes. However, this functionality 
is currently available only with respect to combined market makers' 
accounts.
---------------------------------------------------------------------------

    All sub-accounts for eligible accounts would be enabled to carry 
positions in OCC-cleared contracts. However, as described in more 
detail below, margin, collateral, and settlement functions could be 
turned on or off at the clearing member's election except in combined 
market-makers' accounts. A sub-account would have to be margin-enabled 
in order to be collateral enabled and collateral-enabled in order to be 
settlement-enabled.
    If a sub-account is not ``margin enabled,'' the positions in the 
sub-account will simply be included in the parent account for purposes 
of calculating the margin requirement except that if a short option 
position in the sub-account is covered by an escrow deposit or a 
specific deposit or if the short position has been properly identified 
in a spread instruction, the short position will not be included in the 
margin calculation for the parent account. If a sub-account is margin 
enabled, OCC will calculate and report to the clearing member a 
separate margin requirement considering only the positions in the sub-
account. However, if the account is not collateral enabled or 
settlement enabled, any margin deficiency will be added to the margin 
requirement of the parent account. Any excess long option or other 
asset value in a margin enabled sub-account will not be applied against 
a margin deficit in the parent account. The provision of OCC Rule 
604(b)(4), under which equity and debt issues of a single issuer may 
not be valued in excess of 10% of the margin requirement of the account 
in which the securities are deposited, will be separately applied to 
sub-accounts that are margin enabled.
    If a sub-account is ``margin and collateral enabled,'' collateral 
deposited by a clearing member to satisfy its margin requirements can 
be identified as being in the particular sub-account at the direction 
of the clearing member. If the account lacks sufficient excess 
collateral or has no excess, any margin deficiency will be added to the 
margin requirement of the parent account. Accordingly, a clearing 
member may withdraw collateral from the sub-account even if it has a 
margin deficiency or a margin deficiency would be created provided that 
the parent account has sufficient excess.
    If a sub-account is ``margin, collateral, and settlement enabled,'' 
OCC will make separate daily cash settlement with respect to the sub-
account. The clearing member may but does not have to designate a bank 
account for such settlements that is different from the bank accounts 
used for other settlements. If there is a margin deficiency in the sub-
account, OCC will draft the clearing member's bank account for the 
deficit without regard to any margin excess in the parent account. 
Escrow deposits and specific deposits with respect to positions in a 
sub-account must specify the sub-account regardless of whether the sub-
account is margin enabled. Similarly, spread instructions with respect 
to any position carried in a sub-account must identify the sub-account 
and will be given no effect unless both legs of the spread are in the 
same sub-account regardless of whether the sub-account is margin 
enabled.
    The new sub-accounts are not intended as a mechanism for 
identifying

[[Page 67993]]

positions or other property as belonging to individual customers of a 
clearing member or as a substitute for a clearing member's own books 
and records. Rather they are intended primarily to allow clearing 
members more flexibility in structuring the interface between the data 
they receive from OCC and their own systems. The new sub-accounts are 
not intended to have any effect on the way in which clearing member 
accounts would be liquidated in the event of the clearing member's 
insolvency, and they will not impose any limits on OCC's use of 
proceeds of collateral or positions that are credited to a particular 
sub-account. For these purposes, each sub-account is simply a part of 
the parent account to which it is attached, and proceeds will be pooled 
and netted as and to the extent that they would be if the sub-accounts 
did not exist and all positions and collateral were commingled and 
carried in the parent account. Interpretation and Policy .02 to Article 
VI, section 3 of OCC's By-Laws, which is not being amended, together 
with Interpretation and Policy .03 to Article VI, section 3, which is 
not being amended in relevant part, make this clear. Accordingly, the 
sub-accounts are not intended to provide any segregation or separation 
of property to satisfy legal requirements such as the customer 
protection rules of the Commission or Commodities Futures Trading 
Commission although, as noted, sub-accounts may be used within a 
segregated account for purposes of convenience.
    The ability of clearing members to use sub-accounts for margin, 
collateral, and settlement purposes is operational and will not result 
in lessened margin requirements. In fact, the use of the margin 
enabling function could result in a higher margin requirement for 
clearing members because positions in sub-accounts may not be offset 
against positions in other sub-accounts for purposes of calculating a 
clearing member's margin requirement, and a margin excess in one sub-
account may not be applied against a margin requirement in another sub-
account or in the parent account.
    In addition to the expansion of functions of sub-accounts, OCC is 
proposing to use the sub-account capability to facilitate clearing 
members' ability to maintain separate types of combined market makers' 
accounts. Under the existing account structure for market-maker 
accounts, collateral can only be deposited with respect to an entire 
range of market-maker accounts, including individual market-maker 
accounts, all combined market-makers' accounts, and any sub-accounts. 
If a clearing member wishes to clear market-maker business and carry 
accounts for proprietary market-makers, associated market-makers, and 
independent market-makers, OCC generally requires that the clearing 
member open separate clearing member numbers so that proprietary, 
associated, and independent market-maker collateral can be separated 
under different clearing numbers. OCC is proposing to allow 
proprietary, associated, and independent collateral with respect to 
combined market-makers' accounts to be separated under the same 
clearing member number. In addition, margin requirements would be 
calculated separately with regard to the three account types. The 
account types for proprietary, associated, and independent market-
makers would be treated as separate accounts in the event of a 
liquidation. Other than with respect to this separation of proprietary, 
associated, and independent market-maker accounts, use of the sub-
account capability with respect to market maker accounts would be 
permitted only for position reporting purposes.
    OCC proposes to expand Interpretation and Policy .03 under Article 
VI, Section 3, which already addresses the sub-accounts available to 
clearing members with respect to combined market-makers' accounts to 
describe the expanded uses of sub-accounts and the accounts for which 
they are available. This Interpretation and Policy would also be 
expanded to require clearing members to specify the sub-accounts with 
respect to which escrow and specific deposits, segregation 
instructions, and pledges of securities are made. In addition, the 
portion of the Interpretation and Policy clarifying that sub-accounts 
will be disregarded in connection with the liquidation of a clearing 
member would be simplified. OCC is proposing to add Interpretation and 
Policy .04 under Article VI, Section 3 to explain the manner in which 
the sub-account capability can be used to separate proprietary, 
associated, and independent market-maker accounts under the same 
clearing member number and to clarify that these three account types 
would be treated as separate for all purposes under OCC's By-laws and 
Rules. Interpretation and Policy .04 would also clarify that while 
clearing members may deposit collateral with respect to all combined 
market-maker account types under the same clearing member number, 
collateral deposited for this purpose would be proprietary collateral 
and would be treated as such for all purposes under the By-laws and 
Rules.
    OCC is proposing to add an Interpretation and Policy under Rule 
501, which would also be applicable to Rules 502 and 503, to make it 
clear that daily cash settlement amounts will be calculated separately 
for sub-accounts that are settlement enabled. A similar Interpretation 
and Policy would be added under Rule 601, and be applicable to all of 
Chapter VI, to clarify the manner in which margin is calculated with 
respect to sub-accounts and their parent accounts. OCC also proposes to 
add an Interpretation and Policy to Rule 604 stating that the 10% 
concentration limit of Rule 604(b)(4) would be separately applied to 
sub-accounts that are margin enabled.
    An Interpretation and Policy would be added under Rule 803, which 
would relate to assignment of exercise notices to clearing members, 
stating that where an account is divided into sub-accounts assignment 
of exercise notices will be made to specific sub-accounts. OCC is also 
proposing to add an Interpretation and Policy under Rule 804, which 
would relate to allocation of exercises by clearing members to specific 
short positions, under which clearing members would be required to 
allocate exercises by sub-account in accordance with OCC's assignment 
procedures described in the Interpretation and Policy to Rule 803.
    The proposed rule change is consistent with the purposes and 
requirements of Section 17A of the Act because it is designed to 
promote the prompt and accurate clearance and settlement of 
transactions in options and futures, and 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. The proposed rule change accomplishes this 
purpose by permitting clearing members to establish sub-accounts within 
certain of the OCC account types in order that clearing members may 
identify positions or property belonging to individual customers for 
the clearing members' internal purposes while having no adverse impact 
on OCC's to maintain adequate security for clearing members' 
obligations under OCC's By-laws and Rules.

[[Page 67994]]

(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

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(iii) of the Act \6\ and Rule 19b-4(f)(4) \7\ promulgated 
thereunder because the proposal effects a change in an existing service 
of OCC that (A) does not adversely affect the safeguarding of 
securities or funds in the custody or control of OCC or for which it is 
responsible and (B) does not significantly affect the respective rights 
or obligations of OCC or persons using the service. At any time within 
sixty days of the filing of the proposed rule change, the Commission 
could have summarily abrogated such rule change if it appeared to the 
Commission that such action was necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \7\ 17 CFR 240.19b-4(f)(4).
---------------------------------------------------------------------------

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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-OCC-2007-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2007-11. 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 inspection and 
copying 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 the principal office of OCC. 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 
submissions should refer to File Number SR-OCC-2007-11 and should be 
submitted on or before December 24, 2007.
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Nancy M. Morris,
Secretary.
 [FR Doc. E7-23320 Filed 11-30-07; 8:45 am]

BILLING CODE 8011-01-P
