

[Federal Register: December 17, 2007 (Volume 72, Number 241)]
[Notices]               
[Page 71469-71470]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17de07-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56930; File No. SR-OCC-2006-09]

 
Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Relating to Choice of 
Law and Forum Selection

December 7, 2007.

I. Introduction

    On May 22, 2006, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-OCC-2006-09 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on April 27, 2007.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 55653, (April 20, 2007), 
72 FR 21062.
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II. Description

    The proposed rule change will add new general choice of law and 
forum selection provisions to OCC's By-Laws. The purpose of the 
proposed rule change is to ensure there are appropriate choice of law 
and forum selection provisions governing all contractual relations 
between OCC and each of its clearing members. The proposed provisions 
should provide greater clarity, consistency, and predictability in the 
application of the law to all contractual relations between OCC and 
each of its clearing members and in the choice of forum in the event of 
litigation on such matters.
    OCC's By-Laws and Rules each currently contain choice of law 
provisions that apply in somewhat limited circumstances. This approach 
is problematic as it could lead to inconsistencies between the two 
provisions or because it may fail to

[[Page 71470]]

properly specify a governing law with respect to certain contractual 
relations altogether.
    Article VI, Section 9(c) of OCC's By-Laws provides that Illinois 
law, specifically the Illinois Uniform Commercial Code, is the 
governing law with respect to cleared contracts. A ``cleared contract'' 
is defined in Article I, Section 1 of OCC's By-Laws as ``a cleared 
security or commodity future or futures option that is cleared by 
[OCC].'' A ``cleared security'' is defined as ``an option contract 
(other than a futures option), a security future or a BOUND.'' However, 
OCC has interactions and relationships with clearing members not 
directly involving cleared contracts (e.g., membership and financial 
requirements). Accordingly, the choice of law provisions in Article VI, 
Section 9(c) are not comprehensive.
    OCC Rule 614(m), which clarifies the limited obligations of OCC in 
connection with pledges of cleared securities, incorporates certain 
provisions of Article VI, Section 9 of the By-Laws by reference and 
also contains special provisions applicable in the event that, 
notwithstanding the choice of law provisions of Article VI, Section 
9(c), the laws of a jurisdiction that has not adopted the 1994 
revisions to Article 8 and 9 of the UCC are applicable to security 
interests in pledged securities. However, because all 50 U.S. States, 
the District of Colombia, the U.S. Virgin Islands, and Puerto Rico have 
now adopted the 1994 revisions to Article 8 and 9 of the UCC, the 
special provisions are unnecessary.
    Article V (Clearing Members), Section 3 (Conditions to Admission), 
paragraph (k) of OCC's By-Laws provides that as a condition to 
admission as a clearing member non-U.S. securities firms must consent 
to the jurisdiction of Illinois courts and to the application of U.S. 
law in connection with any dispute with OCC arising from membership. 
However, this provision only applies to the limited context of disputes 
with OCC arising from membership.
    The proposed rule change adds a general choice of law provision to 
OCC's By-Laws in order to provide consistency and predictability in the 
application of the law to all relations between OCC and its clearing 
members. This new provision will be particularly useful with respect to 
collateral posted by non-U.S. clearing members where a clear choice of 
law provision could provide further assurance that OCC's interests in 
such collateral are properly perfected. Such a provision will also 
decrease the likelihood of an inadvertent inconsistency among 
provisions of the various Articles of the By-Laws.
    Illinois law is the most logical choice to be the governing law 
under the proposed choice of law provision given OCC's location and 
OCC's familiarity with Illinois law. Selecting Illinois law, along with 
federal law, as the governing law will also result in greatest 
consistency with current provisions of OCC's By-Laws and Rules. In 
addition, selection of Illinois as the forum for resolving any claims 
or disputes arising out of or relating to OCC's By-Laws or Rules will 
be most logical in light of the consistent application of Illinois law 
to relations between OCC and its clearing members.
    The following revisions to OCC's By-Laws and Rules are necessary to 
create a general choice of law provision:
    (1) New Choice of Law Provision: OCC will add a new Section 10 
(General Choice of Law and Forum Selection) to Article IX (General 
Provisions) of its By-Laws. New Section 10 will specify Illinois law as 
the governing law with respect to OCC's By-Laws and Rules as well as 
any agreements between OCC and clearing members. It will also specify 
that any lawsuits between clearing members and OCC be brought in a 
federal court or in the absence of federal jurisdiction in a state 
court located in Chicago, Illinois. Existing Sections 10-12 of Article 
IX will be renumbered as Sections 11-13 but will otherwise remain 
unchanged.
    (2) Amendments to Other Sections of the By-Laws: OCC will remove 
Article VI, Section 9(c) of the By-Laws in its entirety and replace it 
with a reference to Article IX, Section 10 of the By-Laws and with a 
notice provision that persons desiring to perfect security interests in 
cleared securities should seek the advice of counsel.
    (3) Amendments to Rules: OCC will make conforming amendments to 
Rule 604(b)(3)(ii) and to Interpretation and Policy .01 under Rule 614. 
These amendments are necessary in light of the adoption of the general 
choice of law provision described above. OCC will also delete language 
in Rule 614(m) providing for a contingency in the event of the 
application of the law of a jurisdiction that has not adopted the 1994 
amendments to Articles 8 and 9 of the UCC as these are no longer 
necessary.

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 its custody or control or for 
which it is responsible. \3\ The proposed rule change is designed to 
eliminate any uncertainty about the law applicable to contractual 
disputes between OCC and its members and about the forum for any 
litigation between OCC and its members. Uncertainty about these matters 
could prolong contractual disputes or litigation, which ultimately 
could affect or interfere with OCC's ability to clear and settle 
securities transactions for one or more of its members. Additionally, 
the proposed rule change is designed to assure that OCC's interests in 
members' collateral is perfected because the rule change clarifies that 
Illinois law applies to the securities on deposit at OCC by its foreign 
members. In the event of a member default, OCC uses such collateral 
either in the form of margin or clearing fund to meet its settlement 
obligations and to protect itself and its other members from financial 
loss. Accordingly, because the proposed rule change adds a new choice 
of law and forum selection provision to OCC's rules, the Commission 
finds that it is designed to assure the safeguarding of securities and 
funds which are in OCC's custody or control of for which it is 
responsible under Section 17A of the Act.
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    \3\ 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 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder. \4\
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    \4\ 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).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-2006-09) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority. \5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-24307 Filed 12-14-07; 8:45 am]

BILLING CODE 8011-01-P
