

[Federal Register: January 16, 2008 (Volume 73, Number 11)]
[Notices]               
[Page 2970-2974]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16ja08-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57118; File No. SR-OCC-2007-19]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Cross-Margining With ICE Clear U.S., Inc.

January 9, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 12, 2007, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared 
primarily by OCC. The Commission is publishing this notice and order to 
solicit comments on the proposed rule change from interested persons 
and to grant accelerated approval of the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).

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[[Page 2971]]

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

    The proposed rule change would facilitate the establishment of a 
program with ICE Clear U.S., Inc. (``ICE Clear'') for the cross-
margining of certain securities options contracts cleared by OCC in its 
capacity as a clearing agency registered with the Commission with 
certain futures and options on such futures cleared by ICE Clear in its 
capacity as a derivatives clearing organization registered with the 
Commodities Futures Trading Commission (``CFTC'').

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.\2\
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    \2\ The Commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The principal purpose of the proposed rule change is to facilitate 
the establishment of a program with ICE Clear for the cross-margining 
of certain securities options contracts cleared by OCC in its capacity 
as an Commission-registered clearing agency with certain futures and 
options on such futures cleared by ICE Clear in its capacity as a CFTC-
registered derivatives clearing organization.
    To establish the program, OCC and ICE Clear have entered into a 
Cross-Margining Agreement (``XM Agreement''), a copy of which is set 
forth as Exhibit 5A to SR-OCC-2007-19. The XM Agreement is based on and 
is substantially similar to the XM Agreement between OCC and the 
Chicago Mercantile Exchange Inc. (``CME'') as it relates to bilateral 
cross-margining.\3\ The following highlights the principal differences 
between the OCC-ICE Clear XM Agreement and the OCC-CME XM Agreement for 
bilateral cross-margining.
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    \3\ Securities Exchange Act No. 38584 (May 8, 1997), 62 FR 26602 
(May 14, 1997) (File No. SR-OCC-97-04). From 1997 to 2004, ICE Clear 
U.S. participated in a trilateral cross-margining program with OCC 
and CME under its prior names, ``Commodity Clearing Corporation'' 
and ``New York Clearing Corporation.'' The agreement governing the 
trilateral cross-margining program also sets forth the terms and 
conditions governing the current bilateral cross-margining program 
between OCC and CME.
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    Section 1 of the XM Agreement contains definitional provisions. 
Certain definitions have been amended, and others have been deleted as 
unnecessary. The definition of ``Business Day'' (section 1(b)) has been 
revised to delete the specific reference to Good Friday as a Business 
Day leaving it up to OCC and ICE Clear to mutually agree on days that 
may be deemed to be Business Days for purposes of the Agreement. The 
definition of ``Eligible Contract'' (section 1(k)) has been revised to 
permit the removal of a Contract as an Eligible Contract within 30 days 
of the written request of the Clearing Organization, which is defined 
as either OCC or ICE Clear, that clears such contract. The 30 day 
period may be extended if necessary to provide appropriate protection 
for the market place, existing open positions, and the holders thereof. 
The definition of ``Market Professional'' (section 1(p)) has been 
revised to reflect that a market professional includes any member of 
ICE Futures US, Inc. to the extent such member is trading Eligible 
Contracts for his or its own account. The terms ``Pair of Non-
Proprietary X-M Accounts'' and ``Pair of Proprietary X-M Accounts'' 
have replaced the terms ``Sets of Non-Proprietary X-M Accounts'' and 
``Sets of Non-Proprietary X-M Accounts'' (sections 1(r) and (v)) in 
order to reflect the bilateral nature of the OCC-ICE Clear XM program. 
This change has been made throughout the XM Agreement, as applicable. 
The terms ``Carrying Clearing Organization'' ``X-M Pledge Account'' 
have been deleted throughout the XM Agreement as unnecessary given the 
deletion of section 3 as described below.
    Section 2 of the OCC-ICE Clear XM Agreement governs establishment 
of X-M Accounts and contains no substantive changes from the OCC-CME XM 
Agreement other than referencing pairs of cross-margined accounts 
instead of sets of cross-margined accounts.
    Section 3 of the OCC/CME XM Agreement concerns the establishment of 
X-M Pledge Accounts. The terms of section 3, however, have been deleted 
from the OCC-ICE Clear XM Agreement. No X-M Pledge Accounts have been 
established in cross-margining programs operated by OCC and other 
commodity clearing organizations, and OCC and ICE Clear do not expect 
such accounts to be established in connection with their cross-
margining program.
    No changes have been made to section 4 of the OCC-ICE Clear XM 
Agreement.
    Section 5 relates to the calculation of margin. OCC and ICE Clear 
have agreed not to apply Super Margins to pairs of cross-margined 
accounts established under the OCC-ICE Clear XM Agreement. Accordingly, 
provisions of the OCC-CME XM Agreement relating to Super Margins, 
including Exhibit B to that agreement, the Super Margins Schedule, have 
been eliminated. References to Base Margin have been eliminated as it 
is no longer necessary to identify Base Margin and Super Margin as 
being the components of the total Margin Requirement. Other provisions, 
including the fact that OCC will calculate the Margin Requirement with 
respect to each pair of cross-margined accounts, have been reordered 
and clarified. Nevertheless, ICE Clear will have the right to elect to 
calculate margin requirements with prior notice to OCC. Finally, the 
requirement that oral agreements be made on a recorded telephone line 
has been deleted as OCC understands that ICE Clear does not utilize 
such lines.
    Section 6 relates to the forms and method of holding initial 
margin. As revised, section 6 permits the Clearing Organizations to 
agree to value collateral as provided under the rules of one Clearing 
Organization, but if no such agreement is reached, collateral would be 
valued at the lowest value given under the rules of both Clearing 
Organizations. This change accommodates OCC's and ICE Clear's current 
agreement to use OCC's valuations for deposits of Government 
securities, which valuations are substantially similar to but not 
exactly the same as those specified by ICE Clear.\4\ Further, OCC and 
ICE Clear have agreed that the Clearing Organizations shall be joint 
beneficiaries. To the extent that a letter of credit permits draws by 
only one of the beneficiaries, one Clearing Organization may make such 
draws by providing notice to but without obtaining consent of the other 
beneficiary. However, as in other cross-margining programs, the 
proceeds of any demand for payment under a letter of credit must be 
deposited by the issuer of the letter of credit directly into the 
applicable joint bank account of the Clearing Organizations. Section 6 
also has been modified to refer explicitly to the standard practice of 
equal sharing of

[[Page 2972]]

interest income earned from overnight investments by the Clearing 
Organizations. In addition, investments of customer segregated funds 
may be made only in ``permitted investments'' as defined in CFTC 
Regulation 1.25.
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    \4\ OCC implemented a comparable change in its cross-margining 
program with The Clearing Corporation. Securities Exchange Act 
Release No. 34-51291 (March 2, 2005), 70 FR 11295 (March 8, 2005) 
(File No. SR-OCC-2005-01).
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    Section 7 describes daily settlement procedures, which are subject 
to joint coordination and authorization of the Clearing Organizations. 
For initial morning settlements, the initiating Clearing Organization 
will send settlement instructions to the other Clearing Organization by 
6 a.m. (for clearing member debits) and by 9 a.m. (for clearing member 
credits). If approved, the non-initiating Clearing Organization will 
then send such instruction to the applicable XM clearing bank by the 
designated time frames. Final settlement for clearing member debits is 
to occur at or before 8 a.m. (ICE Clear's standard settlement time) and 
for clearing member credits at or before 10 a.m. (OCC's standard 
settlement time for such credits). Section 7 further has been modified 
to update the times at which certain files (e.g., prices, positions, 
and settlement amounts) are to be transmitted and collateral 
transactions may be effected by clearing members to reflect current 
processing cycles. In addition, section 7 has been amended to clarify 
that instructions to transfer funds to or from the bank accounts of a 
cross-margining clearing members or to or from the joint settlement 
accounts of the clearing organizations are subject to the provisions of 
section 7(a). Other changes to section 7 include additional references 
to the term ``Business Day'' and provisions clarifying that requests to 
the Designated Clearing Organization (``DCO'') to generate settlement 
instructions are to be made during normal business hours except as the 
DCO may otherwise agree. Finally, section 7 has been amended to 
eliminate the requirement that oral agreements to alter the time frames 
specified in section 7 be made over a recorded telephone line. Rather, 
such agreements will be confirmed by e-mail and in a subsequent written 
document.
    Section 8 concerns the suspension and liquidation of a cross-
margining clearing member. Section 8 has been modified to generally 
provide that the Clearing Organizations will use good faith efforts to 
transfer or liquidate contracts to minimize risk rather than to more 
specifically require best efforts to close out legs of hedged positions 
simultaneously. This change is principally intended to provide a small 
measure of additional flexibility and is not reflective of any 
substantive difference in the level of coordination expected to occur 
between OCC and ICE Clear with respect to the liquidation of cross-
margining accounts. Section 8 also has been modified to provide that 
the Clearing Organizations will issue a demand for immediate payment 
under any letter of credit deposited as margin unless they agree not to 
take such action. Provisions that permitted the Clearing Organizations 
to defer drawing on a letter of credit on receipt of satisfactory 
written assurances from the issuing bank extending its irrevocable 
commitment under the letter have been deleted in favor of the 
formulation described in the preceding sentence. Provisions relating to 
X-M Pledge Accounts have been deleted for the reasons described above.
    No substantive changes have been made to sections 9 through 12.
    Section 13 concerns termination of the OCC-ICE Clear XM agreement. 
Section 13 has been modified to provide that on termination of the OCC-
ICE Clear XM agreement any common stock deposited as margin would be 
transferred from the applicable joint custody account to the custody 
account of either of the Clearing Organizations at the direction of the 
depositing clearing member. This change has been made for clarity.
    No change has been made to Section 14.
    Section 15 concerns information sharing between the Clearing 
Organizations. No substantive change has been made to section 15 other 
than to reflect that ICE Clear will notify OCC if ICE Futures has 
applied any special surveillance procedures to any Clearing Member 
participating in OCC-ICE Clear cross-margining program. For the reason 
previously identified, section 15 has been further amended to eliminate 
the requirement that a recorded line be used for purposes of providing 
notices issued pursuant to section 15.
    Section 16 contains general provisions relating to the OCC-ICE 
Clear XM Agreement. A new paragraph (m) has been added to section 16, 
which sets forth the acknowledgment of each Clearing Organization that 
it does not have any intellectual property rights with respect to 
Eligible Contracts, including with respect to contract prices, 
settlement prices, open interest, trading volume, or any other data 
related to the Eligible Contracts cleared by the other Clearing 
Organization. However, paragraph (m) permits the use of such data by a 
Clearing Organization as necessary to carry out its functions under the 
OCC-ICE Clear XM Agreement. Remedies for any alleged violation of the 
paragraph are limited to equitable relief. Furthermore, the terms of 
paragraph (m) make it clear that the paragraph is in no way intended to 
limit or adversely affect the security interest of either Clearing 
Organization in Eligible Contracts or margin collateral.
    Section 17, which provides for arbitration of disputes, has been 
amended to provide an additional office where an arbitration proceeding 
may be held.
    Any other differences between the OCC-ICE Clear XM Agreement and 
the OCC-CME XM Agreement not specifically described above are not 
material in nature.
    Exhibit A to the OCC-ICE Clear XM Agreement contains the list of 
Eligible Contracts initially to be included in the OCC-ICE Clear cross-
margining program. Previously when approving cross-margining programs, 
the Commission required OCC to provide notice to the Commission when 
proposing to add new options classes to a cross-margining program. OCC 
now requests that the Commission terminate this notice requirement for 
all OCC cross-margining programs. OCC believes that such notification 
should no longer be required because of its substantial experience in 
safely operating various cross-margining programs since 1988 and 
because the addition of new options classes to cross-margining programs 
will be expedited by eliminating the notice requirement. Except for 
changes to the list of Eligible Contracts, OCC would continue to submit 
other modifications to the various XM agreements pursuant to the 
section 19(b) rule filing process.
    In addition to the OCC-ICE Clear XM Agreement, attached as Exhibit 
5A, the following are attached as exhibits to SR-OCC-2007-19:

------------------------------------------------------------------------
             Exhibit                                Name
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Exhibit 5B.......................  Proprietary Cross-Margin Account
                                    Agreement and Security Agreement
                                    (Joint Clearing Member).
Exhibit 5C.......................  Proprietary Cross-Margin Account
                                    Agreement and Security Agreement
                                    (Affiliated Clearing Members).
Exhibit 5D.......................  Non-Proprietary Cross-Margin Account
                                    Agreement and Security Agreement
                                    (Joint Clearing Member).
Exhibit 5E.......................  Non-Proprietary Cross-Margin Account
                                    Agreement and Security Agreement
                                    (Affiliated Clearing Members).
Exhibit 5F.......................  Market Professional's Agreement for
                                    Cross-Margining (Joint Clearing
                                    Member).
Exhibit 5G.......................  Market Professional's Agreement for
                                    Cross-Margining (Affiliated Clearing
                                    Members).
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[[Page 2973]]

    These agreements are also based on the comparable agreements used 
in OCC-CME cross-margining program with slight modifications as 
appropriate. Those modifications include: (i) Identifying the cross-
margining program as being a bilateral program between OCC and ICE 
Clear; (ii) making other non-substantive, technical changes (e.g., 
eliminating the term ``Carrying Clearing Organization,'' which was a 
concept needed only in the trilateral program); (iii) reflecting the 
revised definition of ``Market Professional'' as used in the OCC-ICE 
Clear XM Agreement; and (iv) eliminating the requirement that clearing 
members and market professionals furnish the Clearing Organizations 
with financing statements relating to positions, collateral, and 
property maintained with respect to accounts subject to the OCC-ICE 
Clear cross-margining program. The adoption by all fifty states of 
revisions to Articles 8 and 9 of the Uniform Commercial Code (``UCC'') 
has eliminated the need to obtain financing statements that were 
required to perfect security interests in futures and options under 
earlier versions of those Articles.
    The Commission has previously found that cross-margining programs 
are consistent with clearing agency responsibilities under section 17A 
of the Act.\5\ In so finding, the Commission noted that cross-margining 
enhances clearing member liquidity and systemic liquidity both in times 
of normal trading and in times of market stress.\6\ Accordingly, the 
proposed rule change is consistent with section 17A of the Act in that 
it implements another cross-margining program which will facilitate the 
removal of impediments to and help perfect the mechanism of a national 
system for the prompt and accurate clearance and settlement of 
securities transactions.
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    \5\ See, e.g., Securities Exchange Act Release No. 38584.
    \6\ Id.
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(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

    Section 17A(b)(3)(F) of the Act 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.\7\ The proposed rule change to 
establish a cross margining program between OCC and ICE Clear is 
substantially similar to other cross-margining programs to which OCC is 
a party that have been previously approved by the Commission. The 
Commission views cross-margining programs as a significant risk 
reduction method because they provide a means whereby individual 
clearing organizations do not have to independently manage the risk 
associated with some components (i.e., the futures or options 
component) of a clearing member's total portfolio. 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 it is responsible.
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    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC also requested that the Commission eliminate its requirement 
that OCC provide the Commission notice when proposing to add new 
options classes to a cross-margining program. Given OCC's long 
experience with operating cross-margining programs as well as its 
demonstrated ability to evaluate and manage any risks associated with 
adding new options classes, we find that the requirement to provide the 
Commission notice of the addition of new options classes is no longer 
either necessary or required.
    OCC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after publication 
of the notice of filing. The Commission finds good cause for approving 
the proposed rule change prior to the thirtieth day after publication 
of the notice of the filing because the proposed OCC-ICE Clear cross-
margining program is based on and is substantially similar to the 
existing OCC-CME cross-margining program, which was previously approved 
by the Commission and because such approval will allow OCC to implement 
the OCC-ICE Clear cross-margining program in early January pursuant to 
its implementation schedule.

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-2007-19 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-2007-19. 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-2007-19 and should be 
submitted on or before February 6, 2008.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the

[[Page 2974]]

requirements of the Act and in particular section 17A of the Act and 
the rules and regulations thereunder.\8\
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    \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).
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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-2007-19) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
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    \9\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E8-630 Filed 1-15-08; 8:45 am]

BILLING CODE 8011-01-P
