
[Federal Register: August 7, 2008 (Volume 73, Number 153)]
[Notices]               
[Page 46133-46136]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au08-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58258; File No. SR-OCC-2008-12]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to Cross-Margining

July 30, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on June 10, 2008, 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. 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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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The proposed rule change would amend OCC Rule 705 to add shares of 
money market funds as a form of collateral that may be deposited and 
recognized with respect to cross-margin (``XM'') accounts. In addition, 
the proposed rule change revises the cross-

[[Page 46134]]

margining agreement between OCC and the Chicago Mercantile Exchange, 
Inc., (``CME'') to reflect the allowance of money market fund shares as 
acceptable collateral.

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.

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

    OCC Rule 705 specifies the forms of collateral that may be 
deposited with respect to cross-margin (``XM'') accounts to meet 
required margin. Such forms of collateral currently include cash, 
government securities, government sponsored debt securities, letters of 
credit, and, if mutually acceptable to the XM clearing organizations, 
common stock. OCC staff regularly reviews these forms of collateral 
with an approach of determining a suitable balance between its clearing 
members' desire for a diverse combination of readily-available and 
cost-effective financial instruments and OCC's interest to access 
financial instruments that are relatively stable in value and easily 
converted to cash. Based on such a review, OCC is proposing to expand 
the forms of margin collateral acceptable for XM accounts to include 
shares in money market funds (``MMF Shares'').
    MMF Shares have been increasingly used to collateralize accounts at 
futures clearinghouses following the December 2000 amendments to 
Commodity Futures Trading Commission Regulation 1.25, which allow a 
futures commission merchant or a derivatives clearing organization to 
invest segregated funds in money market funds.\2\ OCC has accepted MMF 
Shares as collateral for several years.\3\ XM participants therefore 
desire to hypothecate shares in such funds as margin for their XM 
accounts as well.
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    \2\ Rules Relating to Intermediaries of Commodity Interest 
Transactions, 65 FR 77993 (Dec. 13, 2000). OCC estimates that MMF 
shares account for approximately 30% of the performance bond 
deposits at the two largest futures clearinghouses, CME and the New 
York Mercantile Exchange.
    \3\ Securities Exchange Act Release No. 47599 (Mar. 31, 2003), 
68 FR 16849 (Apr. 7, 2003).
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    Under the rule change, the underlying money market funds will be 
required to continuously meet the qualification standards of both OCC 
and the participating Commodity Clearing Organization (``CCO'') and 
will be valued at the lowest value given to MMF Shares under OCC's or 
the CCO's rules. Initially, OCC proposes to permit MMF Shares to be 
deposited as collateral in connection with its XM program with CME.\4\ 
Operationally, the shares will be transferred into an account held with 
the fund issuer that will be jointly controlled by OCC and CME for 
purposes of perfecting their security interest in deposited shares.
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    \4\ Presently, OCC maintains XM programs with the CME, The 
Clearing Corporation (``CCorp'') and ICE Clear U.S., Inc. (``ICE 
Clear''). However, there is currently no clearing member 
participating in the OCC/CCorp XM program. If that XM program 
becomes active again in the future and there is interest in MMF 
Shares as a form of margin collateral, OCC would then file with the 
Commission a proposed rule change to amend the OCC/CCorp XM 
agreement to include MMF Shares. OCC and ICE Clear have determined 
to defer including MMF Shares in their XM program until the clearing 
organizations have determined that there is clearing member interest 
in using such collateral. Because MMF Shares will not be an 
allowable form of collateral in all OCC XM programs, Rule 705 has 
been amended to provide that forms of margin collateral must be 
mutually acceptable to OCC and each participating CCO. This 
requirement is currently applied to deposits of common stock.
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    Clearing members will request the purchase of money market mutual 
fund shares from either OCC or CME. The shares will be jointly 
purchased by the clearinghouses using the funds of the requesting 
clearing member(s) that have been drafted from the bank account 
established in respect of the applicable cross-margining account (i.e., 
proprietary or segregated funds account). These shares will then be 
deposited in an account jointly controlled by OCC and the CME, and the 
clearing member(s) will receive margin credit for the collateral value 
less the applicable haircut of the shares purchased. Shares will be 
redeemed for cash from the fund issuer upon the instruction of either 
(i) the clearing member(s), with the proceeds being returned to the 
appropriate bank account, or (ii) the clearing organizations, upon the 
suspension of the clearing member(s) with proceeds being deposited into 
the appropriate liquidating settlement account for distribution in 
accordance with the XM agreement between OCC and CME.
    To permit the use of MMF Shares as a form of margin once all 
necessary regulatory approvals are obtained, OCC and CME have amended 
and restated their Cross-Margining Agreement (``Original Agreement''), 
which also has been updated to reflect the withdrawal in 2004 of the 
New York Clearing Corporation (``NYCC'') as a party thereto.\5\ With 
the elimination of NYCC as a party to the Original Agreement, the New 
Agreement accommodates the current OCC/CME bilateral cross-margining 
program but no longer provides for a trilateral cross-margining 
program. Other significant differences between the Original Agreement 
and the New Agreement are as follows.
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    \5\ The Amended and Restated Cross-Margining Agreement (``New 
Agreement'') is attached to OCC's rule filing as Exhibit 5A. From 
1997 to 2004, NYCC (now known as ICE Clear, U.S., Inc.) participated 
in a trilateral XM program with OCC and CME. See Securities Exchange 
Act Release No. 38584 (May 8, 1997), 62 FR 26602 (May 14, 1997) 
(order approving a cross-margining agreement among OCC, CME, and the 
Commodity Clearing Corporation). The agreement governing this 
trilateral XM also sets forth the terms and conditions governing the 
current bilateral program between OCC and CME.
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    Section 1 of the New Agreement contains definitional terms. Section 
1 has been modified to add a definitional term for MMF Shares (Section 
1(q)) and to revise other definitions to reflect the bilateral nature 
of the OCC/CME XM program. As defined, MMF Shares refer to shares in a 
money market fund that meet the requirements established under OCC's 
and CME's rules.\6\ References to NYCC have been eliminated from all 
the definition provisions and throughout the cross-margining agreement. 
The term ``Carrying Clearing Organization'' has been eliminated as 
unnecessary. The terms ``Pair of Non-Proprietary X-M Accounts'' and 
``Pair of X-M Accounts,'' respectively, have replaced the terms ``Sets 
of Non-Proprietary X-M Accounts'' and ``Sets of Proprietary X-M 
Accounts'' (Sections 1(s) and (w)) in order to reflect the bilateral 
nature of the OCC/CME XM program. Changes reflecting the deletion of 
the terms ``Carrying Clearing Organization,'' ``Sets of Non-Proprietary 
X-M Accounts,'' and ``Sets of Proprietary X-M Accounts'' have been made 
throughout the New Agreement. The definition of ``Market Professional'' 
(Section 1(p)) has been revised to eliminate references to NYFE 
members, which is the former name of the market for which NYCC provides 
clearing services. Other than referencing pairs of XM accounts, as 
applicable, no substantive changes have been made to Sections 2, 3, and 
4. Section 5, which relates to the calculation of margin, is also 
substantively unchanged other than

[[Page 46135]]

the deletion of an unnecessary provision regarding NYCC's election to 
use the margin calculation produced by the designated clearing 
organization's margin system.
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    \6\ OCC's criteria for accepting deposits of MMF shares as 
margin are set forth in OCC Rule 604(b)(3). This rule, among other 
things, establishes concentration, control, and valuation standards 
governing money market fund shares.
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    Section 6 relates to the forms and method of holding initial 
margin. As revised, Section 6 permits the deposit of MMF Shares as a 
form of initial margin and requires such shares to be held for the 
joint benefit of the clearing organizations on the books of the issuing 
fund or its agent or in such other manner as mutually agreed upon by 
the clearing organizations.\7\ Unnecessary references to the CME acting 
as NYCC's agent for the purpose of executing instructions to release 
forms of collateral from deposit have been deleted.\8\
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    \7\ Proposed Section 6(a) and (b).
    \8\ Id.
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    Section 7 describes daily settlement procedures, which are subject 
to joint coordination and authorization. References to the CME acting 
as NYCC's agent for purposes of authorizing fund transfers and other 
provisions relating to trilateral cross-margining have been deleted.\9\ 
The time at which the Clearing Organizations are to share position and 
other related information to the XM accounts has been advanced to 1 
a.m. (Central Time) from 3 a.m. (Central Time).\10\
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    \9\ Proposed Section 7(a) and (b).
    \10\ Proposed Section 7(d).
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    Section 8 concerns the suspension and liquidation of one or more XM 
clearing members. Section 8 has been modified to eliminate the loss or 
surplus sharing provisions that were effective in the event NYCC was a 
Carrying Clearing Organization in respect of an XM account, leaving in 
place terms that provide for equal loss or surplus sharing subject to 
the limitation that sharing in a surplus by a clearing organization for 
purposes of covering its other losses experienced is capped at an 
amount equal to such other losses.\11\ In addition, Section 8 has been 
amended to provide that OCC and CME would demand immediate payment of 
any letter of credit deposited as margin unless both agreed 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.\12\ No substantive changes have 
been made to Sections 9 through 12.
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    \11\ Proposed Section 8(d) and (f).
    \12\ Proposed Section 8(c).
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    Section 13 concerns the termination of the New Agreement. 
Provisions that specifically related to termination by NYCC have been 
deleted.\13\ Proposed Section 13, paragraph (d), which concerns the 
treatment of collateral deposited as margin on termination, has been 
modified to provide for the return of deposited MMF Shares to the 
depositing clearing member. No substantive changes have been made to 
Section 14. Section 15, which addresses information sharing, has been 
modified to reflect the OCC/ICE Clear XM Agreement other than as it 
relates to use of a recorded phone line for providing notices pursuant 
to Section 15.\14\ No substantive changes have been made to Sections 16 
and 17. OCC states that any other changes made to the XM Agreement not 
specifically described above are not material in nature and therefore 
were not described in this narrative of the proposed rule change.
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    \13\ Proposed Section 13(a), (b), and (c).
    \14\ See Securities Exchange Act Release No. 57118 (Jan. 9, 
2008), 73 FR 2970 (Jan. 16, 2008) (order approving the cross-
margining agreement between OCC and ICE Clear U.S., Inc.).
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    In addition to Exhibit 5A, the following are attached as exhibits 
to the proposed rule change filing:

------------------------------------------------------------------------
                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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    These forms of agreements have been slightly modified from the 
forms currently used in OCC/CME cross-margining. Modifications include: 
(i) Deleting provisions and terminology (e.g., ``Carrying Clearing 
Organization'') that were applicable to trilateral cross-margining, 
(ii) reflecting the definition of ``market professional'' as used in 
the New Agreement, and (iii) 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 cross-
margining. The adoption by all 50 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.
    OCC states that the proposed rule change is consistent with the 
purposes and requirements of Section 17A of the Act \15\ because it 
updates the (i) forms of collateral that are currently permitted to be 
deposited with respect to XM accounts under the OCC/CME cross-margining 
program to include MMF Shares, a form of collateral currently permitted 
by both clearing organizations to be deposited with respect to accounts 
other than cross-margin accounts; and (ii) documents used in connection 
with OCC/CME cross-margining. Cross-margining enhances the safety of 
the clearing system while providing lower clearing margin costs to 
participants. Expanding acceptable collateral for cross-margin accounts 
should encourage their use and is therefore beneficial to the clearing 
system and its participants. Updating the documents governing the OCC/
CME cross-margining program provides greater clarity and certainty with 
respect to the program's operation. Moreover, OCC states that the 
proposed rule change is not inconsistent with OCC's by-laws and rules, 
including any proposed to be amended.
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    \15\ 15 U.S.C. 78q-1.
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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.

[[Page 46136]]

III. Commission's Findings and Order Granted Accelerated Approval of 
the Proposed Rule Change

    Section 17A(b)(3)(F) of the Act \16\ requires the rules of a 
clearing agency to assure the safeguarding of securities and funds that 
are in the custody or control of the clearing agency or for which it is 
responsible. The Commission believes the proposal is consistent with 
this requirement because money market fund shares are already an 
acceptable form of margin asset that may be deposited at OCC and are 
subject to OCC's prudent controls. Moreover, the use of money market 
fund shares for cross-margining purposes should further diversify the 
portfolio of assets that may be deposited to collateralize cross-margin 
accounts thereby enhancing OCC's ability to access financial 
instruments that are relatively liquid and stable in value. 
Accordingly, the proposed rule change should not affect OCC's ability 
to assure the safeguarding of securities and funds in its custody or 
control or for which it is responsible.
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    Pursuant to section 19(b)(2) of the Act,\17\ OCC has requested the 
Commission to approve the proposed rule change prior to the thirtieth 
day after the date of publication of notice of the filing. The 
Commission finds good cause for approving because the new OCC/CME 
cross-margining program is based on and is substantially similar to 
other cross-margining programs that the Commission has approved and 
because such approval will allow OCC to implement the new program in 
late July pursuant to its implementation schedule.
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    \17\ 15 U.S.C. 78s(b)(2).
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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-comment@sec.gov. Please include 
File No. SR-OCC-2008-12 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-OCC-2008-12. 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. to 3 p.m. Copies of such filing also will be available for 
inspection and copying at OCC's principal office and on OCC's Web site 
at http://www.theocc.com/publications/rules/proposed_changes/
proposed_changes.jsp. 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 No. OCC-
2008-12 and should be submitted on or before August 28, 2008.

V. 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 \18\ and the rules and regulations 
thereunder.
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    \18\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-OCC-2008-12) be, and it 
hereby is, approved on an accelerated basis.\20\
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    \19\ 15 U.S.C. 19s(b)(2).
    \20\ 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).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18237 Filed 8-6-08; 8:45 am]

BILLING CODE 8010-01-P
