
[Federal Register: December 8, 2008 (Volume 73, Number 236)]
[Notices]               
[Page 74554-74556]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08de08-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59036; File No. SR-OCC-2008-06]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Accelerated Approval of a Proposed Rule Change Relating 
to the Stock Loan/Hedge Program

December 1, 2008.

I. Introduction

    On February 25, 2008, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') and 
on October 7, 2008, amended proposed rule change File No. SR-OCC-2008-
06 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 November 17, 2008.\2\ No comment letters have been received 
to date. This order approves the proposed rule change on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 58901 (November 5, 
2008), 73 FR 67918.
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II. Description

    OCC has decided to take certain steps to provide for the continued 
growth and development of its Stock Loan/Hedge Program (``Program''). 
These include (1) elimination of the ability of clearing members to 
carry stock loan and borrow positions without depositing risk margin 
and (2) adjusting the amount of required risk margin where stock loan 
collateral provided by the borrower to the lender exceeds the value of 
the borrowed stock.

Background and General Description of the Proposed Rule Change

    The Program is provided for in Article XXI of OCC's By-Laws and 
Chapter XXII of the Rules. It provides a means for OCC clearing members 
to submit certain stock loan/borrow transactions (``stock loan 
transactions'') to OCC for clearance. The stock and the stock loan 
collateral move through the facilities of The Depository Trust Company 
from the lending clearing member (``lender'') to the borrowing clearing 
member (``borrower''), and vice versa when the stock is returned, in 
the same way that such transactions are ordinarily effected. Where the 
stock loan transaction is submitted to OCC for clearance, however, OCC 
is substituted as the lender to the borrower and the borrower to the 
lender. Thereafter, OCC guarantees performance of the stock loan 
transaction with respect to delivery and return of stock and collateral 
and the making of daily mark-to-market payments between the lender and 
borrower, which are effected through OCC's cash settlement system.
    One advantage of submitting stock loan transactions to OCC is that 
the stock loan and borrow positions then reside in the clearing 
member's options accounts at OCC and to the extent that they offset the 
risk of options positions carried in the same account, may reduce the 
clearing member's margin requirement in the account. OCC's risk is, in 
turn, reduced by having the benefit of the hedge. Nevertheless, OCC 
currently permits qualified clearing members to elect to submit stock 
loan and borrow transactions to OCC on a ``margin ineligible basis,'' 
meaning that the positions are excluded from OCC's margin calculations 
for the account containing those positions. Margin-ineligible stock 
loan and borrow positions do not reduce the margin requirement for the 
account to reflect any offsetting value they might have, and OCC does 
not collect additional margin to reflect the risk of those positions. 
The election is made by each clearing member on an account-by-account 
basis so that all stock loan and borrow positions in a particular 
account are carried on a margin ineligible basis or none are. In order 
to carry stock loan and borrow positions on a margin ineligible basis, 
a clearing member must meet heightened standards of creditworthiness as 
set forth in Interpretation and Policy .06 under Section 1 of Article V 
of OCC's By-Laws.
    While OCC believes that the current credit-based risk management 
approach has been adequate to date given historical Program activity 
levels, OCC also believes that a more conservative approach is 
warranted to provide for further growth of the Program and greater 
market volatility. OCC therefore seeks to better manage the market risk 
resulting from open stock loan and

[[Page 74555]]

borrow positions by applying its standard margining approach to all 
such positions.
    Another potential exposure that OCC seeks to address arises from 
the stock loan market practice of requiring the borrower to 
overcollateralize a position by giving the lender cash collateral equal 
to 102% of the position's current market value. OCC's rules provide 
that OCC's guarantee of Program transactions extends to the full value 
of the collateral exchanged as part of a stock loan transaction. 
Therefore, if a lender were to fail, even if the stock could be sold 
out at 100% of the marking price, the borrower would be left with a 2% 
deficiency for which OCC would be liable. Managing this potential 
exposure will be accomplished by (a) an additional margin charge to 
lenders executing stock loans at 102% in an amount equal to the 2% 
excess collateral and (b) borrowers receiving a margin credit in an 
equal amount. These new margin charges/credits are independent of and 
in addition to the risk margin determined by the ``STANS'' margining 
system that will be collected and maintained from both lenders and 
borrowers.
    In connection with the submission of this filing, OCC has confirmed 
with the Commission staff that the proposed rule change would not have 
adverse consequences to clearing members under Rule 15c3-1, the 
Commission's net capital rule.\3\ Specifically, where stock loan/borrow 
transactions are submitted to OCC for clearance through the Program, 
any additional amount of margin required to be deposited with OCC as a 
result of such transactions shall be treated the same as any other 
portion of the OCC margin deposit and therefore shall not constitute an 
unsecured receivable and shall not be required to be deducted from net 
capital.
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    \3\ 17 CFR 240.15c-3-1.
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    In order to minimize any potential disruptive impact associated 
with these changes in the margin treatment of stock loan and borrow 
positions, OCC will utilize a two-step implementation plan. There will 
be a one-month grace period (beginning from the date of Commission 
approval of this rule filing) before the changes are applied to any 
positions. For the next two months, all new positions must be submitted 
on a margin-eligible basis and will be subject to the 
overcollateralization provisions, but positions that were carried on a 
margin-ineligible basis as of the date of the approval order will not 
be required to be margined or subject to the overcollateralization 
provisions. After the end of that initial three-month period, all stock 
loan and borrow positions in all accounts will be carried on a margin-
eligible basis and will be subject to the overcollateralization 
provisions regardless of when the positions were established.

Rule Amendments Applicable to Changes in the Program

    OCC proposes the following amendments to its Rules to achieve the 
above-referenced initiative and accommodate and facilitate the 
continued growth and development of the Program.
1. Margin Requirements--Rule 601
    OCC will amend Rule 601(e) to eliminate its current category of 
``margin-ineligible'' accounts and instead will apply its standard 
margining approach to all Program positions using its ``STANS'' system. 
This change will become effective three months following the date of 
the Commission's order approving this rule filing. In addition, a new 
interpretation .06 will be added to Rule 601 setting forth the 
additional margin charges and credits and the implementation schedule 
applicable to stock loan and borrow positions that have collateral set 
at 102%.
2. Instructions to the Corporation--Rule 2201
    Rule 2201(a) will be amended to provide that with respect to 
standing instructions that clearing members provide to OCC, the 
requirement to notify OCC of the fact that the clearing member is 
approved to maintain stock loan positions and stock borrow positions in 
its accounts on a non-margined basis and the account or accounts that 
are to be margin-ineligible shall become inapplicable three months from 
the date of this order. After that time, OCC will have eliminated the 
ability to carry any stock loan or borrow positions on a ``margin-
ineligible'' basis.
3. Initiation of Stock Loans--Rule 2202
    Rule 2202(f) is being amended to specify that one month after the 
date of this order a member shall not be able to submit new stock loan 
transactions to OCC for clearance in a margin-ineligible account.

III. Discussion

    Section 19(b)(2)(B) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization. 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 the custody or 
control of the clearing agency or for which it is responsible.\4\ The 
proposed rule change eliminates the ability of members to carry stock 
loan/borrow positions on a ``margin ineligible'' basis which should 
enhance OCC's ability to assure that it has collected sufficient margin 
from its members in relation to such members' Program activity. This 
approach enhances OCC's ability to manage the risk of a clearing 
member's Program activity in relation to its general clearance and 
settlement activities and should better enable OCC to protect itself 
and its members from potential losses associated with the Program. The 
addition of implementation period should alleviate any potential 
disruptive effects for members in connection with the proposal. 
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 OCC is responsible.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC has requested that the Commission approve 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 
changes prior to the thirtieth day after publication of notice and 
prior to the expiration of the comment period because such approval 
will permit OCC to implement a risk-reduction proposal without 
unnecessary delay.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular Section 17A of the Act and the rules and regulations 
thereunder.\5\
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    \5\ In approving the proposed rule changes, the Commission 
considered the proposals' 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-2008-06) be and hereby 
is approved on an accelerated basis.


[[Page 74556]]


    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-28964 Filed 12-5-08; 8:45 am]

BILLING CODE 8011-01-P
