
[Federal Register: May 6, 2009 (Volume 74, Number 86)]
[Notices]               
[Page 21039-21041]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06my09-150]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59845; File No. SR-OCC-2009-08]

 
Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to Stock as Margin

April 29, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on April 14, 2009, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
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 to solicit comments on the proposed rule 
change from interested persons and to grant accelerated approval of the 
proposed rule change.
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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 will revise OCC's eligibility requirements 
for the deposit of stocks as margin.

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 is proposing to amend its rules to facilitate the deposit of 
common stocks as margin collateral by: (1) Reducing the minimum price 
for stocks from $10 to $3 and (2) eliminating the 10% concentration 
test for certain Exchange-Traded Funds (``ETFs'').
1. Minimum Price Test
    Prior to this rule change, OCC Rule 604(b)(4) required that all 
stocks (``Valued Securities'') including common and preferred stocks, 
submitted as margin collateral had to have a market value greater than 
$10 per share. The dramatic fall in equity prices over the last several 
months has led to a significant increase in the number of stocks that 
are priced below $10. Approximately one year ago, eleven stocks in the 
S&P 500 were priced below $10. As of April 13, 2009, sixty-six stocks 
were priced below $10. Although OCC's $10 minimum price requirement for 
stock collateral was intended to exclude stocks that might be volatile, 
illiquid, close to delisting, etc., it did so at the expense of 
excluding many stocks that if looked at individually would be deemed 
appropriate for margin collateral purposes.
    Under this filing, OCC will reduce the minimum market value for 
stocks from $10 to $3. OCC has performed an analysis of the impact of 
reducing the minimum share price for common stock and has concluded 
that such a change can be implemented for both option and non-option 
securities without materially increasing risk to OCC. OCC states that 
its approach to valuing Valued Securities is conservative because the 
current 30% haircut is high relative to the haircuts that will be 
applied upon implementation of its Collateral in Margins project.\2\ 
Moreover, OCC has examined the member accounts that hold the most 
volatile Valued Securities and found no instance where the amount of 
such holdings in any particular account was excessive. OCC nevertheless 
intends to closely monitor any account with a large amount of

[[Page 21040]]

deposited Valued Securities that would be subject to a high haircut 
(i.e., greater than 40%) under STANS. Preferred stocks, which will not 
be included in the Collateral in Margin program, will remain subject to 
a minimum share price of greater than $10.
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    \2\ Securities Exchange Act Release No. 58158 (July 15, 2008), 
73 FR 42646 (July 15, 2008). Under the Collateral in Margins filing, 
OCC will be updating its margin requirement methodology and risk 
management system known as ``STANS'' to more accurately measure the 
risk in clearing members' accounts. Some of the changes include 
providing OCC with greater flexibility to determine the amount of 
replacement collateral when securities deposited as margin are 
withdrawn and eliminating certain concentration limits and minimum 
share prices.
    OCC expects to fully implement the new Collateral in Margins 
methodology in the second quarter of 2010. In order to address 
current market conditions, OCC is proposing changes now to reduce 
the impact of the minimum price requirement and the 10% 
concentration test, both of which will be eliminated altogether for 
options securities when Collateral in Margins is implemented.
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2. ETF Concentration Test
    OCC Rule 604(b)(4) provides that ``equity and debt issues of any 
one issuer shall not be valued at an amount in excess of 10% of the 
margin requirement in the account for which such securities are 
deposited.'' The main purpose of the concentration test is to protect 
OCC from undue exposure where a single security deposited as collateral 
by a member suffers a sudden and extreme fall in value or becomes 
illiquid. Under the concentration test, a clearing member that wants to 
satisfy its OCC margin requirement solely with Valued Securities must 
submit a portfolio that contains at least ten separate securities. The 
concentration test was developed before the advent of ETFs representing 
an ownership interest in large numbers of securities such as those 
based on the S&P 500, Nasdaq 100, and Russell 2000.
    OCC states that it has analyzed such assets from a risk perspective 
and has concluded that they should be accepted as margin without regard 
to the concentration limits but subject to certain conditions. First, 
the assets acceptable for this purpose should be limited to liquid, 
broad-based equity index ETFs. Secondly, the applicable STANS margin 
interval for each deposited ETF exempted from the 10% concentration 
test must be less than or equal to 30%.
    Because this interim proposal for limiting the applicability of the 
10% concentration test is narrower than the corresponding change in the 
Collateral in Margins filing, OCC proposes to implement this interim 
proposal by adding an interpretation under Rule 604. By its terms, the 
interpretation will be superseded upon full implementation of the 
Collateral in Margins rule change, and OCC will thereafter remove it 
from the rule book.
    OCC states that the proposed changes to OCC's rules are consistent 
with the purposes and requirements of Section 17A of the Act \3\ 
because they are designed to promote the accurate and efficient 
clearance and settlement of transactions in securities and to safeguard 
assets within OCC's custody or control. The changes accomplish this 
purpose by facilitating the expanded use of Valued Securities as margin 
collateral while implementing certain limitations and monitoring 
procedures designed to limit risk. The proposed rule change is not 
inconsistent with the existing rules of OCC including any rules 
proposed to be amended.
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    \3\ 15 U.S.C. 78-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change will impose any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    OCC has not solicited or received written comments with respect to 
the proposed rule change. OCC will notify the Commission of any 
comments it receives.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a registered clearing agency and, in 
particular, the requirements of Section 17A of the Act.\4\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act,\5\ which requires that 
the rules of a clearing agency be designed 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. Although OCC is 
reducing the minimum share price for stocks eligible to be deposited as 
margin, the Commission is satisfied with OCC's analysis that such 
reduction is accompanied by sufficient risk-management controls to 
protect OCC from the risks associated with including such lower-priced 
stocks in members' margin accounts. The Commission also finds that 
allowing certain ETFs and other fund shares to be deposited as margin 
collateral that otherwise could not be deposited because of OCC's 
concentration restriction should not pose undue risks because such 
funds are broad based and highly liquid. Therefore, the proposed rule 
change should not adversely impact OCC's ability to continue to assure 
that the securities and funds in its custody or control or for which it 
is responsible are properly safeguarded.
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    \4\ 15 U.S.C. 78-1.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\6\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of notice in the Federal 
Register. The Commission believes that accelerating approval of this 
proposal should benefit OCC's members and investors by permitting OCC 
to update its margin requirements without undue delay and in a manner 
that will expand the securities that members may deposit as margin 
collateral while it implements the Collateral in Margin project without 
compromising OCC's ability to safeguard the funds and securities in its 
custody or control.
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    \6\ 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-2009-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-OCC-2009-08. 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

[[Page 21041]]

between the hours of 10:00 a.m. to 3:00 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-2009-08 and should be submitted on or 
before May 27, 2009.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\7\ that the proposed rule change (SR-OCC-2009-08) be, and it hereby 
is, approved on an accelerated basis.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule'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.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-10448 Filed 5-5-09; 8:45 am]

BILLING CODE 8010-01-P
