
[Federal Register Volume 76, Number 69 (Monday, April 11, 2011)]
[Notices]
[Pages 20063-20065]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8473]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64181; File No. SR-OCC-2010-19]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving a Proposed Rule Change Relating to Stock Loan Programs

April 5, 2011.

I. Introduction

    On December 16, 2010, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'').\1\ The proposed rule change clarifies the regulatory 
treatment under Rule 15c3-1 \2\ of collateral and margin posted by 
clearing members participating in stock loan transactions through OCC's 
Stock Loan/Hedge Program or Market Loan Program. The proposed rule 
change was published for comment in the Federal Register on January 5, 
2011.\3\ No comment letters were received. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.15c3-1.
    \3\ Securities Exchange Act Release No. 63623 (Dec. 30, 2010), 
76 FR 0602.
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II. Description of the Proposal

A. Background

    OCC's Stock Loan/Hedge Program, provided for in Article XXI of 
OCC's By-

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Laws and Chapter XXII of OCC's Rules, provides a means for OCC clearing 
members to submit broker-to-broker stock loan transactions to OCC for 
clearance. Broker-to-broker transactions are independently-executed 
stock loan transactions that are negotiated directly between two OCC 
clearing members. OCC's Market Loan Program, provided for in Article 
XXIA of OCC's By-Laws and Chapter XXIIA of OCC's Rules, accommodates 
securities loan transactions executed through electronic trading 
platforms that match lenders and borrowers on an anonymous basis. 
Anonymous stock loan transactions are initiated when a lender or 
borrower, which is either an OCC clearing member participating in the 
Market Loan Program or a non-clearing member that has a clearing 
relationship with an OCC clearing member participating in the Market 
Loan Program, accepts a bid/offer displayed on a trading platform.\4\
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    \4\ A clearing member participating in the Market Loan Program 
is obligated to OCC as principal with respect to transactions 
effected by its customers that are non-clearing members of a trading 
platform.
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    When a stock loan transaction is submitted to and accepted by OCC 
for clearance, OCC substitutes itself as the lender to the borrower and 
as the borrower to the lender thus serving a function for the stock 
loan market similar to the one it serves for the listed options market. 
OCC guarantees the future daily mark-to-market payments, which are 
effected through OCC's cash settlement system, between the lending 
clearing member and borrowing clearing member and guarantees the return 
of the loaned stock to the lending clearing member and the return of 
the collateral to the borrowing clearing member upon close-out of the 
stock loan transaction.\5\ One advantage of submitting stock loan 
transactions to OCC is that the stock loan and stock borrow positions 
then reside in the clearing member's options account 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.
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    \5\ With respect to both the Stock Loan/Hedge Program and the 
Market Loan Program, the loaned securities are moved to the account 
of the borrower against cash collateral (normally 102%) through the 
facilities of The Depository Trust Company (``DTC''). DTC notifies 
OCC that the movement has occurred at the time the transaction is 
submitted for clearance. The securities are returned to the lender 
against return of the cash collateral through the same mechanism.
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    One of the tools that OCC uses to manage its exposure to stock loan 
transactions is the margin that OCC calculates and collects with 
respect to each account of a clearing member.\6\ Such margin consists 
of a mark-to-market component that is based on the net asset value of 
the account (i.e., the cost to liquidate the account at current 
prices). A second component of such margin is the risk component 
(``Risk Margin'') determined by OCC's proprietary margin system based 
on the net risk of all open positions carried in the account, including 
stock loan positions as well as options positions.\7\ An additional 
margin requirement (``Additional Margin''), which is solely applicable 
to stock loan transactions, arises where the collateral provided by the 
borrowing clearing member is greater than the current market value of 
the loaned stock. For example, in a stock loan transaction where the 
borrowing clearing member is required to provide collateral equal to 
102% of the current market value of the loaned stock, OCC will charge 
the corresponding lending clearing member an Additional Margin amount 
equal to the 2% excess collateral and will credit the borrowing 
clearing member an equal amount. The Additional Margin charge/credit is 
designed to provide OCC with resources so it can fully compensate a 
party to a stock loan transaction in the event of a counterparty 
default where the loaned stock or collateral held by the non-defaulting 
party is worth less than the value of the collateral or loaned stock 
exchanged.
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    \6\ This OCC margin requirement is in addition to the cash 
collateral that is transferred to the stock lender and may be 
deposited in any form constituting acceptable margin collateral 
under OCC Rule 604.
    \7\ OCC does not calculate risk margin on stock loan positions 
and stock borrow positions separately from risk margin on options 
positions carried in the same account.
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B. Description of Rule Change

    In December 2008, the Commission approved an OCC proposed rule 
change that memorialized OCC's understanding that where stock loan 
transactions are submitted to OCC for clearance through the Stock Loan/
Hedge Program, any Additional Margin that a clearing member is required 
to deposit with OCC will be treated the same as any other portion of 
the OCC margin deposit requirement and therefore will not constitute an 
unsecured receivable that would otherwise be required to be deducted 
from such clearing member's net capital for purposes of Rule 15c3-1.\8\
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    \8\ Securities Exchange Act Release No. 59036 (Dec. 1, 2008), 73 
FR 74554 (Dec. 8, 2008).
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    Pursuant to this rule change, OCC is expanding the prior 
interpretive relief to make clear that: (i) clearing members are not 
required to take a net capital deduction with respect to any excess of 
the collateral over the market value of the loaned stock and (ii) the 
interpretive relief also applies to stock loan transactions submitted 
to OCC for clearance through the Market Loan Program. As explained 
above, any over-collateralization of the loaned stock will be secured 
and offset by Additional Margin charges/credits applied by OCC. 
Therefore, any such excess collateral on loaned stock also would not be 
deemed to constitute an unsecured receivable for purposes of Rule 15c3-
1.
    In connection with the above-referenced initiatives, OCC will amend 
Interpretation .05 to OCC Rule 601 to reflect the regulatory treatment 
under Rule 15c3-1 of collateral and margin posted by clearing members 
participating in stock loan transactions through the Stock Loan/Hedge 
Program and/or Market Loan Program.\9\
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    \9\ The text of the proposed amendment to Interpretation .05 can 
be found at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_10_19.pdf.
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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 the custody or control of the 
clearing agency or for which it is responsible.\10\ OCC's rule change 
to provide additional interpretive relief with respect to the net 
capital treatment of stock loan transactions extends OCC's previous 
changes to its Stock Loan/Hedge Program \11\ and is similarly designed 
to enhance OCC's ability to assure that it has collected sufficient 
margin from its members in relation to such members' activity. The new 
interpretive relief should continue to provide OCC with the ability to 
manage the risk of a clearing member's stock loan activity and should 
continue to enable OCC to protect itself and its members from potential 
losses associated with the stock loan program. 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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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ Supra note 8.
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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 \12\ and the rules and regulations 
thereunder.
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    \12\ 15 U.S.C. 78q-1.

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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-OCC-2010-19) be and 
hereby is approved.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8473 Filed 4-8-11; 8:45 am]
BILLING CODE 8011-01-P


