
[Federal Register Volume 76, Number 213 (Thursday, November 3, 2011)]
[Notices]
[Pages 68238-68239]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28461]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65654; File No. SR-OCC-2011-08]


Self-Regulatory Organizations; Options Clearing Corporation; 
Order Approving Proposed Rule Change, as Modified by Amendment No. 1, 
To Provide Specific Authority To Use an Auction Process as One of the 
Means To Liquidate a Defaulting Clearing Member's Accounts

October 28, 2011.

I. Introduction

    On July 28, 2011, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2011-08 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on August 3, 2011.\3\ On September 15, 2011, OCC 
filed Amendment No. 1 to the proposed rule change. The proposed rule 
change, as modified by Amendment No. 1 was published in the Federal 
Register on September 27, 2011.\4\ The Commission received no comment 
letters on the proposed rule change or Amendment No. 1. This order 
approves the proposed rule change as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 64982 (July 28, 2011), 
76 FR 46867 (August 3, 2011).
    \4\ Securities Exchange Act Release No. 65370 (September 21, 
2011), 76 FR 59750 (September 27, 2011). The proposed rule change as 
originally filed revises OCC Rule 1104 (margins deposited and 
contributions to the Clearing Fund) to clarify that the auction 
process is one way to liquidate a defaulting members accounts with 
respect to positions and collateral in a defaulting member's 
accounts. Amendment No. 1 to the proposed rule change also revises 
OCC Rule 1106 (open positions of a suspended clearing member) in a 
similar manner. Accordingly, as amended, the proposed rule change 
clarifies that the auction process is one way to liquidate a 
defaulting members accounts with respect to positions and collateral 
in a defaulting member's accounts under both OCC Rule 1104 and OCC 
Rule 1106. Telephone conference between Stephen Szarmack, Vice 
President and Associate General Counsel, OCC, and Pamela Kesner, 
Special Counsel, Securities and Exchange Commission Division of 
Trading and Markets, on September 20, 2011.
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II. Description

    OCC is revising its rules to provide specific authority for OCC to 
use an auction process as one of the possible means by which OCC may 
liquidate a defaulting clearing member's accounts.\5\ An auction is 
likely to be the most efficient and orderly procedure practicable for 
closing out clearing member portfolios in some circumstances.
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    \5\ The specific language of the proposed provision can be found 
at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_11_08_a_1.pdf.
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    The liquidation of open long and short positions through exchange 
transactions is an obvious means of closing out the positions of a 
defaulting member. However, auctions are increasingly viewed as an 
efficient and cost effective alternative for liquidating some or all of 
a clearing member's positions and collateral, especially where the 
positions are very large or in unstable market conditions. As compared 
to liquidating positions through exchange transactions, an auction may 
usually be expected to result in a shorter liquidation period and 
reduced execution risk. During Lehman Brothers Holdings Inc.'s 
liquidation, clearinghouses such as LCH. Clearnet and CME Clearing 
liquidated certain derivatives positions through auctions.
    Chapter XI of OCC's Rules, which governs the liquidation of a 
clearing member's accounts in the event of an insolvency, provides that 
open positions of a clearing member must be closed by OCC ``in the most 
orderly manner practicable.'' While OCC and its counsel believe that 
this language is broad enough to authorize a private auction, i.e., an 
auction limited to selected bidders, as a means of closing out open 
positions, OCC also believes that explicit authorization for a private 
auction procedure could reduce the likelihood of a legal challenge 
should such a procedure be utilized.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that, among other things, 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, and, to 
the extent applicable, derivative agreements, contracts, and 
transactions.\6\ The proposed rule change is designed to ensure OCC has 
the tools necessary to liquidate the open positions and margin of a 
defaulting member in order to meet its settlement obligations to non-
defaulting members promptly and in a manner that is least disruptive to 
the securities markets. OCC has not yet established detailed procedures 
for conducting an auction; however, any such auction must comply with 
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requirements of Section 17A, including requirements that the rules of a 
clearing agency are, in general, designed to protect investors and the 
public interest and are not designed to permit unfair discrimination 
among participants in the use of the clearing agency.\7\
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \8\ and the 
rules and regulations thereunder.
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    \8\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change, as modified by Amendment No. 1, 
(File No. SR-OCC-2011-08) be, and hereby is, approved.\10\
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact of efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary .
[FR Doc. 2011-28461 Filed 11-2-11; 8:45 am]
BILLING CODE 8011-01-P


