
[Federal Register Volume 77, Number 140 (Friday, July 20, 2012)]
[Notices]
[Pages 42784-42786]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17664]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67443; File No. SR-OCC-2012-11]


Self-Regulatory Organizations; Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to the Auction 
Process Under Options Clearing Corporation Rule 1104

July 16, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on July 3, 2012, 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 to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Among other things, the proposed rule change would add an 
interpretation .02 to Rule 1104 to provide a further general 
description of such a private auction process by which OCC may 
liquidate all or any part of a suspended Clearing Member's accounts.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of

[[Page 42785]]

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. The self-
regulatory organization 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

    In a recent rule change, OCC proposed and the Commission approved 
provisions to OCC Rule 1104 and Rule 1106 to specifically provide that, 
in addition to all other permitted means of liquidating positions and 
collateral in the accounts of a suspended Clearing Member, OCC may, at 
its discretion, liquidate such positions and collateral through a 
private auction process.\3\ The purpose of the current proposed rule 
change is to add an interpretation .02 to Rule 1104 to provide a 
further general description of such a private auction process by which 
OCC may liquidate all or any part of a suspended Clearing Member's 
accounts. The proposed interpretation would set forth the basic 
parameters of such an auction, including the process for creating a 
standing pool of pre-qualified potential bidders, criteria for fixing 
the number of bidders to participate in any particular auction and the 
method of selection of such bidders. Such criteria are intended to 
ensure an orderly and robust auction and to ensure that auction bidders 
are financially able to make payment for and assume the obligations of 
the collateral and positions they are acquiring and able to manage the 
risk thereof and/or trade out of the positions without creating 
unnecessary further risk to the Corporation. Interpretations cross-
referencing interpretation .02 to Rule 1104 would be added following 
Rules 1106, 1107, 2210, and 2210A, and the latter three rules are 
proposed to be amended to provide that the auction process is 
applicable to assets and obligations arising from exercised and 
assigned options and matured, physically-settled futures and to assets 
and obligations arising from the close-out of stock loan and borrow 
positions as well.
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    \3\ See Exchange Act Release No. 65654 (October 28, 2011), 76 FR 
68236 (November 3, 2011) (SR-OCC-2011-08) (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).
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    Each private auction will be a ``sealed bid'' auction in which pre-
qualified bidders selected by OCC will submit confidential bids such 
that no bidder will know the bid information of any of the other 
bidders. The pool of prequalified potential bidders in any auction 
would consist of all Clearing Members who are interested in 
participation and willing to execute the required documentation. 
Participation in the pre-qualified bidder pool by certain non-Clearing 
Members would also be solicited. Should the Corporation determine to 
hold a private auction, the Corporation will review the pool of pre-
qualified auction bidders and would seek to invite a fixed number of 
bidders for the auction based on objective criteria that the 
Corporation believes would optimize the effectiveness of the auction 
process. OCC believes that fixing the size of the desired bidder group 
at a number that is either too large or too small could have an adverse 
impact on the effectiveness and competitiveness of the auction process. 
A group that is too small would not provide adequate competition among 
bidders, while setting the target size for the group of bidders at too 
large a number would discourage participation because of fear that the 
composition of the portfolios to be bid on would be leaked beyond the 
bidder group, allowing non-bidders to trade ahead of the auction to the 
disadvantage of bidders in the auction. Attempting to organize too 
large a group of bidders would also cause potentially costly delay in 
the auction process. OCC would most likely use its secure ENCORE system 
or telephone contact to invite selected pre-qualified bidders to submit 
bids in the private auction. No invited bidder would be obligated to 
bid in the private auction.
    At the conclusion of a private auction, OCC will, in its 
discretion, select the best bid submitted for the auctioned portfolio 
based on the totality of the circumstances.\4\ For example, where an 
auction portfolio has a negative net asset value, negative bids may be 
submitted which indicate how much OCC would be required to pay a bidder 
to assume the auction portfolio, and the lowest rather than the highest 
bid may therefore be the best bid. Other factors such as any condition 
attached to a bid may influence the choice of best bid.
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    \4\ The Staff notes for clarity that OCC has no specific 
procedures to announce auctions or their results other than notices 
to the winning bidders and losing bidders as specified in proposed 
Rule 1104(e).
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    Finally, in order to increase legal certainty under potentially 
applicable provisions of the Uniform Commercial Code, the proposed 
interpretations would require Clearing Members to acknowledge that the 
private auction process is a commercially reasonable method of 
liquidating a suspended Clearing Member's accounts and that notice of a 
private auction to a suspended Clearing Member is not required under 
the auction process.
    OCC believes that the proposed changes to OCC's Rules are 
consistent with the purposes and requirements of Section 17A of the 
Act, because they are designed to assure the safeguarding of securities 
and funds which are in the custody or control of OCC by providing 
appropriate procedures for the auctioning of positions and collateral 
of a suspended clearing member. The changes are intended to facilitate 
the performance of OCC's obligations with respect to the prompt and 
accurate clearance and settlement of securities transactions and the 
protection of securities investors and the public interest. The 
proposed rule change is not inconsistent with the By-Laws and Rules of 
OCC, including any proposed to be amended.

(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.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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.

[[Page 42786]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml) or
    Send an email to rule-comments@sec.gov. Please include File Number 
SR-OCC-2012-11 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 Number SR-OCC-2012-11. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_12_11.pdf.
    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 Number SR-OCC-2012-11 
and should be submitted on or before August 10, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-17664 Filed 7-19-12; 8:45 am]
BILLING CODE 8011-01-P


