
[Federal Register Volume 77, Number 170 (Friday, August 31, 2012)]
[Notices]
[Pages 53241-53242]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21494]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67733; File No. SR-OCC-2012-11]


Self-Regulatory Organizations; Options Clearing Corporation; 
Order Approving Proposed Rule Change Relating to the Auction Process 
Under Options Clearing Corporation Rule 1104

August 27, 2012.

I. Introduction

    On July 3, 2012, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2012-11 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 July 20, 2012.\3\ The Commission received no 
comment letters. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 67443 (July 16, 2012), 
77 FR 42784 (July 20, 2012).
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II. Description

    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.\4\ The purpose of the current 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 sets 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 will 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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    \4\ 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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[[Page 53242]]

    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.\5\ 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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    \5\ 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.

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 rule change sets forth the procedures that OCC 
will use 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. Section 17A(b)(3)(F) of the Act also requires 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\ 
The rule change sets forth the general criteria used by OCC to select 
bidders, invite bidders to participate in the auction, and select the 
best bid.
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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 (File No. SR-OCC-2012-11) 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).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21494 Filed 8-30-12; 8:45 am]
BILLING CODE 8011-01-P


