
[Federal Register Volume 79, Number 11 (Thursday, January 16, 2014)]
[Rules and Regulations]
[Pages 2779-2781]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00556]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 300

[Release No. SIPA-172; File No. SIPC- 2012-01]


Rules of the Securities Investor Protection Corporation

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
approving a proposed rule change filed by the Securities Investor 
Protection Corporation (``SIPC''). The proposed rule change amends SIPC 
Rule 400 (``Rule 400''), entitled ``Rules Relating to Satisfaction of 
Customer Claims for Standardized Options,'' which relates to the 
satisfaction of customer claims for standardized options under the 
Securities Investor Protection Act of 1970 (``SIPA''). Because SIPC 
rules have the force and effect as if promulgated by the Commission, 
the rules are published in Title 17 of the Code of Federal Regulations, 
where the rule change will be reflected.

DATES: Effective Date: February 18, 2014.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate

[[Page 2780]]

Director, at (202) 551-5525; Thomas K. McGowan, Deputy Associate 
Director, at (202) 551-5521; Sheila Dombal Swartz, Special Counsel, at 
(202) 551-5545; or Kimberly N. Chehardy, Special Counsel, at (202) 551-
5791, Office of Financial Responsibility, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is approving a proposed rule 
change filed by SIPC, amending Rule 400, 17 CFR 300.400 under SIPA.

I. Background

    On November 7, 2012, SIPC filed a proposed rule change pursuant to 
section 3(e)(2)(A) of SIPA \1\ with the Securities and Exchange 
Commission.\2\ SIPC subsequently submitted an amendment to the proposed 
rule change on January 31, 2013.\3\ Notice of the proposed rule change 
was published in the Federal Register on November 5, 2013.\4\ The 
Commission did not receive comments in response to the notice. The 
Commission is approving the proposed rule change under section 3(e)(2) 
of SIPA.
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    \1\ 15 U.S.C. 78ccc(e)(2)(A).
    \2\ See Letter from Josephine Wang, General Counsel and 
Secretary, SIPC, to Elizabeth M. Murphy, Secretary, Securities and 
Exchange Commission (Nov. 7, 2012).
    \3\ See Letter from Josephine Wang, General Counsel and 
Secretary, SIPC, to Elizabeth M. Murphy, Secretary, Securities and 
Exchange Commission (Jan. 31, 2013) (``Pursuant to discussions 
between SIPC and the Commission's Division of Trading and Markets, 
SIPC hereby submits a partial amendment to the proposed amendments 
previously submitted.''). ``The partial amendment makes changes only 
to subsection (h) of Rule 400, by inserting the phrase ``a 
`security' under section 16(14) of the Act and is'' prior to the 
words ``issued by a securities clearing agency . . . .'' Id.
    \4\ See Notice of Filing a Proposed Rule Change Relating to 
Securities Investor Protection Corporation Rule 400, Release No. 
SIPA-171 (Oct. 29, 2013), 78 FR 66318 (Nov. 5, 2013).
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II. Proposed Rule Change

    Rule 400 was enacted to provide clarity in the treatment of 
customer claims based on ``Standardized Options'' \5\ positions in the 
liquidation of broker-dealers under SIPA. Currently, Rule 400 provides 
for the closeout of open Standardized Options positions upon the 
commencement of a SIPA liquidation. Based upon the amounts realized 
upon closeout, the trustee calculates the value of customers' 
Standardized Options positions, and credits or debits customers' 
accounts by the appropriate amounts. The amendments to Rule 400 are 
designed to: (1) Provide trustees appointed under SIPA with greater 
flexibility in the treatment of Standardized Options upon the 
commencement of a SIPA liquidation proceeding; and (2) modify the 
definition of Standardized Options to include options issued by a 
Commission-registered securities clearing agency or a foreign 
securities clearing agency, i.e., a cleared over-the-counter option 
(``OTC Option'').
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    \5\ The term Standardized Options is defined in paragraph (h) of 
Rule 400 as ``options traded on a national securities exchange, an 
automated quotation system of a registered securities association, 
or a foreign securities exchange. 17 CFR 300.400(h).
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    In light of experience and knowledge gained from the liquidation of 
Lehman Brothers Inc. (``Lehman'') and other SIPA proceedings, SIPC has 
determined that allowing SIPA trustees the flexibility, subject to SIPC 
approval, of transferring customers' options positions or of 
liquidating their positions, would be beneficial to the investing 
public and consistent with the customer protection purposes of SIPA. 
SIPC stated that the ability to transfer Standardized Options positions 
to another brokerage in lieu of an automatic closeout gives SIPA 
trustees more flexibility in handling such customer assets after the 
commencement of a SIPA liquidation proceeding, and more closely 
approximates what the customer would expect to be in his account but 
for the failure of the broker-dealer.
    This is particularly true where the trustee, as in the Lehman case, 
was able promptly to effectuate bulk transfers of customer accounts to 
other brokerages enabling customers to regain access to their accounts 
in the form in which the accounts existed pre-liquidation, with 
comparatively minimal disruption. In such instances, customers 
generally are better served by having their options positions 
transferred with their other securities to their accounts at their new 
broker-dealer. SIPC stated that proposed amendments would provide clear 
authority for a SIPA trustee to transfer the Standardized Options 
positions, with SIPC's consent. This greater flexibility in the 
treatment of open positions would enhance customer protection under 
exigent circumstances, and potentially avoid exacerbating the turmoil 
or harm to customers and/or the markets that could be caused by the 
forced liquidation of open positions.
    Under paragraph (h) of Rule 400, Standardized Options means options 
traded on a national securities exchange, an automated quotation system 
of a registered securities association, or a foreign securities 
exchange. The amendments modify the definition of Standardized Options 
to include any other option that is a security under section 16(14) of 
SIPA and is issued by a registered securities clearing agency or 
foreign securities clearing agency.\6\ For example, the Options 
Clearing Corporation (``OCC'') proposed, and the Commission approved, a 
rule change to establish a legal and operational framework for OCC to 
provide central clearing for OTC Options.\7\ If OCC clears OTC Options, 
SIPC stated these options will be deemed Standardized Options subject 
to closeout or transfer in a SIPA proceeding.
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    \6\ Existing Rule 400 applies to options traded on foreign 
securities exchanges as well as U.S. exchanges.
    \7\ See Securities Exchange Act Release No. 67835 (Sept. 12, 
2012), 77 FR 57602 (Sept. 18, 2012), (SR-OCC-2012-14); see also 
Securities Exchange Act Release No. 68434 (Dec. 14, 2012), 77 FR 
75243 (Dec. 19, 2012) (approving proposed rule change). OCC also 
filed, and received accelerated approval of, a proposed rule change 
to reflect enhancements in its system for theoretical analysis and 
numerical simulations as applied to longer-tenor options. Securities 
Exchange Act Release No. 70719 (Oct. 18, 2013), 78 FR 63548 (Oct. 
24, 2013), (SR-OCC-2013-16).
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    Because the OTC Options are similar to exchange-traded index 
options, and generally would be cleared by a securities clearing agency 
registered under section 17A of the Securities Exchange Act of 1934 
(``Exchange Act'') \8\ subject to the same basic rules and procedures 
used for the clearance of index options, SIPC stated there appears to 
be no practical basis to treat OTC Options differently under SIPA for 
purposes of Rule 400. Indeed, modifying the definition of Standardized 
Options under paragraph (h) of Rule 400 to include OTC Options would 
enhance the protections afforded customers in the event of a 
liquidation of their broker-dealer.
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    \8\ 15 U.S.C. 78q-1.
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II. Discussion and Commission Action

    Section 3(e)(2)(A) of SIPA provides that the SIPC Board of 
Directors must file with the Commission a copy of any proposed 
amendment to a SIPC rule.\9\ Section 3(e)(2)(B) of SIPA provides that 
within thirty-five days after the date of publication of the notice of 
filing of a proposed rule change, the Commission shall: (1) By order 
approve the proposed rule change; or (2) institute proceedings to 
determine whether the proposed rule change should be disapproved.\10\ 
Further, section 3(e)(2)(D) of SIPA provides that the Commission shall 
approve a proposed rule change if it finds that the proposed rule 
change is in the public interest and is consistent with the purposes of 
SIPA.\11\
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    \9\ 15 U.S.C. 78ccc(e)(2)(A).
    \10\ 15 U.S.C. 78ccc(e)(2)(B).
    \11\ 15 U.S.C. 78ccc(e)(2)(D).

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[[Page 2781]]

    The Commission finds, pursuant to section 3(e)(2)(D) of SIPA, that 
the proposed rule change is in the public interest and consistent with 
the purposes of SIPA. First, as noted above, SIPC has determined that 
allowing SIPA trustees the flexibility, subject to SIPC approval, to 
transfer customers' options positions or to liquidate their positions, 
would be beneficial to the investing public and consistent with the 
customer protection purposes of SIPA. The ability to transfer 
Standardized Options positions to another brokerage instead of being 
required to close them out gives SIPA trustees more flexibility in 
handling customer assets after the commencement of a SIPA liquidation 
proceeding. Second, SIPA noted that modifying the definition of 
Standardized Options under paragraph (h) of Rule 400 to include OTC 
Options would enhance the protections afforded customers in the event 
of a liquidation of their broker-dealer. This modification also 
clarifies that--like exchange-traded options--OTC Options would be 
deemed Standardized Options subject to closeout or transfer in a SIPA 
liquidation proceeding. Accordingly, the Commission finds that the 
proposed SIPC rule change is in the public interest and is consistent 
with the purposes of the SIPA.
    It is therefore ordered by the commission, pursuant to section 
3(e)(2) of SIPA, that the above mentioned proposed rule change is 
approved. In accordance with section 3(e)(2) of SIPA, the approved rule 
change shall be given the force and effect as if promulgated by the 
Commission.

III. Statutory Authority

    Pursuant to SIPA, 15 U.S.C. 78aaa et. seq., and particularly, 
section 3(e) (15 U.S.C. 78ccc(e)), SIPC is amending section 300.400 of 
Title 17 of the Code of Federal Regulations in the manner set forth 
below.

List of Subjects in 17 CFR Part 300

    Brokers, Securities.

Text of the Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is amended as follows:

PART 300--RULES OF THE SECURITIES INVESTOR PROTECTION CORPORATION

0
1. The authority citation for part 300 is revised to read as follows:

    Authority:  15 U.S.C. 78ccc.
* * * * *


Sec.  300.400  [Amended]

0
2. Section 300.400 is amended by:
0
a. In paragraph (b), adding the phrase ``except to the extent that the 
trustee, with SIPC's consent, or SIPC as trustee, as the case may be, 
has arranged or is able promptly to arrange, a transfer of some or all 
of such positions to another SIPC member'' after the phrase ``accounts 
of customers'';
0
b. In paragraph (e), adding the phrase ``except to the extent that such 
positions have been transferred as provided in paragraph (b) of this 
section'' after the phrase ``section 7(b)(1) of the Act''; and
0
c. In paragraph (h), adding the phrase ``, and any other option that is 
a security under section 16(14) of the Act, 15 U.S.C. 78lll(14), and is 
issued by a securities clearing agency registered under section 17A of 
the Securities Exchange Act of 1934, 15 U.S.C. 78q-1, or a foreign 
securities clearing agency'' after the phrase ``foreign securities 
exchange''.

    Dated: January 9, 2014.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2014-00556 Filed 1-15-14; 8:45 am]
BILLING CODE 8011-01-P


