
[Federal Register Volume 79, Number 72 (Tuesday, April 15, 2014)]
[Notices]
[Pages 21319-21321]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-08413]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71910; File No. SR-OCC-2014-07]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Eliminate Preferred Stock 
and Corporate Bonds as Acceptable Forms of Margin Assets and Make 
Additional, Conforming, Rule Changes

April 9, 2014.
    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 March 28, 2014, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to amend its Rules to eliminate preferred stock and 
corporate bonds as acceptable forms of margin assets. OCC is also 
proposing additional amendments to eliminate a provision that 
automatically renders a common stock as ineligible for deposit if it is 
subject to special margin requirements under the rules of the listing 
market, and to also eliminate certain provisions from the Rules that 
will no longer be applicable upon the elimination of preferred stock as 
an acceptable form of margin asset.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of 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. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
    The principal purpose of this proposed rule change is to amend 
OCC's Rule 604(b)(4) (the ``Rule'') to eliminate preferred stock and 
corporate bonds as acceptable forms of margin assets. Other changes 
also are proposed to the Rule in order to update its terms and 
provisions to reflect current practices with respect to the deposit of 
assets (i.e., common stock, including fund shares and index linked-
securities, which are collectively referred to as ``common stock'') 
that will continued to be covered by the Rule on the approval of this 
proposed rule change.
Background
    OCC historically has sought to permit clearing members to deposit 
as margin a diverse mix of assets, subject to the application of 
prudent safeguards designed to ensure such assets present limited 
credit, market and liquidation risk, as applicable. OCC Rule 604 sets 
forth the forms of assets eligible to be deposited as margin and 
conditions that must be satisfied in order for margin credit to be 
given to such deposits. Eligible forms of margin assets presently

[[Page 21320]]

are: Cash, Government securities,\3\ GSE Debt Securities, money market 
fund shares, letters of credit, common stock (including fund shares), 
corporate bonds and preferred stock. Since 1988, OCC has been 
authorized to accept preferred stock and corporate bonds as margin.\4\ 
OCC recently reviewed its current practices with respect to these two 
asset types and, for the reasons discussed below, determined they 
should no longer be accepted as a form of margin.
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    \3\ OCC defines the term ``Government securities'' to mean 
securities issued or guaranteed by the United States or Canadian 
Government, or by any other foreign government acceptable to the 
Corporation, except Separate Trading of Registered Interest and 
Principal Securities issued on Treasury Inflation Protected 
Securities (commonly called TIP-STRIPS). See OCC By-Laws Article I, 
Section 1(G)(5).
    \4\ See Securities Exchange Act Release No. 29576 (August 16, 
1991), 56 FR 41873 (August 23, 1991), (SR-OCC-88-03).
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Review of Preferred Stock and Corporate Bonds
    Preferred stock and corporate bonds (on a combined basis) 
consistently have accounted for less than one percent of the margin 
assets on deposit at OCC. Corporate bonds have not been deposited as 
margin, nor have clearing members attempted to deposit corporate bonds 
as margin, since March 2012. As of March 6, 2014, preferred stock 
comprised .13% of OCC's total margin deposits and less than five 
percent of any individual clearing member's margin deposits.
    OCC presently uses a manual process to review the valuation 
methodology for preferred stocks and corporate bonds. Such review 
process occurs monthly and contemplates: (1) Adequacy of haircuts, (2) 
volume, and (3) price transparency. While OCC believes this review 
process is adequate, OCC has concluded it is less robust than the 
process applied to deposits of common stocks. In comparison, OCC uses 
STANS, its daily automated Monte Carlo simulation-based margining 
methodology, to value and risk manage common stocks deposited as margin 
collateral.\5\ STANS calculates haircuts that are regularly tested, 
taking into account stressed market conditions.
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    \5\ OCC also uses STANS to value Government securities with the 
exception of TIPS and Canadian Government securities, which are 
valued using the haircuts set forth in OCC Rule 604.
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    OCC researched the work necessary to integrate preferred stock and 
corporate bonds into STANS and otherwise automate monitoring and 
controls as they relate to risk managing these asset types. Given their 
general lack of utilization as margin collateral, OCC determined that 
it would be inefficient and ineffective from a cost perspective to 
expend the significant time, resources and expense needed to complete 
the required systems development to automate monitoring and assessment 
processes for these asset types. OCC also concluded that the continued 
use of its current manual processes may not be fully consistent with 
Principle 5 of the CPSS-IOSCO Principles for Financial Market 
Utilities.\6\ OCC is therefore proposing to stop accepting preferred 
stock and corporate bonds as forms of margin assets and to remove 
provisions from the Rule pertaining to the deposit of these asset 
types. OCC notes that after giving effect to this proposed rule change, 
a varied mix of asset types would still be available to clearing 
members for deposit as margin.\7\
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    \6\ Principle 5 provides that margin collateral accepted by a 
financial market infrastructure (``FMI'') should have low credit, 
liquidity and market risk and should establish prudent valuation 
practices and develop haircuts that are regularly tested, taking 
into account stressed market conditions.
    \7\ OCC discussed this proposal with the Financial Risk Advisory 
Committee, a working group consisting of representatives of clearing 
members and exchanges that was formed by OCC to review and comment 
on risk management proposals under consideration. No concerns were 
raised by the group during the course of such discussions.
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Additional Revisions
    In connection with reviewing the Rule for the purposes described 
above, and in order to conform the Rule to current operational 
practices after giving effect to the proposed rule change, OCC also 
reassessed the remaining provisions of this Rule as applied to OCC's 
practices for accepting common stock, the form of margin asset that the 
Rule would continue to address after Commission approval of this rule 
filing. As a result of such review, OCC is proposing several additional 
changes to the Rule. OCC proposes to eliminate a provision that 
automatically renders a common stock as ineligible for deposit if it is 
subject to special margin rules under the rules of the listing market. 
OCC believes that it is not an efficient use of resources to monitor 
listing markets to determine if a common stock becomes subject to 
special margin rules. OCC also believes it is currently able to 
effectively risk manage common stocks that may become subject to 
special margin rules through existing STANS functionality. 
Additionally, OCC notes that it may act under Rule 604, Interpretation 
and Policy .14, to restrict deposits of issues that are subject to 
special margin rules by a listing market.
    Moreover, as a result of the proposed elimination of preferred 
stock as a form of margin asset, OCC proposes conforming changes to 
remove provisions of the Rule that: (i) Limit the amount of margin 
credit of any single issue to 10% of the market value of margin 
deposited by Clearing Member because additional charges for 
concentrated positions are determined under STANS pursuant to Rule 601, 
and (ii) limit margin credit given to deposits to 70% of daily closing 
bid prices because haircuts applied to common stock deposits are 
determined under STANS pursuant to Rule 601.\8\ Also, a provision would 
be added to make explicit that common stock deposits are valued in 
accordance with Rule 601.\9\
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    \8\ OCC has integrated common stocks into the process by which 
OCC calculates margin requirements using STANS. See Securities 
Exchange Act Release No. 58158 (July 15, 2008), 73 FR 42646 (July 
22, 2008), (SR-OCC-2007-20).
    \9\ Id.
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Implementation
    OCC has advised its clearing members of its intent to eliminate the 
acceptance of preferred stock and corporate bonds, subject to 
regulatory approval. Because corporate bonds have not been deposited as 
margin since March 2012 and are not currently deposited for such 
purposes, OCC requested clearing members to voluntarily not deposit 
such asset type pending regulatory approval of this rule filing. OCC 
further has discussed this planned change with those clearing members 
maintaining preferred stock as a form of margin deposit and has worked 
with them to ensure each has developed an appropriate plan to wind down 
its use of such deposits in light of this proposal. No concerns were 
raised by clearing members with respect to the elimination of preferred 
stock and OCC does not anticipate any delay in the implementation of 
this proposed rule change upon regulatory approval. A final Information 
Memorandum will be issued once this proposed rule change is eligible to 
be implemented and OCC will modify its system to prohibit clearing 
members from depositing preferred stock and corporate bonds as margin 
collateral thereafter.
(2) Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \10\ because it promotes the prompt and 
accurate clearance and settlement of securities transactions for which 
it is responsible. OCC believes that the proposed elimination of 
preferred stocks and corporate bonds as acceptable forms of margin is 
consistent with the Act because these assets are subject to a manual 
valuation process, not OCC's

[[Page 21321]]

automated STANS system. STANS provides more expeditious and accurate 
margin calculations than a manual process. As such, investors and the 
public will be more confident that OCC will be able to meet its daily 
settlement obligations because the possibility that clearing member 
margin deposits would be insufficient should OCC need to use them to 
complete a settlement will be reduced since margin in the form of 
preferred stock and corporate bonds valued through a manual process 
will no longer be permitted. Additionally, OCC will be better able to 
determine the sufficiency of its margin deposits at any given time 
since manually valued margin forms of assets, consisting of preferred 
stock and corporate bonds, will be eliminated. The proposed rule change 
is not inconsistent with any rules of OCC, including any other rules 
proposed to be amended.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impact, or 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.\11\ Changes to the rules of a 
clearing agency may have an impact on the participants in a clearing 
agency, their customers, and the markets that the clearing agency 
serves. This proposed rule change affects certain clearing members and 
their customers inasmuch as it eliminates two forms of assets eligible 
for deposit as margin. However, as stated above, corporate bonds have 
not been deposited as margin since March 2012 and preferred stock 
comprises .13% of OCC's total margin deposits and less than five 
percent of the margin deposits of any individual clearing member.
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    \11\ 15 U.S.C. 78q-1(b)(3)(I).
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    OCC believes it would be inefficient and ineffective from a cost 
perspective to expend significant time, resources and expense needed to 
complete the required systems work to automate monitoring and 
assessment processes for these asset types in light of their limited 
usage over time. Moreover, OCC will continue to accept multiple forms 
of assets from clearing members to meet margin requirements and, based 
on the quantitative measures concerning clearing member usage of 
preferred stocks and corporate bonds set forth above, OCC does not 
believe that the proposed rule change will materially impact users of 
its services.
    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and does not 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments on the proposed rule change 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 such 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's 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-2014-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2014-07. 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 Room, 100 F Street NE., 
Washington, DC 20549-1090 on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site: http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_14_07.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-2014-07 
and should be submitted on or before May 6, 2014.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-08413 Filed 4-14-14; 8:45 am]
BILLING CODE 8011-01-P


