[Federal Register Volume 78, Number 58 (Tuesday, March 26, 2013)]
[Notices]
[Pages 18382-18384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06878]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69188; File No. SR-OCC-2013-03]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change To Add Provisions to the By-
Laws To Facilitate the Use of the Stock Loan/Hedge Program by Canadian
Clearing Members
March 20, 2013.
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 8, 2013, 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
OCC proposes to add provisions to the By-Laws to facilitate the use
of the Stock Loan/Hedge Program by Canadian Clearing Members.
II. Self-Regulatory Organization'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 such
statements.\3\
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\3\ The Commission has modified the text of the summaries
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to add provisions to the
By-Laws governing the OCC's Stock Loan/Hedge Program to facilitate the
use of the Stock Loan/Hedge Program by Canadian Clearing Members.
[[Page 18383]]
Background
OCC's Stock Loan/Hedge Program is provided for in Article XXI of
the By-Laws and Chapter XXII of the Rules, and provides a means for OCC
clearing members to submit broker-to-broker stock loan transactions to
OCC for clearance. Broker-to-broker transactions are independently-
executed stock loan transactions that are negotiated directly between
two OCC clearing members.
Where a stock loan transaction is submitted to, and accepted by,
OCC for clearance, OCC substitutes itself as the lender to the borrower
and the borrower to the lender, thus serving a function for the stock
loan market similar to the one it serves within the listed options
market. OCC thereby guarantees the future daily mark-to-market payments
between the lending clearing member and borrowing clearing member,
which are effected through OCC's cash settlement system, and the return
of the loaned stock to the lending clearing member and the collateral
to the borrowing clearing member, upon close-out of the stock loan
transaction. OCC leverages the infrastructure of the Depository Trust
Company (``DTC'') to transfer loaned stock and collateral between OCC
clearing members.
Description of Proposed Rule Change
Currently, for OCC clearing members to participate in OCC's Stock
Loan/Hedge Program, they must be members of DTC and maintain accounts
to facilitate Delivery Orders (``DOs'') to approved counterparties for
stock loan transactions. Canadian Clearing Members \4\ (who are
otherwise eligible to participate in the Stock Loan/Hedge Program) are
not participants of DTC. For purposes of settling transactions in U.S.
equity securities, Canadian Clearing Members ordinarily rely on the
services of CDS Clearing and Depository Services Inc. (``CDS''),\5\
which provides a cross-border service to clear and settle trades with
U.S. counterparties.\6\ CDS is Canada's national securities depository,
processing over 413 million trades annually. One of CDS's services
enable its Canadian participants to clear and settle trades (which
would include stock loan and borrow transactions) with U.S.
counterparties through affiliations with DTC and the National
Securities Clearing Corporation (``NSCC'').
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\4\ OCC By-Laws define a Canadian Clearing Member as a Non-U.S.
Clearing Member formed and operating under the laws of Canada or a
province thereof with its principal place of business in Canada.
\5\ CDS is Canada's national securities depository, processing
over 413 million trades annually. One of CDS's services enables its
Canadian participants to clear and settle trades (including stock
loan and borrow transactions) with U.S. counterparties through
affiliations with DTC and the National Securities Clearing
Corporation (``NSCC'').
\6\ OCC is not a party to such cross-border service
arrangements.
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Under current OCC Rules 901(a) and (g), Canadian Clearing Members
are able to effect settlement of deliver/receive obligations arising
from exercised or assigned stock options and matured stock futures by
appointing CDS to act as their agent through the arrangements with DTC
and NSCC described above.\7\ OCC is now proposing to amend
Interpretation .07 to Section 1 of Article V of the By-Laws to allow
participation by Canadian Clearing Members in the Stock Loan/Hedge
Program by permitting them to appoint CDS to act as their agent in
effecting DOs for stock loan transactions through DTC under
arrangements similar to those used for deliveries under options and
futures.\8\ Upon such an appointment, a sponsored sub-account would be
established on behalf of the Canadian Clearing Member in a CDS
participant account at DTC, through which the Canadian Clearing Member
could obtain access to similar DTC services used by U.S. clearing
members who maintain participant accounts at DTC in respect to stock
loan transactions. Through their identified sub-accounts within a CDS
participant account at DTC, Canadian Clearing Members would be able to
effect DOs for stock loan transactions to other DTC participants in the
same manner as U.S. clearing members. The cross-border service offered
by DTC and CDS would enable Canadian Clearing Members to transfer
securities between their accounts held at CDS and the identified sub-
accounts carried on their behalf in CDS participant accounts held at
DTC to effect DOs for stock loan transactions. DTC would continue to
play the same role in connection with such transactions as it does with
respect to stock loan transactions of all other clearing members,
except that DOs would be effected in the identifiable sub-account of
the Canadian Clearing Member maintained in a CDS participant account at
DTC.
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\7\ In January 1994, OCC adopted Rule 913(h) whereby Canadian
Clearing Members that settle through the CDS were required to
execute a new agreement appointing CDS to act on its behalf, and for
which CDS and NSCC would acknowledge such appointment. See
Securities Exchange Act Release No. 33543 (January 28, 1994), 59 FR
5639 (February 7, 1994) (SR-OCC-1992-05). In March 2004, OCC
restructured Chapter IX of its rules applicable to physical
settlement of exercised stock options and matured stock futures, and
as part of this rule filing, re-designated Rule 913 as Rule 901. See
Securities Exchange Act Release No. 49420 (March 16, 2004), 69 FR
13345 (March 22, 2004) (SR-OCC-2003-08).
\8\ Unlike settlement of deliver/receive obligations in respect
of stock options and stock futures, stock loan and borrow
transactions do not involve NSCC.
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Similar to appointments of CDS under Rules 901(a) and (g), under
the amended Interpretation .07 to Section 1 of Article V of the By-
Laws, a Canadian Clearing Member that appoints CDS to act for it in
connection with the Stock Loan/Hedge Program would be required to agree
with OCC that the clearing member remains responsible to OCC in respect
of its stock loan and borrow positions regardless of any non-
performance by CDS, that OCC may treat any failure of CDS to complete
delivery or payment required to close an open stock loan or borrow
position as a failure by such Canadian Clearing Member, thereby
triggering OCC's buy-in and sell-out procedures and such other
procedures and remedies as are provided under OCC's Rules, including
recourse to the collateral deposited by the clearing member.
Accordingly, OCC would have no credit exposure to CDS as the result of
a failure by CDS to perform. Also consistent with precedent under Rules
901(a) and (g), in amended Interpretation .07 to Section 1 of Article V
of the By-Laws, OCC would seek acknowledgement of CDS and DTC with
respect to these arrangements. If, for any reason, CDS ceased to act
for one or more Canadian Clearing Members,\9\ OCC would have authority
to require clearing members to close out open stock loan and borrow
positions through buy-in and sell-out procedures, or any other
procedures provided in the By-Laws or Rules, if necessary. A copy of
the proposed agreement through which a Canadian Clearing Member would
appoint CDS to act on the Canadian Clearing Member's behalf, and CDS
and DTC would acknowledge this appointment, is included as Exhibit
3A.\10\
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\9\ A Canadian Clearing Member would be obligated, under amended
Interpretation .07 to Section 1 of Article V of the By-Laws, to
promptly notify OCC in writing if it knew or reasonably expected CDS
to cease acting on its behalf, or if CDS had ceased acting on its
behalf, with respect to effecting DOs for stock loan and stock
borrow transactions.
\10\ Both CDS and DTC have reviewed and signed off on this Form
of Appointment and Acknowledgement, which is included as Exhibit 3A.
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As part of the application process to become a clearing member of
OCC, any non-U.S. applicant must execute a copy of OCC's Non-U.S.
Clearing Member Agreement. In the agreement, the applicant makes
certain representations with respect to, among other things, the types
of transactions it will engage in as
[[Page 18384]]
a Non-U.S. Clearing Member.\11\ In order to accommodate the
participation by Canadian Clearing Members in the Stock Loan/Hedge
Program as provided in this proposed rule change, OCC proposes to make
certain conforming changes to its Non-U.S. Clearing Member Agreement.
OCC also proposes to make certain technical changes to its Non-U.S.
Clearing Member Agreement for clarity and consistency with its U.S.
Clearing Member Agreement.
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\11\ OCC's By-Laws define ``Non-U.S. Clearing Member'' as a Non-
U.S. Securities Firm that has been admitted to membership in OCC
pursuant to the provisions of OCC's By-Laws and Rules.
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Finally, for ease of reference throughout the proposed addition to
Interpretation .07 to Section 1 of Article V of the By-Laws, OCC
proposes to define a Canadian Clearing Member approved to participate
in the Stock Loan/Hedge Program as a ``Canadian Hedge Clearing Member''
for purposes of its By-Laws and Rules.
OCC believes that the proposed changes to OCC By-Laws are
consistent with the purposes and requirements of Section 17A of the
Act,\12\ and the rules and regulations thereunder, because they are
designed to promote the prompt and accurate clearance and settlement of
stock loan and borrow transactions, foster cooperation and coordination
with persons engaged in the clearance and settlement of such
transactions, remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
such transactions, and, in general, protect investors and the public
interest.\13\ OCC believes that the proposed changes to OCC By-Laws
achieve this by facilitating participation by Canadian Clearing Members
in OCC's Stock Loan/Hedge Program in a manner that protects the
clearing system against risk through the same or equivalent mechanisms
used with respect to domestic clearing members. OCC also believes that
the proposed rule change is not inconsistent with the existing OCC By-
Laws, including any By-Laws proposed to be amended.
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\12\ 15 U.S.C. 78q-1.
\13\ 15 U.S.C. 78q-1(b)(3)(F).
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(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 that is not necessary or appropriate in
furtherance of the purposes of the Act.
(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.
The proposed rule change shall not take effect until all regulatory
actions required with respect to the proposed rule change are
completed.
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 Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml) or Send an email to [email protected].
Please include File Number SR-OCC-2013-03 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-2013-03. 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.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_13_03.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-2013-03
and should be submitted on or before April 16, 2013.
For the Commission by the Division of Trading and Markets, pursuant
to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06878 Filed 3-25-13; 8:45 am]
BILLING CODE 8011-01-P