[Federal Register Volume 78, Number 93 (Tuesday, May 14, 2013)]
[Notices]
[Pages 28267-28269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11366]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69534; File No. SR-OCC-2013-03]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change To Add Provisions to the By-Laws
To Facilitate the Use of the Stock Loan/Hedge Program by Canadian
Clearing Members
May 8, 2013.
I. Introduction
On March 8, 2013 The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2013-03 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
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Register on March 26, 2013.\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. 34-69188 (March 20,
2013), 78 FR 18382 (March 26, 2013).
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II. Description of 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.
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 \4\
to OCC for clearance.\5\
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\4\ Broker-to-broker transactions are independently-executed
stock loan transactions that are negotiated directly between two OCC
clearing members.
\5\ 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 DTC to transfer loaned stock and collateral
between OCC clearing members.
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Currently, for OCC clearing members to participate in OCC's Stock
Loan/Hedge Program, they must be members of the Depository Trust
Company (``DTC'') and maintain accounts to facilitate Delivery Orders
(``DOs'') to approved counterparties for stock loan transactions.
Canadian Clearing Members (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''),\6\ which provides a cross-border service to
clear and settle trades with U.S. counterparties.\7\
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\6\ 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 (which would
include stock loan and borrow transactions) with U.S. counterparties
through affiliations with DTC and the National Securities Clearing
Corporation (``NSCC''). 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.
\7\ OCC is not a party to such cross-border service
arrangements.
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OCC is amending 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 will
be established on behalf of the Canadian Clearing Member in a CDS
participant account at DTC, through which the Canadian Clearing Member
can 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 will 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 will 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.
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\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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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 will 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 believes that it will have no credit exposure to CDS
as the result of a failure by CDS to perform. OCC will seek
acknowledgement of CDS and DTC with respect to these arrangements. If,
for any reason, CDS ceases to act for one or more Canadian Clearing
Members,\9\ OCC will 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.
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\9\ A Canadian Clearing Member will 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.
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In order to accommodate the participation by Canadian Clearing
Members in the Stock Loan/Hedge Program, OCC will make certain
conforming changes to its Non-U.S. Clearing Member Agreement.\10\ OCC
also will 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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\10\ 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 a Non-U.S. Clearing
Member.
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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 is
amending Section 1 of Article I of the By-Laws to define a Canadian
Clearing Member approved to participate in the Stock Loan/Hedge Program
as a ``Canadian Hedge Clearing Member.''
III. Discussion
Section 19(b)(2)(C) of the Act \11\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. Section 17A(b)(3)(F) of the Act \12\
requires, among other things, that the rules of a clearing agency are
designed to promote the prompt and accurate clearance and settlement of
securities transactions and foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions.
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\11\ 15 U.S.C. 78s(b)(2)(C).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
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By facilitating the inclusion of Canadian Clearing Members in OCC's
Stock Loan/Hedge Program, the rule change serves to broaden the scope
of OCC clearing members that are able to participate in stock loan
transactions and thereby further promotes the prompt and accurate
clearance and settlement of stock loan transactions, and also fosters
cooperation and coordination with persons engaged in the clearance and
settlement of stock loan transactions. The rule change achieves these
objectives while also
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continuing to protect the clearing system against risk.
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 \13\ and the
rules and regulations thereunder.
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\13\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No. SR-OCC-2013-03) be and
hereby is APPROVED.\15\
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\14\ 15 U.S.C. 78s(b)(2).
\15\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11366 Filed 5-13-13; 8:45 am]
BILLING CODE 8011-01-P