[Federal Register Volume 79, Number 102 (Wednesday, May 28, 2014)]
[Notices]
[Pages 30674-30675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12224]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72206; File No. SR-OCC-2014-07]
Self-Regulatory Organizations; the Options Clearing Corporation;
Order Approving Proposed Rule Change To Eliminate Preferred Stock and
Corporate Bonds as Acceptable Forms of Margin Assets
May 21, 2014.
I. Introduction
On March 28, 2014, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2014-07 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 April 15, 2014.\3\ The Commission received no
comment letters. For the reasons discussed below, the Commission is
granting approval of 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. 71910 (April 9, 2014),
79 FR 21319 (April 15, 2014).
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II. Description
A. Elimination of Preferred Stock & Corporate Bonds as Acceptable
Margin Assets
Pursuant to the proposed rule change, as approved, OCC is amending
Rule 604(b)(4)\4\ to eliminate preferred stock and corporate bonds as
acceptable forms of margin assets.
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\4\ 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 are: cash, government securities, GSE debt
securities, money market fund shares, letters of credit, common
stock (including fund shares and index linked securities), corporate
bonds, and preferred stock.
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OCC has accepted preferred stock and corporate bonds as margin
since 1988.\5\ However, in more recent times, 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. No
corporate bonds have been deposited since March 2012.
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\5\ See Securities Exchange Act Release No. 29576 (August 16,
1991), 56 FR 41873 (August 23, 1991), (SR-OCC-88-03).
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OCC presently uses a manual process to review the valuation
methodology for preferred stocks and corporate bonds.\6\
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While OCC believes this review process is adequate, it has concluded
that the manual process is less robust than the daily automated Monte
Carlo simulation-based methodology applied to deposits of common
stocks.\7\ OCC states that it has 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. However, given the de minimis use of these securities as
margin collateral, OCC determined that it would be inefficient and
ineffective from a cost perspective to expend the significant time,
resources and expenses needed to complete the required systems
development to automate monitoring and assessment processes for these
asset types. Therefore, OCC will discontinue accepting preferred stock
and corporate bonds as forms of margin assets and remove provisions
from the Rule 604(b)(4) pertaining to the deposit of these asset types.
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\6\ Such review process occurs monthly and contemplates: (1)
adequacy of haircuts, (2) volume, and (3) price transparency.
\7\ OCC uses STANS to value and risk-manage common stocks
deposited as margin collateral. STANS calculates haircuts that are
regularly tested, taking into account stressed market conditions.
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B. Additional Changes
OCC is making additional amendments to Rule 604(b)(4) to eliminate
certain provisions that will no longer be applicable upon the
elimination of preferred stock as an acceptable form of margin
asset.\8\ OCC is making conforming changes to remove provisions of Rule
604(b)(4) that: (i) Limit the amount of margin credit of any single
issue to 10% of the market value of margin deposited by a 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.\9\ OCC is also adding a provision explicitly
stating that common stock margin deposits are valued in accordance with
Rule 601.
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\8\ Amended Rule 604(b)(4) will still set forth common stocks as
a form of assets eligible for deposit as margin.
\9\ 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).
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OCC is also making additional amendments to Rule 604(b)(4) 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. 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.
III. Discussion
Section 19(b)(2)(C) of the Act \10\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that the 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 \11\ requires that the
rules of a clearing agency that is registered with the Commission be
designed to, among other things, promote the prompt and accurate
clearance and settlement of securities transactions.
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\10\ 15 U.S.C. 78s(b)(2)(C).
\11\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission finds that the proposed rule change is consistent
with Section 17A(b)(3)(F) of the Act \12\ because eliminating preferred
stock and corporate bonds as acceptable margin assets should facilitate
the prompt and accurate clearance and settlement of securities
transactions by ensuring that the process for valuating all margin
assets will be automated using STANS, which should provide for a more
expeditious and accurate valuation process than a manual haircut-based
approach. Furthermore, eliminating preferred stock and corporate bonds
as acceptable margin assets should further facilitate the prompt and
accurate clearance and settlement of securities transactions because
completely automating the margin valuation process should also give OCC
the ability to make a more accurate determination of the sufficiency of
all margin assets on deposit at any given point in time.
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\12\ 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\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-2014-07) 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. 2014-12224 Filed 5-27-14; 8:45 am]
BILLING CODE 8011-01-P