[Federal Register Volume 81, Number 59 (Monday, March 28, 2016)]
[Notices]
[Pages 17231-17234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06862]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77415; File No. SR-OCC-2016-006]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Related to the Voluntary Termination by Offset and Re-Matching of
Matched-Book Positions in the Stock Loan/Hedge Program
March 22, 2016.
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 15, 2016, 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. OCC filed the proposed rule
change pursuant to Section 19(b)(3)(A)(iii) \3\ of the Act and Rule
19b-4(f)(4)(i) \4\ thereunder so that the proposal was effective upon
filing with the Commission. The Commission is publishing this notice to
solicit comments on the rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(4)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The purpose of this proposed rule change is to enhance the overall
resilience of OCC's Stock Loan/Hedge Program \5\ by allowing OCC to
close out the Matched-Book Positions (as defined herein) of Hedge
Clearing Members requesting an orderly wind down of Matched-Book
Positions through the termination by offset and ``re-matching'' of such
positions without requiring the transfer of securities against the
payment of settlement prices as currently required under OCC's rules.
All capitalized terms not defined herein have the same meaning as in
OCC's By-Laws and Rules.\6\
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\5\ See Article XXI of OCC's By-Laws and Chapter XXII of OCC's
Rules. It is also noted that no changes are being proposed to
Article XXIA of OCC's By-Laws or Chapter XXIIA of OCC's Rules, which
address OCC's Market Loan Program.
\6\ Staff has inserted this sentence based on OCC's request to
clarify the use of capitalized terms by OCC in these statements
prepared by OCC.
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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
OCC proposes amendments to its By-Laws and Rules designed to
enhance the overall resilience of OCC's Stock Loan/Hedge Program by
allowing OCC to close out the Matched-Book Positions of a Hedge
Clearing Member requesting an orderly wind down of Matched-Book
Positions through the termination by offset and re-matching of such
positions without requiring the transfer of securities against the
payment of settlement prices as currently required under OCC's rules.
The proposed termination by offset and re-matching of stock loan and
borrow positions is designed to leave the affected Clearing Members
with the same net position in such stock loan and borrow positions as
prior to the adjustment.
Background
In the Stock Loan/Hedge Program, OCC acts as a central counterparty
(``CCP'') for Hedge Loans that are directly negotiated by Hedge
Clearing Members and sent to OCC for clearance and settlement. A
prospective Lending Clearing Member and a prospective Borrowing
Clearing Member identify each other (independent of OCC) and agree on
the terms of the stock loan. The Hedge Clearing Members then send the
details of the stock loan to The Depository Trust Company
(``Depository'') with a certain ``reason code,'' \7\ which designates
the stock loan as a Hedge Loan for guaranty and clearance at OCC. The
Lending Clearing Member instructs the Depository to transfer a
specified number of shares of Eligible Stock to the account of the
Borrowing Clearing Member, and the Borrowing Clearing Member instructs
the Depository to transfer the appropriate amount of cash collateral to
the account of the Lending Clearing Member.\8\ The Depository then
sends the Hedge Loan information to OCC via an end-of-day report.\9\
After OCC receives the report from the Depository, OCC validates and
novates the stock loan transaction and becomes the lender to the
Borrowing Clearing Member and the borrower to the Lending Clearing
Member.\10\
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\7\ Unique reason codes were created by the Depository for
Clearing Members to designate stock loan transactions intended to be
sent to OCC for novation and guarantee.
\8\ See OCC Rule 2202(a).
\9\ See OCC Rule 2202(b).
\10\ Id.
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After novation, as part of the guaranty, OCC makes Mark-to-Market
Payments for all Hedge Loans on a daily basis to collateralize all
loans to the negotiated levels.\11\ As the CCP, OCC guarantees the
return of the full value of cash collateral to a Borrowing Clearing
Member and the Loaned Stock, or value of that Loaned Stock, to the
Lending
[[Page 17232]]
Clearing Member. Settlements generally are combined and netted against
other OCC settlement obligations in a Hedge Clearing Member's account,
including trade premiums and margin deficits. A Hedge Clearing Member's
open positions in the Stock Loan/Hedge Program are factored into the
Hedge Clearing Member's overall Margin \12\ and Clearing Fund
contribution requirements.\13\
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\11\ Mark-to-Market Payments are based on the value of the
loaned securities and made between Clearing Members using OCC's cash
settlement system. The percentage of the value of the loaned
securities, either 100% or 102%, is dependent upon the agreement
between the two Hedge Clearing Members party to the transaction.
\12\ See OCC Rules 601 and 2203.
\13\ See OCC Rule 1001.
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A significant portion of the activity in OCC's stock lending
programs relates to what is often referred to as matched-book activity
where a Hedge Clearing Member maintains in an account a stock loan
position for a specified number of shares of an Eligible Stock
reflecting a stock lending transaction with one Hedge Clearing Member
(the Borrowing Clearing Member) and also maintains in that same account
a stock borrow position for the same number, or lesser number, of
shares of the same Eligible Stock with another Hedge Clearing Member
(the Lending Clearing Member) (such positions being ``Matched-Book
Positions''). From a daily mark-to-market settlement perspective, there
are typically no obligations related to Matched-Book Positions because
the member is simultaneously borrowing and lending the same securities
(and quantity), which are marked to the same price. OCC's margin
process recognizes this and currently nets loans and borrows in the
same security prior to calculating exposure, resulting in no margin on
a perfectly matched position.
Currently, in order for a Hedge Clearing Member to close out its
stock loan positions, including Matched-Book Positions, the Hedge
Clearing Member is required to terminate its loans through instructions
issued to the Depository to transfer a specified quantity of the loaned
stock against payment of the settlement price in accordance with the
process prescribed in Rule 2208. Borrowing and Lending Clearing Member
counterparties to the Matched-Book Positions that wish to maintain
equivalent stock loan positions at OCC would then be required to
initiate new stock loans, through the process described above, in
accordance with Rule 2202. Throughout this process of terminating and
reestablishing stock loan positions, a number of operational steps are
required to effectuate and settle those transactions, which introduce
the potential for market disruption. For example, because OCC maintains
stock loan inventory on a bilateral basis (i.e., maintains the borrower
and lender to a transaction) and guarantees the return of cash
collateral and the Loaned Stock, or price of the Loaned Stock, if a
Hedge Clearing Member with Matched-Book Positions fails to fulfill its
obligations for the recall of loans and return of borrowed shares,
there would be a temporary imbalance of the previously ``matched-book''
position. In addition, the successful initiation of new replacement
stock loans for the Borrowing or Lending Clearing Members could be
subject to disruption by operational or execution risks, with the
result that one ``leg'' of the initiating transaction would fail.
Moreover, the Borrowing and Lending Clearing Members lose the
protections afforded by OCC's guaranty of their stock loan positions
until the newly initiated stock loan positions have been accepted,
novated, and guaranteed by OCC.
The proposed rule change would permit a Hedge Clearing Member to
request the orderly wind down of Matched-Book Positions, subject to the
agreement of all affected Borrowing and Lending Clearing Members,
without requiring the transfer of securities against the payment of
settlement prices as currently required under OCC Rules 2202, 2208 and
2209. OCC believes the proposed rule change would eliminate the
potential risks described above associated with the transfer of
securities and funds and provide the overall marketplace with more
stability with respect to the process of voluntarily closing out
Matched-Book Positions in the Stock Loan/Hedge Program.
Voluntary Termination by Offset and Re-Matching
OCC proposes to amend its By-Laws and Rules to permit a Hedge
Clearing Member to request an orderly wind down of its Matched-Book
Positions, contingent upon the explicit agreement of the requesting
Hedge Clearing Member, its counterparty Borrowing Clearing Member, and
counterparty Lending Clearing Member, and at the sole discretion of
OCC, without requiring the transfer of securities against the payment
of settlement prices as currently required under OCC's rules. First,
OCC proposes to amend Article I of its By-Laws to add new defined terms
``Matched-Book Borrowing Clearing Member,'' which would mean, with
respect to any Matched-Book Positions, the Hedge Clearing Member that
borrows Eligible Stock from a Hedge Clearing Member maintaining
Matched-Book Positions in that Eligible Stock and ``Matched-Book
Lending Clearing Member,'' which would mean, with respect to any
Matched-Book Positions, the Hedge Clearing Member that lends Eligible
Stock to a Hedge Clearing Member maintaining Matched-Book Positions in
that Eligible Stock. OCC also proposes to add a new definition for
``Matched-Book Positions,'' which would be defined as Hedge Loan
positions in which a single Hedge Clearing Member borrows Eligible
Stock from its Matched-Book Lending Clearing Member and lends an equal
or lesser amount of the same Eligible Stock to its Matched-Book
Borrowing Clearing Member.
In addition, OCC proposes to amend Rule 2208 to adopt new rules for
the voluntary termination by offset and re-matching of Matched-Book
Positions. Specifically, OCC proposes to adopt new Rule 2208(e)(1),
which would provide that a Hedge Clearing Member may submit a written
request to OCC to effect one or more position adjustments to terminate
by offset all or some of its Matched-Book Positions if the following
conditions are met. First, the requesting Hedge Clearing Member, its
Matched-Book Lending Clearing Member, and its Matched-Book Borrowing
Clearing Member have furnished to the Corporation their written
agreement to (i) the termination by offset of such Matched-Book
Positions maintained in the requesting Hedge Clearing Member's account
and (ii) the Corporation's re-matching the stock borrow position for
the same number of shares in the same Eligible Stock maintained in a
designated account of the Matched-Book Borrowing Clearing Member
against the stock loan position for the same number of shares in the
same Eligible Stock maintained in a designated account of the Matched-
Book Lending Clearing Member. Second, the written agreement furnished
by the requesting Hedge Clearing Member, the Matched-Book Borrowing
Clearing Member, and the Matched-Book Lending Clearing Member must be
in the form specified by OCC. Third, the written request to terminate
by offset and to re-match stock loan and borrow positions may be for
less than the total number of shares of the Eligible Stock that is the
subject of the stock loan and borrow positions maintained, as
applicable, by the requesting Hedge Clearing Member, the Matched-Book
Borrowing Clearing Member, and Matched-Book Lending Clearing Member,
but must be for an equal number of shares.
Additionally, proposed Rule 2208(e)(2) would provide that, if OCC
in its sole discretion approves the requested termination by offset and
re-matching of positions, the requesting Hedge Clearing Member, the
Matched-Book Borrowing Clearing Member, and Matched-Book Lending
Clearing
[[Page 17233]]
Member would not be required to issue instructions to the Depository to
terminate such stock loans and stock borrow positions maintained in the
Stock Loan/Hedge Program or to initiate new stock lending transactions
for inclusion in the Stock Loan/Hedge Program as currently required
under Rules 2202(a) and 2208(a).
Proposed Rules 2208(e)(3) and (4) would provide that, from and
after the time OCC has completed the requested position adjustments to
terminate by offset and re-match the specified stock loan and borrow
positions, the requesting Hedge Clearing Member would have no further
obligation under the By-Laws and Rules with respect to such positions;
however, the Borrowing Clearing Member with re-matched stock borrow
positions remains obligated as a Borrowing Clearing Member and the
Lending Clearing Member with re-matched stock loan positions remains
obligated as a Lending Clearing Member with respect to the re-matched
positions as specified in the By-Laws and Rules applicable to the Stock
Loan/Hedge Program.
Proposed Rule 2208(e)(5) would require the requesting Hedge
Clearing Member and re-matched Borrowing Clearing Member and Lending
Clearing Member to make any necessary bookkeeping entries at the
Depository necessitated by the termination by offset and re-matching
upon notification that the termination by offset and re-matching has
been completed as set forth in proposed Rule 2209(h).
In addition, OCC proposes to adopt new Rule 2209(h) to specify
that, in the event of a termination by offset and re-matching of a
stock loan under proposed Rule 2208(e), such termination by offset and
re-match shall be complete upon OCC completing all position adjustments
in the accounts of the requesting Hedge Clearing Member, the Matched-
Book Borrowing Clearing Member, and the Matched-Book Lending Clearing
Member in accordance with Rule 2208(e) and the earlier of (i)
communicating confirmation of the transaction in the form of direct
written communications with the requesting Hedge Clearing Member, the
Matched-Book Borrowing Clearing Member, and the Matched-Book Lending
Clearing Member or (ii) when systems reports are produced and provided
to the Clearing Members reflecting the transaction.
OCC also proposes conforming and clean-up changes to Article XXI,
Sections 2, 3 and 4 of its By-Laws. Article XXI, Section 2 would be
revised to (i) account for the netting of stock loan and stock borrow
positions during the voluntary termination by offset and re-matching of
Matched-Book Positions in accordance with proposed Rule 2208(e) and
(ii) make clean-up changes to ensure the consistent use of the defined
term ``Eligible Stock.'' Additionally, Article XXI, Sections 3 and 4
would be revised to state that the voluntary termination by offset of
Matched-Book Positions in accordance with proposed Rule 2208(e) would
be excluded from the requirement to pay the settlement price against
delivery of the Loaned Stock as currently required for all terminations
under OCC's existing rules.
2. Statutory Basis
OCC believes the proposed rule change is consistent with Section
17A(b)(3)(F) of the Securities Exchange Act of 1934, as amended (the
``Act''),\14\ and the rules thereunder applicable to OCC. The proposed
rule change would allow OCC to close out the Matched-Book Positions of
Hedge Clearing Members, which could include distressed Hedge Clearing
Members or Hedge Clearing Members otherwise wishing to wind down their
Matched-Book Positions in an orderly manner, through the termination by
offset and re-matching of such positions. As described above, under
OCC's existing rules, the close out of Matched-Book Positions requires
the transfer of securities against the payment of settlement prices.
Moreover, to the extent Borrowing and Lending Clearing Member
counterparties to the Matched-Book Positions wish to continue to
maintain equivalent stock loan positions at OCC, those members would be
required to initiate new stock loans to replace the closed out
positions. Throughout this process of terminating and reestablishing
stock loan positions, a number of operational steps are required to
effectuate and settle those transactions, which introduce the potential
for execution and operational risks and thereby pose risks to the
prompt and accurate clearance and settlement of securities transactions
and the safeguarding of securities and funds associated therewith.
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change would eliminate these risks by allowing
OCC and its Hedge Clearing Members to close out Matched-Book Positions
through a process of termination by offset and re-matching without
requiring the transfer of securities and funds. Moreover, due to the
nature of Matched-Book Positions, the proposed position adjustments
would enable the requesting Hedge Clearing Member to orderly wind down
its Matched-Book Positions while ensuring the Matched-Book Borrowing
and Matched-Book Lending Clearing Members' positions are continuously
protected by OCC's guaranty. OCC therefore believes the proposed rule
change is designed to promote the prompt and accurate clearance of
settlement of securities transactions, the safeguarding of securities
and funds in the custody or control of OCC or for which it is
responsible and, in general, to protect investors and the public
interest in accordance with Section 17A(b)(3)(F) of the Act.\15\
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\15\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
OCC does not believe that the proposed rule change would have any
impact or impose any burden on competition.\16\ The proposed rules
would be equally applicable to all Hedge Clearing Members at OCC. The
proposed rule change is designed to allow for the termination by offset
and re-matching of Matched-Book Positions without requiring the
transfer of securities and funds between Hedge Clearing Members and
exposing OCC's members to the risks attendant to such transfers (as
described in detail above). Accordingly, OCC does not believe that the
proposed rule change would have any impact or impose any burden on
competition.
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\16\ 15 U.S.C. 78q-1(b)(3)(I).
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(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
The foregoing rule change has become effective upon filing \17\
pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and Rule 19b-
4(f)(4)(i) thereunder \19\ as it effects a change in an existing
service of a registered clearing agency that (1) does not adversely
affect the safeguarding of securities or funds in the custody or
control of the clearing agency or for which it is responsible and (2)
does not significantly affect the respective rights
[[Page 17234]]
or obligations of the clearing agency or persons using the service. At
any time within 60 days of the filing of the proposed rule change, the
Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
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\17\ Notwithstanding its immediate effectiveness, implementation
of this rule change will be delayed until this change is deemed
certified under CFTC Regulation Sec. 40.6.
\18\ 15 U.S.C. 78s(b)(3)(A)(iii).
\19\ 17 CFR 240.19b-4(f)(4)(i).
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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 [email protected]. Please include
File Number SR-OCC-2016-006 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-OCC-2016-006. 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, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will 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_16_006.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-2016-006
and should be submitted on or before April 18, 2016.
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\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Brent J. Fields,
Secretary.
[FR Doc. 2016-06862 Filed 3-25-16; 8:45 am]
BILLING CODE 8011-01-P