[Federal Register Volume 81, Number 126 (Thursday, June 30, 2016)]
[Notices]
[Pages 42777-42779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15455]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78151; File No. SR-OCC-2016-003]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Related to the Acceptance of Pass-Through Letters of Credit as a Form
of Margin Asset
June 24, 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 June 17, 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 by OCC. OCC filed the proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(4)(ii)
thereunder \4\ so that the proposal was effective upon filing with the
Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change by OCC would amend OCC Rule 604 to permit
pass-through letters of credit (``Pass-Through Letters of Credit'') as
a form of margin asset to satisfy margin obligations for futures,
futures options, and commodity options positions (collectively referred
to as ``futures positions'') held in segregated futures accounts and
segregated futures professional accounts (collectively referred to as
``segregated futures accounts'') that are not eligible to hold
positions in security futures.\5\ Capitalized terms not defined herein
have the same meaning as set forth in the OCC By-Laws and Rules.
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\5\ See OCC By-Laws Article I, Section 1.S.(5) and (6) defining
segregated futures accounts and segregated futures professional
accounts.
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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
The purpose of the proposed rule change is to amend OCC Rule 604 to
permit Pass-Through Letters of Credit as a form of margin asset to
satisfy margin
[[Page 42778]]
obligations for positions held in segregated futures accounts that are
not eligible to hold positions in security futures in order to provide
futures market participants with the ability to deposit similar forms
of collateral for segregated futures accounts at OCC as they could
deposit at other futures clearinghouses. OCC Rule 604(c) allows
Clearing Members to deposit letters of credit as a form of margin asset
provided that such letters of credit meet the form prescribed by OCC
and satisfy the robust eligibility requirements and risk controls
enumerated under the Rule.\6\ OCC currently accepts two party letters
of credit as a form of margin asset under Rule 604(c), which are
letters of credit issued by an OCC approved bank or trust on behalf of
a Clearing Member, with OCC as beneficiary. Such letters of credit may
be used by Clearing Members to meet margin obligations arising from
positions held in any OCC account type.
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\6\ Rule 604(c) requires, among other things, that: (i) Letters
of credit must contain the unqualified commitment of the issuer to
pay a specified sum of money to OCC within certain specified time
periods; (ii) all letters of credit must be irrevocable; and (iii)
OCC may draw upon a letter of credit at any time, whether or not the
Clearing Member that deposited such letter of credit has been
suspended by OCC or is in default with respect to any obligation to
OCC, if OCC determines that such draw is advisable to protect OCC,
other Clearing Members, or the general public. Moreover, if a
Clearing Member deposits a letter of credit that indicates on its
face that it is being deposited to serve as margin for the Clearing
Member's customers' account or for a segregated futures account,
such letter of credit shall not constitute margin for any other
account maintained by the Clearing Member until such time as the
issuing bank shall instruct OCC by amendment to the letter of credit
stating that such letter of credit is not so restricted. See OCC
Rule 604(c)(1) and (3). Letters of credit are also subject to
specific eligibility standards for issuing banks and both Clearing
Member and issuer concentration limits. Specifically, no more than
50% of a Clearing Member's margin on deposit at any given time may
include letters of credit in the aggregate, and no more than 20% may
include letters of credit issued by any one institution. Moreover,
the total amount of letters of credit issued for the account of any
one Clearing Member by a U.S. or Non-U.S. institution shall not
exceed 15% of such institution's Tier 1 Capital. See OCC Rule 604,
Interpretations and Policies .01, .02, and .04.
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Recently, certain futures market participants have inquired about
using Pass-Through Letters of Credit as a form of margin asset at OCC.
Pass-Through Letters of Credit are letters of credit issued on behalf
of a third party (in this case, a customer of a Clearing Member) with a
joint beneficiary structure that would allow the Clearing Member, as a
joint beneficiary, to ``pass through'' the letter of credit directly to
the clearinghouse, as joint beneficiary, and avoid the need for the
Clearing Member to write its own letter of credit to the clearinghouse
or to deposit cash margin on behalf of the customer. Pass-Through
Letters of Credit are standard collateral vehicles accepted by other
futures clearinghouses, particularly clearinghouses that provide
clearance and settlement services for energy futures products. In order
to provide OCC's futures commission merchant (``FCM'') Clearing Members
with the ability to deposit similar forms of collateral for segregated
futures accounts as they could deposit at other futures clearinghouses,
OCC proposes to add new Interpretation and Policy .10 to Rule 604 to
permit its FCM Clearing Members to deposit Pass-Through Letters of
Credit as margin assets to satisfy margin requirements for their
futures customers. Pass-Through Letters of Credit would be permitted
only to satisfy margin obligations for positions held in segregated
futures accounts and would not be available as a form of margin asset
to satisfy margin obligations for securities products.\7\
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\7\ In connection with the proposed rule change, OCC would
implement procedural checks and verifications in its Collateral
Services and Member Services Departments to ensure that (1) Pass-
Through Letters of Credit would not be permitted to be allocated to
a segregated futures account unless that account is not eligible to
hold positions in security futures and (2) accounts holding Pass-
Through Letters of Credit as a form of margin asset would not be
enabled to hold positions in security futures.
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Pass-Through Letters of Credit would be subject to the same
requirements and risk controls of Rule 604 as the currently accepted
two party letters of credit. Pass-Through Letters of Credit deposited
as margin assets would be based on the industry standard Unified
Clearing Group Uniform Letter of Credit Terms--(Pass-Through), would be
consistent with terms accepted by other futures clearinghouses, and
would work similarly to the two party letters of credit currently used
by OCC Clearing Members. Specifically, the issuing bank would be
required to notify OCC of any changes to the terms of the letter of
credit (and in certain cases, OCC would be required to affirmatively
accept such changes) prior to such changes becoming effective. The
issuing bank would be required to inform OCC in the event that a
Clearing Member beneficiary wished to draw on the letter of credit, and
all potential draws on the letter of credit, regardless of who
initiates them, would be deposited directly into the FCM Clearing
Member's OCC segregated futures account and would be subject to all of
the rules and limitations surrounding the use and withdraw [sic] of
margin funds under OCC's Rules. For these reasons, OCC believes that
Pass-Through Letters of Credit, under the terms and restrictions
described above, are similar to the existing two party letters of
credit currently on deposit as margin assets at OCC and do not raise
any unique risks to OCC.
In addition, existing Interpretations and Policies .10-.16 to Rule
604 would be renumbered but otherwise remain unchanged.
(2) Statutory Basis
OCC believes that the proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act,\8\ and the rules thereunder applicable
to OCC. As noted above, the form of Pass-Through Letters of Credit that
would be accepted by OCC would have terms that work similarly to the
two party letters of credit currently used by OCC Clearing Members and
would be subject to the same restrictions and safeguards contained in
Rule 604 and the Interpretations and Policies thereunder.\9\ These
safeguards include, among other things, that letters of credit
deposited as margin assets have an unqualified commitment of the issuer
to pay OCC within certain specified time periods, that all letters of
credit must be irrevocable, and that OCC may draw upon a letter of
credit at any time, whether or not the Clearing Member that deposited
such letter of credit has been suspended by OCC or is in default with
respect to any obligation to OCC. Moreover, the issuer and
concentration limits for letters of credit deposited as margin assets
are designed to ensure that OCC does not have excessive exposure to a
particular issuing bank or to letters of credit generally as a form of
margin asset. These requirements are designed to minimize the risk of
loss or delay in OCC's access to funds payable under the letter of
credit and reduce the likelihood that OCC would need to use the
mutualized resources in its Clearing Fund to fulfill obligations
arising from Clearing Members depositing letters of credit as a form of
margin asset.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ See supra note 6 and related text.
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In addition to the restrictions and safeguards under Rule 604, the
terms of the Pass-Through Letters of Credit would require that they
effectively operate similarly to the two party letters of credit
currently on deposit as margin assets at OCC. For example, OCC must be
notified of (and in certain cases must affirmatively accept) any
changes to the terms of the letter of credit, the issuing bank would be
required to inform OCC in the case that the Clearing Member beneficiary
wished to draw on the letter of credit, and all potential draws on the
letter of credit, regardless of who initiates them, would be deposited
[[Page 42779]]
directly into the FCM Clearing Member's segregated futures account.
For the reasons stated above, OCC believes that the proposed rule
change is designed to assure the safeguarding of securities and funds
which are in the custody or control of OCC or for which it is
responsible in accordance with Section 17A(b)(3)(F) of the Act \10\ and
is reasonably designed to ensure that OCC holds margin assets in a
manner that minimizes risk of loss or delay in its access to them,
consistent with Rule 17Ad-22(d)(3).\11\ The proposed rule change is not
inconsistent with the existing 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).
\11\ 17 CFR 240.17Ad-22(d)(3).
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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\12\ not necessary or
appropriate in furtherance of the Act because it pertains solely to
OCC's activities relating to the clearing of commodity futures products
subject to the exclusive jurisdiction of the CFTC and therefore would
not have any impact or impose any burden on competition in securities
markets or any other market governed by the Act.
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\12\ 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 \13\
pursuant to Section 19(b)(3)(A)(iii) of the Act \14\ and Rule 19b-
4(f)(4)(ii) thereunder \15\ because it effects a change in an existing
service of OCC that (i) primarily affects the clearing operations of
OCC with respect to products that are not securities, including futures
that are not security futures and (ii) does not significantly affect
any securities clearing operations of OCC or any rights or obligations
of OCC with respect to securities clearing or persons using such
securities-clearing 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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\13\ Notwithstanding the immediate effectiveness of the proposed
rule change, implementation of this rule change is also contingent
on it being deemed certified under CFTC Regulation Sec. 40.6.
\14\ 15 U.S.C. 78s(b)(3)(A)(iii).
\15\ 17 CFR 240.19b-4(f)(4)(ii).
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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-2016-003 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-2016-003. 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 filings 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_003.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-2016-003 and
should be submitted on or before July 21, 2016.
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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Brent J. Fields,
Secretary.
[FR Doc. 2016-15455 Filed 6-29-16; 8:45 am]
BILLING CODE 8011-01-P