[Federal Register Volume 62, Number 4 (Tuesday, January 7, 1997)]
[Notices]
[Pages 1013-1014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-231]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38103; File No. SR-OCC-96-11]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change Relating to Membership Standards
December 31, 1996.
On August 30, 1996, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change (File No. SR-OCC-96-11) pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of
the proposal was published in the Federal Register on October 11,
1996.\2\ No comment letters were received. 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\ Securities Exchange Act Release No. 37792 (October 7, 1996),
61 FR 53475.
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I. Description
The proposed rule change amends OCC's by-laws and rules regarding
OCC's initial membership standards and the ongoing duties of clearing
members as follows.
A. Article V, Section 1 of the By-Laws
Clause d. has been added to Interpretation .02 of the
Interpretations and Policies (``Interpretations'') under Article V,
Section 1 of OCC's by-laws. Clause d. provides that the Membership/
Margin Committee (``Committee'') of the Board of Directors (``Board'')
will not recommend approval of an application for clearing membership
unless the applicant's Designated Examining Authority (``DEA'') has
stated that it has no objections to the application for clearing
membership.\3\ Pursuant to that clause, the Committee, if requested in
writing by the applicant, is permitted to waive the requirement in
exceptional cases and where good cause is shown.
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\3\ Under OCC's current membership review procedures, an
applicant's DEA is contacted for information regarding the applicant
and is requested to provide advice or any objections with respect to
the applicant's ability to self-clear option transactions.
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Interpretation .03 is amended to require that if an applicant
elects to use an associated person \4\ to satisfy the applicable
requirements of clause a. through c. thereof, the designated associated
person must be a full time employee of the applicant.\5\ Interpretation
.03 also is amended to require that the key operations employees
required to have attended applicable OCC operations readiness review
sessions and successfully completed any applicable OCC operational and
financial examinations for operations employees be full time employees
and attend all such review sessions. Interpretation .04 is amended to
eliminate the ability of an applicant for clearing membership to enter
into a facilities management arrangement with a non-clearing member.\6\
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\4\ Associated person is defined in Interpretation .03 as any
partner, officer, director, or branch manager of such applicant (or
any person occupying a similar status or performing similar
functions), any person directly or indirectly controlling,
controlled by, or under common control with such applicant, or any
employee of such applicant.
\5\ Clauses a. through c. require that: an applicant that is a
registered broker-dealer must be registered as a ``Limited
Principal--Financial Operations'' with the National Association of
Securities Dealers; an applicant that is applying for clearing
membership as an exempt Canadian clearing member must be registered
as a principal/director/officer and as a designated registered
options principal with the Investment Dealers Association of Canada;
and an applicant that is a non-U.S. securities firm must have
completed any applicable OCC financial and operational examination
for employees who are responsible for supervising the preparation of
applicant's financial reports.
\6\ Currently, OCC has two clearing members that use the same
non-clearing member facilities manager.
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Interpretation .05 is added to authorize the Committee to recommend
to the Board that additional financial requirements be imposed on an
applicant for clearing membership (e.g., an increase in net capital or
a requirement to make and maintain
[[Page 1014]]
initial margin deposits) or that restrictions be imposed on the
applicant's clearance of option transactions if the Committee has
determined that the applicant's financial or operational condition in
relation to the business that the applicant has proposed to transact
through OCC makes such action necessary or advisable for the protection
of OCC, clearing members, or the general public. The Board is required
to review independently such a recommendation to determine whether it
should be imposed on an applicant. Any requirements or restrictions so
imposed would remain in force for the period determined by the Board
but will last no longer than the end of the first three calendar months
commencing after the applicant's admission to clearing membership.
Furthermore, Interpretation .05 states that the imposition of any
additional requirements or restrictions so imposed shall not preclude
OCC from imposing contemporaneous requirements or restrictions pursuant
to other provisions of OCC's by-laws and rules.\7\
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\7\ E.g., OCC Rule 305.
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B. Article V, Section 3 of the By-Laws
Interpretation .01 has been added to Section 3 of Article V. That
interpretation requires an applicant approved for clearing membership
subject to the satisfaction of specified conditions to meet those
specified conditions within six months from the date on which its
application is approved unless the Board prescribes a shorter time
period at the time of approval. If an applicant fails to meet the
specified conditions within the applicable time period, the approval of
the application will be deemed withdrawn, and the application will be
deemed to have lapsed unless the period to satisfy those conditions is
extended by OCC. Any applicant seeking an extension will be required to
make a written request specifying any material changes that have
occurred in its ability to transact business with OCC. The Chairman or
the President is vested with the authority to approve or disapprove an
extension request. No deadline can be extended beyond one year from the
date the application originally was approved.
C. Chapter II of the Rules
Rule 201 is amended (i) to delete the requirement that each
clearing member maintain an office in the vicinity of the office of OCC
and (ii) to require every clearing member to provide OCC with prompt
written notice of the relocation of its principal office or the office
maintained by the clearing member to comply with the requirements of
Rule 201(a) and with respect to a non-U.S. clearing member, prompt
notice of a material change in the office arrangements OCC had
previously found satisfactory.
Rule 214(a) is amended to require that only associated persons who
are full time employees of a clearing member may satisfy the applicable
requirements of that rule.\8\ Interpretation .02 thereunder is amended
(i) to shorten the time period from one year to three months within
which a clearing member must replace an associated person through whom
a clearing member has been meeting the requirements of the rule and
(ii) to require prompt, written notice of any separation between the
clearing member and such associated person.
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\8\ Rule 214(a) contains provisions similar to Interpretation
.03 of Article V, Section 1 of the by-laws, supra notes 4 and 5 and
accompanying text.
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Rule 215 has been added to require each clearing member to provide
OCC with prompt, prior, written notice of material changes to its
operations including: (i) its involvement in any merger, combination,
or consolidation; (ii) the acquisition of another entity; (iii) the
sale of a significant portion of its assets; (iv) a change in its form
of business organization or the name under which it does business; and
(v) a change in the direct or indirect beneficial ownership of 10% or
more of the equity of the clearing member. Clearing members will be
required to provide OCC with such documents as OCC might require with
respect to such events as well as a list of persons or entities that
are the beneficial owners directly or indirectly of 10% or more of the
equity of the clearing member.
II. Discussion
Section 17A(b)(3)(F) \9\ of the Act requires that the rules of a
clearing agency be designed to safeguard securities and funds in its
custody or control. The proposal should assist OCC in this regard by
helping to ensure that only entities that meet certain standards are
standards are admitted to OCC membership. For example, seeking the
approval of an applicant's DEA prior to admission should help OCC to
confirm that the admission is consistent with the applicant's current
operations. Furthermore, by allowing the Committee to recommend that
additional requirements or restrictions be placed on an applicant, OCC
should be better able to monitor such applicant and evaluate the risks
such applicant poses to OCC. Similarly, by requiring applicants to meet
all conditions of membership within six months of admission, OCC limits
the risk that such applicant poses to OCC while permitting an applicant
a reasonable amount of time to comply with OCC rules.
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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Members are now required to provide OCC prompt notice of such
events as a change in office or a material change in operations. By
providing prompt notice of these changes, the proposal should enable
OCC to better monitor the financial and operational status of its
members. By admitting applicants subject to certain conditions and by
monitoring members' conditions, OCC should be able to further reduce
the risk of member default and thereby further reduce the risk that OCC
may need to expend funds in satisfaction of a defaulting member's
obligations. Thus, the proposal should assist OCC in safeguarding funds
and securities.
III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular Section 17A of the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-96-11) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-231 Filed 1-6-97; 8:45 am]
BILLING CODE 8010-01-M