[Federal Register Volume 63, Number 51 (Tuesday, March 17, 1998)]
[Notices]
[Page 13082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6766]
[[Page 13082]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39738; File No. SR-OCC-97-11]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposing Rule Change Relating to the Stock Loan/Hedge
System
March 10, 1998.
On July 11, 1997, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change (File No. SR-OCC-97-11) pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
was published in the Federal Regiser on December 9, 1997.\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. 39386 (December 2,
1997), 62 FR 64902 (December 9, 1997).
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I. Description
OCC's stock loan/hedge system (``HEDGE system'') is a clearing
system for stock loans between OCC clearing members.\3\ The rule change
amends OCC's by-laws governing the HEDGE system to eliminate the
requirements with respect to the accounts in which stock loan positions
must be maintained.
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\3\ For a complete description of the HEDGE system, refer to
Securities Exchange Act Release No. 32638 (July 15, 1993), 58 FR
39254 (July 22, 1993) [File No. SR-OCC-92-34] (order approving
proposed rule change establishing HEDGE system).
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OCC's by-laws that govern the HEDGE system \4\ currently treat
stock loans as if they were pledges of loaned securities subject to the
Commission's hypothecation rules.\5\ The hypothecation rules limit the
circumstances under which a broker-dealer may pledge securities carried
for the account of any customer \6\ and specifically prohibit broker-
dealers from pledging securities carried for the account of any
customer under circumstances that will permit such securities to be
commingled with securities carried for the account of any person other
than a bona fide customer of such broker or dealer under a lien for a
loan made to such broker or dealer.\7\ Accordingly, under the HEDGE
system's account segregation rules, a clearing member that desires to
lend stock must (1) first determine whether the stock is a customer or
proprietary security and (2) carry out the loan through its OCC
customers' account (or where permitted through its OCC marketmaker's
account) if the stock is a customer security.
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\4\ OCC By-Laws, Article XXI, Section 5.
\5\ 17 CFR 240.8c-1 and 240.15c2-1.
\6\ For purposes of the hypothecation rules, the term
``customer'' includes registered broker-dealers so long as they are
not affiliated in specified ways with the broker-dealer effecting
the pledge. 17 CFR 240.8c--1(b)(1), 240.15c2-1(b)(1). References to
customers'' and ``non-customers'' herein are based on the definition
in the hypothecation rules.
\7\ 17 CFR 240.15c2-1(a)(2). See also 17 CFR 240.8c-1(a)(2)
(providing the same requirements as Rules 15c2-(1)(a)(2) except that
its scope is limited to exchange members and brokers and dealers
that transact business through exchange members).
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OCC has determined that there is no legal reason for OCC's by-laws
to treat stock loans under the HEDGE system as hypothecations.
Therefore, OCC has concluded that it may eliminate the HEDGE system's
account segregation requirements for stock loans without violating or
causing its clearing members to violate the Commission's hypothecation
rules.
II. Discussion
Section 17A(b)(3)(F) of the Act \8\ requires that the rules of a
clearing agency be designed to remove impediments to and perfect the
mechanism of the national system for the prompt and accurate clearance
and settlement of securities transactions. For the reasons discussed
below, the Commission believes that OCC's rule change relating to the
HEDGE system is consistent with OCC's obligations under Section
17A(b)(3)(F).
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission is satisfied with OCC's determination that it is not
obligated to treat stock loans carried out through the HEDGE system as
if they were pledges of loaned securities subject to the Commission's
hypothecation rules. The Commission believes that the rule change
should increase the use of OCC's HEDGE system which should in turn help
to improve the efficiency and safety of stock lending transactions.
Accordingly, the Commission believes that the rule change should enable
OCC to remove impediments to and to help perfect the mechanism of the
national system for the prompt and accurate clearance and settlement of
securities transactions.
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 with Section 17A of the Act \9\ and the rules and
regulations thereunder.
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\9\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-OCC-97-11) 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. 98-6766 Filed 3-16-98; 8:45 am]
BILLING CODE 8010-01-M