[Federal Register Volume 62, Number 187 (Friday, September 26, 1997)]
[Notices]
[Pages 50647-50648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25520]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39104; File No. SR-OCC-97-01]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving a Proposed Rule Change Permitting the Use of Certain
Fund Shares to Satisfy Margin Requirements and Permitting the Use of
Certain Fund Shares and Trust Units as Escrow Deposits
September 22, 1997.
On February 21, 1997, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change (File No. SR-OCC-97-01) 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 May 20, 1997.\2\
No comment letters were received. For the reasons discussed below, the
Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 38625 (May 13, 1997), 62
FR 27638.
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I. Description
(1) Using Fund Shares as a Form of Margin
The proposal amends subparagraph (4) of OCC Rule 604(d), which sets
forth the margin deposit eligibility requirements for debt and equity
issues, to permit OCC's clearing members to deposit as a form of margin
collateral fund shares issued by open-end management investment
companies that hold portfolios or baskets of common stocks (``fund
shares'').\3\ The proposal amends the term ``stock'' defined Rule
604(d)(4) to include fund shares. Fund shares will have to meet the
requirements applicable to stocks under Rule 604(d) and be of a class
approved by OCC for deposit as margin to be eligible for deposit as
margin collateral. Because Rule 604(d)(1) requires that a stock be
exchange listed or traded on the NASDAQ National Market System, the
``publicly traded'' requirement of subparagraph (4) has been deleted.
The proposal also amends Section 11 of OCC's Interpretations and
Policies to require that OCC's Membership/Margin Committee
(``Committee'') approve classes of fund shares for deposit as margin.
Presently, World Equity Benchmark Shares (``WEBS'') listed on the
American Stock Exchange are the only class of fund shares the Committee
has approved.
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\3\ Similarly, OCC permits its clearing members to use certain
publicly traded units of beneficial interest in unit investment
trusts (``trust units'') as margin deposits under the conditions
specified in subparagraph (4) of Rule 604(d). Currently, the only
trust units approved for deposit as margin are Standard & Poor's
(``S&P'') Depository Receipts (``SPDR's'') on the S&P 500 Index and
S&P 400 Mid-Cap Index.
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(2) Using Fund Shares and Trust Units as Escrow Deposits
The proposal amends OCC Rule 1801(b), which relates to index option
escrow deposits, by adding new subparagraph (2) which will define the
term ``common stocks'' to include fund shares and trust units.\4\ By
adding this definition, OCC Rule 1801(b) now permits clearing members
to use fund shares and trust units as part of an escrow deposit made
with respect to index call option contracts carried in a
[[Page 50648]]
short position in a clearing members' customer account.\5\
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\4\The proposed rule change also makes numbering changes to Rule
1801 as a result of the addition of new subparagraph (b)(2).
\5\ OCC has filed with the Commission a proposed rule change
that will authorize OCC to issue and clear options on fund shares
and trust units. Securities Exchange Act Release No. 38706 (June 2,
1997, 62 FR 31468. OCC also asserts that, if approved by the
Commission, fund shares and trust units will by definition become
``underlying securities as defined by Article I, Section 1 of OCC's
bylaws,'' and escrow deposits with respect to call option contracts
on these underlying securities carried in a short position will be
automatically permitted under the existing provisions of OCC Rule
610, which relates to the deposit of underlying securities in lieu
of margin.
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The language of the new definition parallels that of Rule 604(d),
as amended herein. Accordingly, fund shares and trust units deposited
as index option escrow deposits must meet the existing requirements for
deposits of common stock under Rule 1801(b) and must be of a class
approved by OCC for deposit as margin collateral. Because the Committee
already has approved for deposit as margin SPDRs on the S&P 500 Index
and S&P 400 Mid-Cap Index (as an eligible class of trust units) and
WEBS (as an eligible class of fund shares), upon approval of this rule
filing SPDRs and WEBS will be eligible for use as escrow deposits for
short positions in index call options.\6\
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\6\ OCC has indicated that if the Commission approves the
proposal, OCC will send a notice to each of its custodian banks
advising them that the term ``common stocks'' as used in the Amended
and Restated On-Line Escrow Deposit Agreement includes the SPDRs and
WEBS identified above.
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II. Discussion
Section 17A(b)(3)(F) \7\ of the Act requires that the rules of a
clearing agency be designed to assure the safeguarding of securities
and funds in its custody or control or for which it is responsible.
Because fund shares and trust units, among other things, must be either
traded on a national securities exchange or designated as a national
market system security to be eligible as margin collateral, the
proposal ensures that only liquid securities will be accepted as a form
of margin or an escrow deposit. In addition, fund shares and trust
units are typically traded and cleared like shares of common stock and
are typically held in book-entry form at a securities depository.\8\ As
a result, OCC believes it will be able to readily perfect a security
interest in deposited fund shares and will be able to liquidate them if
necessary. Furthermore, OCC already has had an opportunity to gain
experience in accepting trust units as a form of margin and will be
able to use this experience in expanding to fund shares. Therefore, the
Commission believes that OCC's proposed rule change is consistent with
OCC's obligations under the Act to safeguard securities and funds.
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\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ Securities Exchange Act Release No. 38105, (December 31,
1996) 62 FR 1014 [File No. SR-OCC-96-13] (order approving a proposed
rule change relating to unit investment trusts as margin
collateral).
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III. 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 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-97-01) be, and hereby
is, approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25520 Filed 9-25-97; 8:45 am]
BILLING CODE 8010-01-M