Skip to Content


Self-Regulatory Organizations; Options Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to OCC Clearing Members Pledging Long Options Positions

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble July 12, 2000.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 Start Printed Page 44845(“Exchange Act”),[1] notice is hereby given that on March 6, 2000, 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. The Commission is publishing this notice to solicit comments on the proposed rule change from interested parties.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The proposed rule change would allow OCC to expand the categories of accounts from which a clearing member can pledge long option positions and the categories of permitted pledgees.[2]

II. Self-Regulatory Organization'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 such statements.[3]

(A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule change is to expand the categories of accounts from which clearing members may pledge long option positions to third party lenders and to expand the categories of permitted pledgees. The proposed rule change is intended to reflect liberalizing amendments to Regulation T (12 CFR part 220) and Regulation U (12 CFR part 221) made by the Board of Governors of the Federal Reserve System (“Fed Board”).

Options have traditionally had no loan value under the Fed Board's margin regulations. The Only relevant exception was for “special purpose credit” extended to broker-dealers.[4] A bank or another broker-dealer could extend credit on long options carried for the account of market makers and specialists to secure credit for financing their market making functions. Accordingly, when OCC adopted Rule 614, which allowed long options to be pledged to a bank or another broker-dealer, OCC specified that options could only be pledged from clearing members' market-maker and specialist accounts.[5] In addition, the permitted pledgees under Rule 614 were limited to banks and broker-dealers as these were the only categories of lenders from which a broker-dealer such as a clearing member or market maker was permitted to borrow.[6]

In 1996, the Fed Board eliminated the general prohibition against extending credit on long options and instead deferred to the rules of the options exchanges regarding option loan value by incorporating those rules by reference into Regulation T. [7] Although exchange margin rules then in effect also prohibited extensions of credit against long options, these rules have subsequently been amended to permit broker-dealers to extend credit on certain long option positions in a customer margin account. [8]

In 1998, the Board amended the Supplement to Regulation U to allow lenders other than broker-dealers to extend 50 percent loan value against all long positions in listed options.[9] The Fed Board also modified the margin regulations to reflect amendments to the Exchange Act. The National Securities Markets Improvement Act of 1996 (“NSMIA”) repealed section 8(a) of the Exchange Act which, among other things, had prohibited broker-dealers from obtaining credit against the collateral of exchange-traded equity securities from lenders other than broker-dealers and certain banks. For that reason, the Fed Board deleted provisions of Regulations T and U that implemented section 8(a) of the Exchange Act.

As a result of all of the foregoing statutory and regulatory changes, credit may now be extended by broker-dealers, banks and other lenders against long option positions whether carried for the account of a market-maker or specialist, another broker-dealer, a public customer, or for the clearing member's own proprietary account. This renders the provisions of Rule 614, restricting the types of OCC accounts from which long options may be pledged and the kinds of entities that may be pledgees, obsolete. In recognition of this fact, OCC now proposes to amend Rule 614 to delete the obsolete restrictions.

Of course, Regulations T and U continue to impose certain restrictions on extensions of credit secured by OCC-issued options. For example, the 50 percent loan limit would generally be applicable, with certain exceptions such as when the credit is extended to an “exempted borrower.” [10] As is the case with other securities credit transactions, lenders and borrowers who use the OCC pledge program are obligated to comply with the Fed Board's margin regulations.

OCC is also proposing to make certain technical amendments to Rule 614. These reflect, among other things, revisions to section 8 and 9 of the Uniform Commercial Code adopted since Rule 614 was originally drafted. Conforming changes are being made to Rules 601, 602, 1105, and 1106.

OCC believes that the proposed rule change is consistent with the requirements of the Section 17A of the Exchange Act [11] and the rules and regulations thereunder because it increases the ability of clearing members and their customers to arrange for or maintain financing for their positions while maintaining OCC's overall protection against default.

(B) Self-Regulatory Organization's Statement on Burden on Competition

OCC does not believe that the proposed rule change would impose any burden on competition.Start Printed Page 44846

(C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

Written comments 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

Within thirty-five days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or

(ii) as to which OCC consents, the Commission will:

(A) By order approve such proposed rule change or

(B) Institute proceedings to determine whether the proposed rule change should be disapproved.

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 Exchange Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of OCC.

All submissions should refer to File No. SR-OCC-00-02 and should be submitted by August 11, 2000.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[12]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


2.  The complete text of the proposed rule change is included in OCC's filing, which is available for inspection and copying at the Commission's public reference room and through OCC.

Back to Citation

3.  The Commission has modified the text of the summaries prepared by OCC.

Back to Citation

4.  Long options may also be given value in a customer's margin account when used to offset margin otherwise required on short option positions and are in turn given margin credit in the clearing member's account at OCC. However, that use of long option value does not involve the pledging of options to third party lenders, and Rule 614 therefore has no application to such use.

Back to Citation

5.  In recognition of the ability of a clearing member to pledge long options to a commodity clearing organization for the purpose of securing obligations to such clearing organization on related futures and futures option contracts, OCC later amended Rule 614 to permit this particular form of pledge. In 1999, OCC also amended its rules to permit pledging of long positions to third party lenders from a non-proprietary cross-margining account. Securities Exchange Act Rel. No. 41883 (September 17, 1999), 64 FR 51819 (September 24, 1999).

Back to Citation

6.  As noted in the footnote above, the rule was later amended to permit pledging of long options to a commodity clearing organization.

Back to Citation

7.  Fed Board Release, 61 FR 20385 (May 6, 1996).

Back to Citation

8.  E.G., Securities Exchange Act Rel. Nos. 41658 (July 27, 1999), 64 FR 42736 (August 5, 1999) [SR-CBOE-97-67] and 42011 (October 14, 1999), 64 FR 57172 (October 22, 1999) [SR-NYSE-99-03].

Back to Citation

9.  Fed Board Release, 63 FR 2806 (January 16, 1998).

Back to Citation

10.  Exempted borrower is defined in Section 220.2 of Regulation T and in Section 221.2 of Regulation U.

Back to Citation

[FR Doc. 00-18233 Filed 7-18-00; 8:45 am]