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Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change To Rescind Concentration Restrictions on Letters of Credit Issued by Certain Non-U.S. Institutions

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Start Preamble August 20, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] notice is hereby given that on April 11, 2001, 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.[2] 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 rescind the concentration restrictions on letters of credit issued by certain non-U.S. institutions.Start Printed Page 44660

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 these 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 rescind the concentration restrictions placed upon letters of credit issued by a non-U.S. institution where the issuing institution has qualified as a financial holding company under Regulation Y of the Board of Governors of the Federal Reserve System (“Fed”) or is an institution owned by or under the control of such a financial holding company.

OCC began accepting letters of credit from non-U.S. institutions in January 1983 in response to concerns that U.S. institutions were increasing their fees to clearing members or were otherwise reducing their overall commitment to financing clearing members. A combination of factors led OCC to impose more stringent qualification standards on non-U.S. institutions than on U.S. institutions issuing letters of credit for the benefit of OCC.[4] The qualification standards generally are found in Sections .01 through .08 of the Interpretations and Policies under OCC Rule 604.

OCC has recently completed a reassessment of these standards to ensure that they remain appropriate and achieve their intended purposes. We have concluded that with the enactment of the Gramm-Leach-Bliley financial Modernization Act of 1999 (“GLB”) [5] and the Fed amendments to Regulation Y implementing GLB, the concentration restrictions found in Interpretations and Policies .02 should be rescinded for certain non-U.S. institutions.

GLB created a new type of holding company called a “financial holding company” and specified certain eligibility requirements for such institutions.[6] To become a financial holding company, GLB requires a bank holding company to submit a declaration to the Fed that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed. Under GLB, foreign banks are specifically permitted to qualify as financial holding companies. GLB also requires the Fed to apply comparable capital and management standards to such banks that are comparable to those applied to U.S. banks owned by a financial holding company, giving due regard to certain enumerated principles.

The Fed has amended Regulation Y in order to implement provisions of the GLB Act governing the creation and conduct of financial holding companies.[7] Section 225.90 sets forth requirements that a foreign bank must meet for purposes of qualifying as a financial holding company, including capitalization and management tests.[8] The well-capitalized test includes risk based capital assessments.[9] The well-managed test requires the foreign bank to receive satisfactory Fed regulatory ratings, to receive the consent of its home country supervisor to the expansion of its U.S. activities, and to meet management standards comparable to those required of a U.S. bank owned by a financial holding company.[10] A foreign bank's election to be treated as a financial holding company is effective on the thirty-first day after the date that the election was received by the appropriate Federal Reserve Bank unless the applicant receives prior written notice that its election is effective or the applicant is notified that the election is ineffective.[11]

OCC believes that the Fed's regulatory policies governing the qualification of foreign banks as financial holding companies provide sufficient safeguards as to the creditworthiness of such institutions and the collectibility of letters of credit issued by them to warrant rescinding the concentration restrictions currently imposed on such institutions. Letters of credit issued by non-U.S. institutions currently represent only 3.2% of total margin deposits,[12] and OCC does not believe that rescinding the concentration requirements for qualified non-U.S. financial holding companies will materially increase its exposure to letters of credit issued by non-U.S. institutions specifically or letters of credit generally.

The proposed rule change is consistent with section 17A of the Act because it would facilitate the prompt and accurate clearance and settlement of securities transactions and should allow OCC to safely keep funds and securities while allowing non-U.S. institutions that have qualified as financial holding companies to compete on an equal footing with U.S. institutions for purposes of issuing letters of credit on behalf of clearing members.

(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.

(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 the self-regulatory Start Printed Page 44661organization 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 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-2001-03 and should be submitted by September 14, 2001.

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

Jonathan G. Katz,


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2.  A copy of OCC's proposed rule change is available at the Commission's Public Reference Section or through OCC.

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

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4.  Those factors included concerns about the diversity of regulatory structures, exposure to economic or political risk outside of the United States, and OCC's relative inexperience in dealing with non-U.S. institutions. Securities Exchange Act Release No. 19422 (January 12, 1983), 48 FR 2481 [File No. SR-OCC-82-8] (formalizing certain OCC criteria for approving domestic and foreign banks as issuers of letters of credit for margin purposes).

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5.  Gramm-Leach-Bliley Financial Modernization Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338 (1999).

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6.  Qualified financial holding companies may engage in securities, insurance, and other activities that are financial in nature or incidental to a financial activity. 50 FR 14433.

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7.  See 66 FR 399 (January 3, 2001) (Board of Governors of the Federal Reserve Board adopting a final rule to amend Regulation Y to implement the financial holding company provisions of the GLB).

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8.  Section 225.93 sets forth provisions that are applicable should a foreign bank fail to meet the applicable capital and management standards and specifies the consequences of such failure. Consequences include being required to execute an agreement with the Fed providing for a schedule of actions to be taken by the foreign bank to become compliant and, if the foreign bank is unable to meet such schedule, being subjected to an order requiring the divestiture or termination of certain business in the United States. Section 12 CFR 225.93 (2000).

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9.  Section 12 CFR 225.90(b) (2000).

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10.  Section 12 CFR 225.90(c) (2000).

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11.  Section 12 CFR 225.92 (2000). The Fed publishes a list of effective financial holding company elections on its web site. As of January 2001, 13 out of 32 non-U.S. Institutions approved by OCC to issue letters of credit have qualified as financial holding companies.

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12.  Letters of credit currently represent only 11.9% of total margin deposits.

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[FR Doc. 01-21421 Filed 8-23-01; 8:45 am]