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Notice

Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Definition of Non-Customer

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Start Preamble March 21, 2006.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] notice is hereby given that on March 14, 2006, 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 persons.

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

The proposed rule change would clarify the definition of non-customer as it relates to member affiliates.

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.[2]

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

The proposed rule change clarifies that a broker-dealer member affiliate of a clearing member neither needs to consent to being treated as a non-customer nor to execute a non-conforming subordination agreement in order to be treated as a non-customer for purposes of OCC's By-Laws and Rules.

In File No. SR-OCC-99-5, OCC changed its rules to allow an affiliate of a clearing member to designate itself as a non-customer under the Commission's hypothecation rules and OCC's By-Laws and Rules in order for the affiliate's transactions and positions to be commingled in its clearing member's firm and/or proprietary cross-margin account, in order to make more favorable margin treatment of such positions possible.[3] The purpose of File No. SR-OCC-99-5 was to conform OCC's Rules to the terms of a no-action letter issued by the Division of Market Regulation, which set forth requirements for a member affiliate to designate itself as a non-customer.[4] Specifically, that letter required each non-broker-dealer member affiliate whose securities positions would be hypothecated to consent to being treated as a non-customer and to execute a non-conforming subordination agreement meeting certain criteria accompanied by an opinion of counsel regarding the legal authority of the member affiliate to so subordinate its claims. The requirement that a non-broker-dealer member affiliate provide its clearing member with an executed non-conforming subordination agreement was intended to ensure that such member affiliate would not be a customer for purposes of SEC Rule 15c3-3. Because broker-dealers are already excluded from the definition of customer in Rule 15c3-3, there was no need to require broker-dealer affiliates to execute such a subordination agreement. OCC is filing this rule change to clarify the definition of non-customer as it relates to member affiliates so that it more closely conforms to the terms of the no-action letter.

OCC believes that the proposed change is consistent with Section 17A of the Act because it clarifies an existing OCC rule to allow the positions of broker-dealer member affiliates to be included in a clearing member's firm account and/or proprietary cross-margining account, which will result in more favorable margin treatment and encourage participation in cross-margining. The proposed rule change is not inconsistent with the existing rules of OCC, including any other rules proposed to be amended.

(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 16605

(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

The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act [5] and Rule 19b-4(f)(4) [6] promulgated thereunder because the proposal effects a change in an existing service of OCC that (A) does not adversely affect the safeguarding of securities or funds in the custody or control of OCC or for which it is responsible and (B) does not significantly affect the respective rights or obligations of OCC or persons using the service. At any time within sixty days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

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. Comments may be submitted by any of the following methods:

Electronic Comments

Paper Comments

  • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2006-02. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/​rules/​sro.shtml). 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, 100 F Street, NE., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of OCC and on OCC's Web site at http://www.optionsclearing.com.

All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-OCC-2006-02 and should be submitted on or before April 24, 2006.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.[7]

Nancy M. Morris,

Secretary.

End Signature End Preamble

Footnotes

2.  The Commission has modified parts of these statements.

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3.  Securities Exchange Act Release No. 43668 (December 4, 2000), 66 FR 77413 (December 11, 2000).

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4.  Letter from Michael A. Macchiaroli, Associate Director, Division of Market Regulation, to William H. Navin, EVP and General Counsel, OCC (June 15, 2000).

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5.  15 U.S.C. 78s(b)(3)(A)(iii).

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[FR Doc. E6-4756 Filed 3-31-06; 8:45 am]

BILLING CODE 8010-01-P