Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving a Proposed Rule Change To Merge the Equity and Non-Equity Elements of OCC's Clearing Fund

On September 24, 1999, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-OCC-99-9) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”). Notice of the proposal was published in the Federal Register on December 8, 1999. No comment letters were received. For the reasons discussed below, the Commission is approving the proposed rule change.

I. Description

Under the rule change, OCC will merge the equity and non-equity elements of its clearing fund into combined clearing fund. A member's contribution to the combined clearing fund will be based on the member's total margin requirements, with a minimum contribution of $150,000.

In 1982, when OCC first began clearing non-equity products, including treasury, currency, and stock index options, OCC instituted a separate non-equity element to the clearing fund to limit the impact of a member default in one product base (i.e., either equity or non-equity) on members trading only the other product base. The element of the clearing fund applicable to the product(s) involved in the default would be utilized first; only after that element was exhausted would the other element be used. Beginning in 1986, with the introduction of the Theoretical Intermarket Margin System (“TIMS”) for non-equity products, some margin offsets were allowed between equity and non-equity products. Such offsets further expanded following the implementation of TIMS for equity products in 1991. The blurring of the distinction between equity and non-equity margin requirements and the integration of OCC's equity and non-equity systems in general has reached a level such that clearing members only receive a single margin requirement each day. OCC computes distinct equity and non-equity margin requirements only on a monthly basis for the purpose of determining the size of each element of the clearing fund.

Consistent with Article VIII, Section 2 of OCC's Bylaws, OCC will issue a memorandum to its clearing members at least five business days prior to the effective date of the rule change advising them of the change in the minimum contribution and advising them of their ability to withdraw from membership should they choose not to make the required clearing fund contribution.

II. Discussion

Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. The Commission finds that combing the two clearing funds will have no effect on OCC's margining and risk management procedures that protect OCC against a member default. As a result, OCC will maintain its current level of protection while enhancing the efficiency of its operations. Accordingly, the rule change is consistent with OCC's obligation to safeguard securities and funds which are in OCC's custody or control.

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-99-9) be, and hereby is, approved.