Self-Regulatory Organizations; The Intermarket Clearing Corporation; Notice of Filing of the Withdrawal of an Application for Registration as a Clearing Agency

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34110; File No. SR-ICC-600-21]

Self-Regulatory Organizations; The Intermarket Clearing

Corporation; Notice of Filing of the Withdrawal of an Application for

Registration as a Clearing Agency

May 25, 1994.

Pursuant to section 19(a)(3) of the Securities Exchange Act of 1934

(``Act''),\1\ The Intermarket Clearing Corporation (``ICC'') has filed

with the Securities and Exchange Commission (``Commission'') notice of

its intent to withdraw its request for permanent registration as a

clearing agency and to terminate its temporary registration as a

clearing agency.\2\ The Commission is publishing this notice to solicit

comments on ICC's proposal from interested persons.

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\1\15 U.S.C. 78s(a)(3) (1988).

\2\Letter from James C. Yong, Vice President and Assistant

Secretary, ICC, to Jonathan G. Katz, Secretary, Commission (March

24, 1994).

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I. Discussion

ICC is the commodity clearing subsidiary of The Options Clearing

Corporation (``OCC''). ICC commenced operations in 1985 as a ``clearing

organization,'' as defined in the rules promulgated under the Commodity

Exchange Act,\3\ and therefore is subject to oversight and regulation

by the CFTC. ICC guarantees, clears, and settles futures contracts,

options on futures contracts, and commodity options which are traded on

those contract markets that have designated ICC as their clearing

organization.\4\

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\3\Commodity Futures Trading Commission (``CFTC'') Rule 1.3(d)

[17 CFR 1.3(d) (1993)] defines clearing organization as the person

or organization which acts as a medium for clearing transactions in

commodities for future delivery or commodity option transactions or

for effecting settlements of contracts for future delivery or

commodity option transactions for and between members of a contract

market.

\4\Currently, ICC acts as the clearing organization for the Amex

Commodities Corp., the New York Futures Exchange, Inc., and the

Philadelphia Board of Trade.

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Because the economic similarity between certain securities products

and certain commodity products created opportunities for intermarket

hedging and arbitrage, ICC and OCC developed a program to offer cross-

margining to joint members of ICC and OCC.\5\ The original cross-

margining program between ICC and OCC required a joint member to

transfer positions in securities options eligible for cross-margining

from its OCC account to its account at ICC. Such options positions and

futures contracts eligible for cross-margining were margined at ICC

based upon the net risk of the combined positions. ICC held all

positions, margin deposits, and clearing fund deposits with respect to

the cross-margining program. ICC was obligated to OCC to perform a

participating joint member's obligations with respect to short

positions in securities options held in the joint member's ICC cross-

margining account, and OCC remained obligated to collect and pay all

premiums for transactions in securities options and to effect

settlement of all exercises. Because securities positions were held and

were margined at ICC and because ICC held all the margin deposits and

clearing fund deposits with respect to cross-margined positions, ICC

believed that it could possibly be viewed as being within the Act's

definition of a clearing agency\6\ and therefore registered with the

Commission as such.\7\

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\5\Securities Exchange Act Release Nos. 26153 (October 3, 1988),

53 FR 39567 [File No. SR-OCC-86-17] (order approving OCC/ICC

proprietary cross-margining program) and 30041 (December 5, 1991),

56 FR 64824 [File Nos. SR-OCC-90-04 and SR-ICC-90-03] (order

approving OCC/ICC non-proprietary, market professional cross-

margining program).

\6\Section 3(a)(23)(A) [15 U.S.C. 78c(a)(23)(A) (1988)] defines

a clearing agency as any person who acts as an intermediary in

making payments or deliveries or both in connection with

transactions in securities or who provides facilities for comparison

of data respecting the terms of settlement, to reduce the number of

securities transactions, or for the allocation of securities

settlement responsibilities.

\7\On October 3, 1988, the Commission granted ICC temporary

registration as a clearing agency for a period of eighteen months

(Securities Exchange Act Release No. 26154 (October 3, 1988), 53 FR

39556). On April 5, 1990, October 3, 1991, and April 2, 1993, the

Commission extended ICC's temporary registration for additional

eighteen month periods (Securities Exchange Act Release Nos. 27879

(April 5, 1990), 55 FR 39556; 29781 (October 3, 1991), 56 FR 50959;

and 32098 (April 2, 1993), 58 FR 18277).

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Following regulatory approval of the cross-margining program

between ICC and OCC, OCC entered into cross-margining arrangements with

several other commodity clearing organizations.\8\ Pursuant to those

later cross-margining programs, instead of transferring all cross-

margined option and futures positions into an account held at one

clearing organization, cross-margined option positions are held at OCC

and cross-margined futures positions are held at the participating

commodity clearing organization. OCC and the participating commodity

clearing organization share information regarding the positions held in

their cross-margining accounts and treat the cross-margining accounts

as being combined for purposes of calculating margin requirements.

Collateral deposited to satisfy margin requirements is subject to the

joint control of OCC and the participating commodity clearing

organization. Members electing to participate in a cross-margining

program must grant OCC and the participating commodity clearing

organization cross-liens on option positions maintained at OCC and on

futures positions maintained at the participating commodity clearing

organization. Under this later cross-margining structure, a

participating commodity clearing organization is not considered to be

within the Act's definition of a clearing agency and therefore is not

required to register with the Commission as such.

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\8\E.g., Securities Exchange Act Release Nos. 27296 (September

26, 1989), 54 FR 41195 (order approving OCC/CME cross-margining

program for proprietary positions); 29991 (November 26, 1991), 56 FR

61458 (order approving expansion of OCC/CME cross-margining program

to include positions held for market professionals); 29888 (October

31, 1991), 56 FR 56680 (order approving OCC/Board of Trade Clearing

Corporation cross-margining program for proprietary positions);

32681 (July 27, 1993), 58 FR 41302 (order approving expansion of

OCC/BOTCC cross-margining program to include positions held for

market professionals); 30413 (February 26, 1992), 57 FR 7830 (order

approving OCC/Kansas City Board of Trade Clearing Corporation

[``KCBOTCC''] cross-margining program for proprietary positions);

and 32708 (August 2, 1993), 58 FR 42586 (order approving the

expansion of the OCC/KCBOTCC cross-margining program to include

positions held for market professionals).

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Recently, the cross-margining program between ICC and OCC was

restructured so that it parallels the cross-margining programs between

OCC and other participating commodity clearing organizations.\9\ ICC

believes that under the restructured cross-margining program it will no

longer be acting as an intermediary in making payments or deliveries in

connection with securities transactions and therefore will not be a

clearing agency under the Act.\10\ Accordingly, ICC requests that its

application for permanent registration with the Commission as a

clearing agency be withdrawn.

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\9\Securities Exchange Act Release No. 33342 (December 22,

1993), 58 FR 67885 [File Nos. SR-OCC-93-07 and SR-ICC-93-04] (order

approving proposed rule changes to restructure the cross-margining

program between OCC and ICC).

\10\ICC and OCC also offer joint members a cross-netting service

which provides for the netting of a member's OCC exercise and

assignment settlement obligations with its ICC settlement

obligations. Previously, a joint member was able to select either

ICC or OCC as its designated clearing organization (``DCO'') for the

purpose of settling its cross-netted obligations. The clearing

agency selected as DCO was to act as the agent of the other clearing

organization in effecting the cross-netted settlements. ICC has

never been selected as a joint member's DCO, and pursuant to the

recent approval of rule changes filed by ICC and OCC, members are no

longer able to select ICC as their DCO. For a more detailed

description of the proposed rule changes, refer to Securities

Exchange Act Release No. 34088 (May 19, 1994), 59 FR 27303 [File

Nos. SR-OCC-94-01 and SR-ICC-94-01] (order approving proposed rule

change related to restructuring of cross-netting agreement between

ICC and OCC). Accordingly, ICC believes that it will no longer be

performing any activity with respect to cross-netting that would

bring it within the definition of a clearing agency under the Act.

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II. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

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 will also be available for

inspection and copying at the principal office of the above-referenced

self-regulatory organization.

All submissions should refer to File No. SR-ICC-600-21 and should

be submitted by July 5, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-13380 Filed 6-1-94; 8:45 am]

BILLING CODE 8010-01-M