59976 Federal Register / Vol. 88, No. 167 / Wednesday, August 30, 2023 / Notices 

57 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The Existing Accord was previously approved 

by the Commission. See Securities Exchange Act 

Release Nos. 81266, 81260 (July 31, 2017) (File Nos. 

SR–NSCC–2017–007; SR–OCC–2017–013), 82 FR 

36484 (Aug. 4, 2017). 

4OCC By-Laws are available at https://

www.theocc.com/getmedia/3309eceb-56cf-48fcb3b3-498669a24572/occ_bylaws.pdf and OCC Rules 

are available at https://www.theocc.com/getmedia/ 

9d3854cd-b782-450f-bcf7-33169b0576ce/occ_

rules.pdf. 

5NSCC also has filed a proposed rule change with 

the Commission in connection with this proposal. 

See SR–NSCC–2023–007. 

III. Date of Effectiveness of the 

Proposed Rule Change, and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the self-regulatory organization 

consents, the Commission will: 

(A) by order approve or disapprove 

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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NSCC–2023–007 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549. 

All submissions should refer to File 

Number SR–NSCC–2023–007. This file 

number should be included on the 

subject line if email 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 website (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 website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of NSCC and on DTCC’s website 

(http://dtcc.com/legal/sec-rulefilings.aspx). 

Do not include personal identifiable 

information in submissions; you should 

submit only information that you wish 

to make available publicly. We may 

redact in part or withhold entirely from 

publication submitted material that is 

obscene or subject to copyright 

protection. All submissions should refer 

to File Number SR–NSCC–2023–007 

and should be submitted on or before 

September 20, 2023. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.57

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–18670 Filed 8–29–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–98215; File No. SR–OCC– 

2023–007] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Proposed Rule Change 

Concerning Modifications to the 

Amended and Restated Stock Options 

and Futures Settlement Agreement 

Between The Options Clearing 

Corporation and the National 

Securities Clearing Corporation 

August 24, 2023. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule 

19b–4 thereunder,2 notice is hereby 

given that on August 10, 2023, the 

Options Clearing Corporation (‘‘OCC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by OCC. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

This proposed rule change would (1) 

modify the Amended and Restated 

Stock Options and Futures Settlement 

Agreement dated August 5, 2017 

between OCC and National Securities 

Clearing Corporation (‘‘NSCC,’’ and 

together with OCC, the ‘‘Clearing 

Agencies’’) (‘‘Existing Accord’’) 3 and (2) 

make certain revisions to OCC By-Laws, 

OCC Rules,4 OCC’s Comprehensive 

Stress Testing & Clearing Fund 

Methodology, and Liquidity Risk 

Management Description and OCC’s 

Liquidity Risk Management Framework 

in connection with the proposed 

modifications to the Existing Accord, as 

described in greater detail below.5

The proposed changes would permit 

OCC to elect to make a cash payment to 

NSCC following the default of a 

common clearing participant that would 

cause NSCC’s central counterparty trade 

guaranty to attach to certain obligations 

of that participant, as described in 

greater detail below. 

The proposed changes are included in 

Exhibits 5A and 5B and confidential 

Exhibits 5C, 5D, and 5E to File No. SR– 

OCC–2023–007. Material proposed to be 

added is underlined and material 

proposed to be deleted is marked in 

strikethrough text. 

II. Clearing Agency’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. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

(1) Purpose 

Executive Summary 

NSCC is a clearing agency that 

provides clearing, settlement, risk 

management, and central counterparty 

services for trades involving equity 

securities. OCC is the sole clearing 

agency for standardized equity options 

listed on national securities exchanges 

registered with the Commission, 

including options that contemplate the 


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6The term ‘‘physically-settled’’ as used 

throughout the OCC Rulebook refers to cleared 

contracts that settle into their underlying interest 

(i.e., options or futures contracts that are not cashsettled). When a contract settles into its underlying 

interest, shares of stock are sent, i.e., delivered, to 

contract holders who have the right to receive the 

shares from contract holders who are obligated to 

deliver the shares at the time of exercise/assignment 

in the case of an option and maturity in the case 

of a future. 

7Under the Existing Accord, such options and 

futures are defined as ‘‘E&A/Delivery 

Transactions’’, which refers to ‘‘Exercise & 

Assignment Delivery Transactions.’’ 

8See Rule 11 (CNS System) and Procedure VII 

(CNS Accounting Operation) of the NSCC Rules. 

See NSCC’s Rules, available at https://

www.dtcc.com/-/media/Files/Downloads/legal/ 

rules/nscc_rules.pdf. 

9A firm that is both an OCC Clearing Member and 

an NSCC Member or is an OCC Clearing Member 

that has designated an NSCC Member to act on its 

behalf is referred to herein as a ‘‘Common 

Member.’’ The term ‘‘Clearing Member’’ as used 

herein has the meaning provided in OCC’s By-Laws. 

See OCC’s By-Laws, supra, note 4. The term 

‘‘Member’’ as used herein has the meaning provided 

in NSCC’s Rules. See NSCC’s Rules, supra note 8. 

10OCC provided its analysis of the financial 

impact of alternate means of settlement as Exhibit 

3A to File No. SR–OCC–2023–007. 

physical delivery of equities cleared by 

NSCC in exchange for cash (‘‘physically 

settled’’ options).6 OCC also clears 

certain futures contracts that, at 

maturity, require the delivery of equity 

securities cleared by NSCC in exchange 

for cash. As a result, the exercise/ 

assignment of certain options or 

maturation of certain futures cleared by 

OCC effectively results in stock 

settlement obligations. NSCC and OCC 

maintain a legal agreement, generally 

referred to by the parties as the 

‘‘Accord’’ agreement, that governs the 

processing of such physically settled 

options and futures cleared by OCC that 

result in transactions in underlying 

equity securities to be cleared by NSCC 

(i.e., the Existing Accord). The Existing 

Accord establishes terms under which 

NSCC accepts for clearing certain 

securities transactions that result from 

the exercise and assignment of relevant 

options contracts and the maturity of 

futures contracts that are cleared and 

settled by OCC.7 It also establishes the 

time when OCC’s settlement guaranty in 

respect of those transactions ends and 

NSCC’s settlement guaranty begins. 

The Existing Accord allows for a 

scenario in which NSCC could choose 

not to guarantee the settlement of such 

securities arising out of transactions. 

Specifically, NSCC is not obligated to 

guarantee settlement until its member 

has met its collateral requirements at 

NSCC. If NSCC chooses not to guarantee 

settlement, OCC would engage in an 

alternate method of settlement outside 

of NSCC. This scenario presents two 

primary problems. First, the cash 

required for OCC and its Clearing 

Members in certain market conditions to 

facilitate settlement outside of NSCC 

could be significantly more than the 

amount required if NSCC were to 

guarantee the relevant transactions. This 

is because settlement of the transactions 

in the underlying equity securities 

outside of NSCC would mean that they 

would no longer receive the benefit of 

netting through the facilities of NSCC. 

In such a scenario, the additional 

collateral required from Clearing 

Members to support OCC’s continuing 

settlement guarantee would also have to 

be sufficiently liquid to properly 

manage the risks associated with those 

transactions being due on the second 

business day following the option 

exercise or the relevant futures contract 

maturity date. Based on an analysis of 

scenarios using historical data where it 

was assumed that OCC could not settle 

transactions through the facilities of 

NSCC, the worst-case outcome resulted 

in extreme liquidity demands of over 

$300 billion for OCC to effect settlement 

via an alternative method, e.g., by way 

of gross broker-to-broker settlement, as 

discussed in more detail below. OCC 

Clearing Members, by way of their 

contributions to the OCC Clearing Fund, 

would bear the brunt of this demand. 

Furthermore, there is no guarantee that 

OCC Clearing Members could fund the 

entire amount of any similar real-life 

scenarios. By contrast, projected GSPs, 

defined below, identified during the 

study ranged from approximately $419 

million to over $6 billion, also as 

discussed in more detail below. 

The second primary problem relates 

to the significant operational 

complexities if settlement occurs 

outside of NSCC. More specifically, 

netting through NSCC reduces the 

volume and value of settlement 

obligations. For example, in 2022 it is 

estimated that netting through NSCC’s 

continuous net settlement (‘‘CNS’’) 

accounting system 8 reduced the value 

of CNS settlement obligations by 

approximately 98% or $510 trillion 

from $519 trillion to $9 trillion. If 

settlement occurred outside of NSCC, on 

a broker-to-broker basis between OCC 

Clearing Members, for example, shares 

would not be netted and Clearing 

Members would have to coordinate 

directly with each other to settle the 

relevant transactions. The operational 

complexities and uncertainty associated 

with alternate means of settlement 

would impact every market participant 

involved in a settlement of OCC-related 

transactions. 

To address these problems, the 

Clearing Agencies are proposing to 

amend and restate the Existing Accord 

and make related changes to their 

respective rules that would allow OCC 

to elect to make a cash payment to 

NSCC following the default of a 

Common Member 9 that would cause 

NSCC to guarantee settlement of that 

Common Member’s transactions and, 

therefore, cause those transactions to be 

settled through processing by NSCC. As 

part of this proposal, OCC also will 

enhance its daily liquidity stress testing 

processes and procedures to account for 

the possibility of OCC making such a 

payment to NSCC in the event of a 

Common Member default. By making 

these enhancements to its stress testing, 

OCC could include the liquid resources 

necessary to make the payment in its 

resource planning. The Clearing 

Agencies believe that by NSCC 

accepting such a payment from OCC, 

the operational efficiencies and reduced 

costs related to the settlement of 

transactions through NSCC would limit 

market disruption following a Common 

Member default because settlement 

through NSCC following such a default 

would be less operationally complex 

and would be expected to require less 

liquidity and other collateral from 

market participants than the processes 

available to OCC for closing out 

positions. Additionally, proposed 

enhancements by OCC to its liquidity 

stress testing would add assurances that 

OCC could make such a payment in the 

event of a Common Member default. 

The Clearing Agencies believe that their 

respective clearing members and all 

other participants in the markets for 

which OCC provides clearance and 

settlement will benefit from OCC’s 

ability to choose to make a cash 

payment to effect settlement through the 

facilities of NSCC. This change will 

provide more certainty around certain 

default scenarios and would blunt the 

financial and operational burdens 

market participants could experience in 

the case of most clearing member 

defaults.10

Background 

OCC acts as a central counterparty 

clearing agency for U.S.-listed options 

and futures on a number of underlying 

financial assets including common 

stocks, currencies, and stock indices. In 

connection with these services, OCC 

provides the OCC Guaranty pursuant to 

its By-Laws and Rules. NSCC acts as a 

central counterparty clearing agency for 

certain equity securities, corporate and 

municipal debt, exchange traded funds 

and unit investment trusts that are 

eligible for its services. Eligible trading 


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11See Rule 11 (CNS System) and Procedure VII 

(CNS Accounting Operation) of the NSCC Rules, 

supra note 8. 

12See Rule 8 (Balance Order and Foreign Security 

Systems) and Procedure V (Balance Order 

Accounting Operation) of the NSCC Rules, supra 

note 8. 

13See Chapter IX of OCC’s Rules (Delivery of 

Underlying Securities and Payment), supra note 4. 

14See OCC Rule 901, supra note 4. 

15See Addendum K and Procedure III of the 

NSCC Rules, supra note 8. 

16A Common Member that has been suspended 

by OCC or for which NSCC has ceased to act is 

referred to as a ‘‘Mutually Suspended Member’’. 

17For example, OCC evaluated certain Clearing 

Member default scenarios in which OCC assumed 

that NSCC would not accept the settlement 

obligations under the Existing Accord, including 

the default of a large Clearing Member coinciding 

with a monthly options expiration. OCC has 

estimated that in such a Clearing Member default 

scenario, the aggregate liquidity burden on OCC in 

connection with obligations having to be settled on 

a gross broker-to-broker basis could reach a 

significantly high level. For example, in January 

2022, the largest gross broker-to-broker settlement 

amount in the case of a larger Clearing Member 

default would have resulted in liquidity needs of 

approximately $384,635,833,942. OCC provided the 

data and analysis as Exhibit 3A to File No. SR– 

OCC–2023–007. 

18 In broker-to-broker settlement, Clearing 

Member parties are responsible for coordinating 

settlement—delivery and payment—among 

themselves on a transaction-by-transaction basis. 

Once transactions settle, the parties also have an 

obligation to affirmatively notify OCC so that OCC 

can close out the transactions. If either one of or 

both of the parties do not notify OCC, the 

transaction will remain open on OCC’s books 

indefinitely until the time both parties have 

provided notice of settlement to OCC. 

19Each day that both OCC and NSCC are open for 

accepting trades for clearing is referred to as an 

‘‘Activity Date’’ in the Existing Accord. Securities 

eligible for settlement at NSCC are referred to 

collectively as ‘‘Eligible Securities’’ in the Existing 

Accord. Eligible securities are settled at NSCC 

through NSCC’s CNS Accounting Operation or 

NSCC’s Balance Order Accounting Operation. 

20The term ‘‘NSCC Clearing Fund’’ as used herein 

has the same meaning as the term ‘‘Clearing Fund’’ 

as provided in the NSCC Rules. Procedure XV of 

the NSCC Rules provides that all NSCC Clearing 

Fund requirements and other deposits must be 

made within one hour of demand, unless NSCC 

determines otherwise, supra note 8. 

21This is referred to in the Existing Accord as the 

‘‘Guaranty Substitution Time,’’ and the process of 

the substitution of the NSCC Guaranty for the OCC 

Guaranty in respect of E&A/Delivery Transactions 

is referred to as ‘‘Guaranty Substitution’’. 

22 Guaranty Substitution by NSCC (discussed 

further below) does not occur with respect to an 

E&A/Delivery Transaction that is not submitted to 

NSCC in the proper format or that involves a 

security that is not identified as an Eligible Security 

on the then-current NSCC Eligibility Master File. 

23Under NSCC’s Rules, a default would generally 

be referred to as a ‘‘cease to act’’ and could 

encompass a number of circumstances, such as an 

NSCC Member’s failure to make a Required Fund 

Deposit in a timely fashion. See NSCC Rule 46 

(Restrictions on Access to Services), supra note 8. 

An NSCC Member for which it has ceased to act is 

referred to in the Existing Accord as a ‘‘Defaulting 

NSCC Member’’. Transactions associated with a 

Defaulting NSCC Member are referred to as 

activity may be processed through 

NSCC’s CNS system 11 or through its 

Balance Order Account system,12 where 

all eligible compared and recorded 

transactions for a particular settlement 

date are netted by issue into one net 

long (buy), net short (sell) or flat 

position. As a result, for each day with 

activity, each Member has a single 

deliver or receive obligation for each 

issue in which it has activity. In 

connection with these services, NSCC 

also provides the NSCC Guaranty 

pursuant to Addendum K of the NSCC 

Rules. 

OCC’s Rules provide that delivery of, 

and payment for, securities underlying 

certain exercised stock options and 

matured single stock futures that are 

physically settled are generally effected 

through the facilities of NSCC and are 

not settled through OCC’s facilities.13

OCC and NSCC executed the Existing 

Accord to facilitate, via NSCC’s systems, 

the physical settlement of securities 

arising out of options and futures 

cleared by OCC. OCC Clearing Members 

that clear and settle physically settled 

options and futures transactions through 

OCC also are required under OCC’s 

Rules 14 to be Members of NSCC or to 

have appointed or nominated a Member 

of NSCC to act on its behalf. As noted 

above, these firms are referred to as 

‘‘Common Members’’ in the Existing 

Accord. 

Summary of the Existing Accord 

The Existing Accord governs the 

transfer between OCC and NSCC of 

responsibility for settlement obligations 

that involve a delivery and receipt of 

stock in the settlement of physically 

settled options and futures that are 

cleared and settled by OCC and for 

which the underlying securities are 

eligible for clearing through the 

facilities of NSCC (‘‘E&A/Delivery 

Transactions’’). It also establishes the 

time when OCC’s settlement guarantee 

(the ‘‘OCC Guaranty’’) ends and NSCC’s 

settlement guarantee (the ‘‘NSCC 

Guaranty’’) 15 begins with respect to 

E&A/Delivery Transactions. However, in 

the case of a Common Member default 16

NSCC can reject these settlement 

obligations, in which case the 

settlement guaranty will not transfer 

from OCC to NSCC and OCC would not 

have a right to settle the transactions 

through the facilities of NSCC. Instead, 

OCC would have to engage in 

alternative methods of settlement that 

have the potential to create significant 

liquidity and collateral requirements for 

both OCC and its non-defaulting 

Clearing Members.17 More specifically, 

this could involve broker-to-broker 

settlement between OCC Clearing 

Members.18 This settlement method is 

operationally complex because it 

requires bilateral coordination directly 

between numerous Clearing Members 

rather than relying on NSCC to facilitate 

multilateral netting to settle the relevant 

settlement obligations. As described 

above, it also potentially could result in 

significant liquidity and collateral 

requirements for both OCC and its nondefaulting Clearing Members because 

the transactions will not be netted 

through the facilities of NSCC. 

Alternatively, where NSCC accepts the 

E&A/Delivery Transactions from OCC, 

the OCC Guaranty ends and the NSCC 

Guaranty takes effect. The transactions 

are then netted through NSCC’s systems, 

which allows settlement obligations for 

the same settlement date to be netted 

into a single deliver or receive 

obligation. This netting reduces the 

costs associated with securities transfers 

by reducing the number of securities 

movements required for settlement and 

further reduces operational and market 

risk. The benefits of such netting by 

NSCC may be significant with respect to 

the large volumes of E&A/Delivery 

Transactions processed during monthly 

options expiry periods. 

Pursuant to the Existing Accord, on 

each trading day NSCC delivers to OCC 

a file that identifies the securities, 

including stocks, exchange-traded funds 

and exchange-traded notes, that are 

eligible (1) to settle through NSCC and 

(2) to be delivered in settlement of (i) 

exercises and assignments of stock 

options cleared and settled by OCC or 

(ii) delivery obligations from maturing 

stock futures cleared and settled by 

OCC. OCC, in turn, delivers to NSCC a 

file identifying securities to be 

delivered, or received, for physical 

settlement in connection with OCC 

transactions.19

After NSCC receives the list of eligible 

transactions from OCC and NSCC has 

received all required deposits to the 

NSCC Clearing Fund from all Common 

Members taking into consideration 

amounts required to physically settle 

the OCC transactions, the OCC Guaranty 

would end and the NSCC Guaranty 

would begin with respect to physical 

settlement of the eligible OCC-related 

transactions.20 At this point, NSCC is 

solely responsible for settling the 

transactions.21

Each day, NSCC is required to 

promptly notify OCC at the time the 

NSCC Guaranty takes effect. If NSCC 

rejects OCC’s transactions due to an 

improper submission 22 or if NSCC 

‘‘ceases to act’’ for a Common 

Member,23 NSCC’s Guaranty will not 


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‘‘Defaulted NSCC Member Transactions’’ in the 

Existing Accord. 

24Acceptance of such transactions by NSCC 

would be subject to NSCC’s standard validation 

criteria for incoming trades. See NSCC Rule 7, 

supra note 8. 

25The term ‘‘OCC Clearing Fund’’ as used herein 

has the same meaning as the term ‘‘Clearing Fund’’ 

in OCC’s By-Laws, supra note 4. 

26The term ‘‘Margin Assets’’ as used herein has 

the same meaning as provided in OCC’s By-Laws, 

supra note 4. 

27The Required Fund Deposit is calculated 

pursuant to Rule 4 (Clearing Fund) and Procedure 

XV (Clearing Fund Formula and Other Matters) of 

the NSCC Rules, see supra note 8. 

28Under the NSCC Rules, NSCC collects 

additional cash deposits from those Members who 

would generate the largest settlement debits in 

stressed market conditions, referred to as 

‘‘Supplemental Liquidity Deposits’’ or ‘‘SLD’’. See 

Rule 4A of the NSCC Rules, supra note 8. 

29OCC provided the revised SLA to the 

Commission as Exhibit 3C to File No. SR–OCC– 

2023–007. 

30The impact study was conducted at the 

Commission’s request to cover a three-day period 

and reviewed the ten Common Members with the 

largest Required Fund Deposits attributable to the 

Mutually Suspended Member’s E&A/Delivery 

Transactions. Over the 30 instances in the study, 

approximately 15 instances resulted in an 

underestimate of the Required Fund Deposit by an 

average of approximately $112,900,926, four 

Continued 

take effect for the affected transactions 

pursuant to the NSCC Rules. 

NSCC is required to promptly notify 

OCC if it ceases to act for a Common 

Member. Upon receiving such a notice, 

OCC would not continue to submit to 

NSCC any further unsettled transactions 

that involve such Common Member, 

unless authorized representatives of 

both OCC and NSCC otherwise consent. 

OCC would, however, deliver to NSCC 

a list of all transactions that have 

already been submitted to NSCC and 

that involve such Common Member. 

The NSCC Guaranty ordinarily would 

not take effect with respect to 

transactions for a Common Member for 

which NSCC has ceased to act, unless 

both Clearing Agencies agree otherwise. 

As such, NSCC does not have any 

existing contractual obligation to 

guarantee such Common Member’s 

transactions. To the extent the NSCC 

Guaranty does not take effect, OCC’s 

Guaranty would continue to apply, and, 

as described above, OCC would remain 

responsible for effecting the settlement 

of such Common Member’s transactions 

pursuant to OCC’s By-Laws and Rules. 

As noted above, the Existing Accord 

does provide that the Clearing Agencies 

may agree to permit additional 

transactions for a Common Member 

default (‘‘Defaulted NSCC Member 

Transactions’’) to be processed by NSCC 

while subject to the NSCC Guaranty. 

This optional feature, however, creates 

uncertainty for the Clearing Agencies 

and market participants about how 

Defaulted NSCC Member Transactions 

may be processed following a Common 

Member default, and also does not 

provide NSCC with the ability to collect 

collateral from OCC that it may need to 

close out these additional transactions. 

While the optional feature would 

remain in the agreement as part of this 

proposal, the proposed changes to the 

Existing Accord, as described below, 

could significantly reduce the 

likelihood that it would be utilized. 

Proposed Changes to the Existing 

Accord 

The proposed changes to the Existing 

Accord would permit OCC to make a 

cash payment, referred to as the 

‘‘Guaranty Substitution Payment’’ or 

‘‘GSP,’’ to NSCC. This cash payment 

could occur on either or both of the day 

that the Common Clearing Member 

becomes a Mutually Suspended Member 

and on the next business day. Upon 

NSCC’s receipt of the Guaranty 

Substitution Payment from OCC, the 

NSCC Guaranty would take effect for the 

Common Member’s transactions, and 

they would be accepted by NSCC for 

clearance and settlement.24 OCC could 

use all Clearing Member contributions 

to the OCC Clearing Fund 25 and certain 

Margin Assets 26 of a defaulted Clearing 

Member to pay the GSP, as described in 

more detail below. 

NSCC would calculate the Guaranty 

Substitution Payment as the sum of the 

Mutually Suspended Member’s unpaid 

required deposit to the NSCC Clearing 

Fund (‘‘Required Fund Deposit’’) 27 and 

the unpaid Supplemental Liquidity 

Deposit 28 obligation that is attributable 

to E&A/Delivery Transactions. The 

proposed changes to the Existing 

Accord define how NSCC would 

calculate the Guaranty Substitution 

Payment. 

More specifically, NSCC would first 

determine how much of the member’s 

unpaid Clearing Fund requirement 

would be included in the GSP. NSCC 

would look at the day-over-day change 

in gross market value of the Mutually 

Suspended Member’s positions as well 

as day-over-day change in the member’s 

NSCC Clearing Fund requirements. 

Based on such changes, NSCC would 

identify how much of the change in the 

Clearing Fund requirement was 

attributable to E&A/Delivery 

Transactions coming from OCC. If 100 

percent of the day-over-day change in 

the NSCC Clearing Fund requirement is 

attributable to activity coming from 

OCC, then the GSP would include 100 

percent of the member’s NSCC Clearing 

Fund requirement. If less than 100 

percent of the change is attributable to 

activity coming from OCC, then the GSP 

would include that percent of the 

member’s unpaid NSCC Clearing Fund 

requirement attributable to activity 

coming from OCC. NSCC would then 

determine the portion of the member’s 

unpaid SLD obligation that is 

attributable to E&A/Delivery 

Transactions. As noted above, the GSP 

would be the sum of these two amounts. 

A member’s NSCC Clearing Fund 

requirement and SLD obligation at 

NSCC are designed to address the credit 

and liquidity risks that a member poses 

to NSCC. The GSP calculation is 

intended to assess how much of a 

member’s obligations arise out of 

activity coming from OCC so that the 

amount paid by OCC is commensurate 

with the risk to NSCC of guarantying 

such activity. 

To permit OCC to anticipate the 

potential resources it would need to pay 

the GSP for a Mutually Suspended 

Member, each business day, NSCC 

would provide OCC with (1) Required 

Fund Deposit and Supplemental 

Liquidity Deposit obligations, as 

calculated pursuant to the NSCC Rules, 

and (2) the gross market value of the 

E&A/Delivery Transactions and the 

gross market value of total Net Unsettled 

Positions (as such term is defined in the 

NSCC Rules). On options expiry days 

that fall on a Friday, NSCC would also 

provide OCC with information regarding 

liquidity needs and resources, and any 

intraday SLD requirements of Common 

Members. Such information would be 

delivered pursuant to the ongoing 

information sharing obligations under 

the Existing Accord (as proposed to be 

amended) and the Service Level 

Agreement (‘‘SLA’’) to which both 

NSCC and OCC are a party pursuant to 

Section 2 of the Existing Accord.29 The 

SLA addresses specifics regarding the 

time, form, and manner of various 

required notifications and actions 

described in the Accord and also 

includes information applicable under 

the Accord. 

NSCC and OCC believe the proposed 

calculation of the Required Fund 

Deposit portion of the GSP is 

appropriate because it is designed to 

provide a reasonable proxy for the 

impact of the Mutually Suspended 

Member’s E&A/Delivery Transactions 

on its Required Fund Deposit. While 

impact study data did show that the 

proposed calculation could result in a 

GSP that overestimates or 

underestimates the Required Fund 

Deposit attributable to the Mutually 

Suspended Member’s E&A/Delivery 

Transactions,30 current technology 


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instances where the proxy calculation was the same 

as the Required Fund Deposit, and eleven instances 

of an overestimate of the Required Fund Deposit by 

an average of approximately $59,654,583. See 

Exhibit 3D to File No. SR–OCC–2023–007 for 

additional detail related to the referenced study. 

31OCC and NSCC have agreed that performing the 

necessary technology build at this time would delay 

the implementation of this proposal. Therefore, 

NSCC would consider incorporating those 

technology updates into future revisions to the 

Accord, for example in connection with a move to 

a shorter settlement cycle in the U.S. equities 

markets. 

32See Exhibit 3A to File No. SR–OCC–2023–007 

for additional detail related to the referenced study. 

33As of March 31, 2023, OCC held approximately 

$10.37 billion in qualifying liquid resources. See 

OCC Quantitative Disclosure, January–March 2023, 

available at https://www.theocc.com/riskmanagement/pfmi-disclosures. 

34CNS reduces the value of obligations that 

require financial settlement by approximately 98%, 

where, for example $519 trillion in trades could be 

netted down to approximately $9 trillion in net 

settlements. 

35OCC provided data regarding such events in 

Exhibit 3B to File No. SR–OCC–2023–007. The 

information contained therein includes the 

assumptions and timelines leading up to the 

declaration of a default for a Common Member and 

the anticipated timing of OCC’s payment of the 

GSP. 

36The term ‘‘Stock Options’’ is defined in the 

Existing Accord within the definition of ‘‘Eligible 

Securities’’ and refers to options issued by OCC. 

37The term ‘‘Stock Futures’’ is defined in the 

Existing Accord within the definition of ‘‘Eligible 

Securities’’ and refers to stock futures contracts 

cleared by OCC. 

constraints prohibit NSCC from 

performing a precise calculation of the 

GSP on a daily basis for every Common 

Member.31

Implementing the ability for OCC to 

make the GSP and cause the E&A/ 

Delivery Transactions to be cleared and 

settled through NSCC would promote 

the ability of OCC and NSCC to be 

efficient and effective in meeting the 

requirements of the markets they serve. 

This is because data demonstrates that 

the expected size of the GSP would be 

smaller than the amount of cash that 

would otherwise be needed by OCC and 

its Clearing Members to facilitate 

settlement outside of NSCC. More 

specifically, based on a historical study 

of alternate means of settlement 

available to OCC from September 2021 

through September 2022, in the event 

that NSCC did not accept E&A/Delivery 

Transactions, the worst-case scenario 

peak liquidity need OCC identified was 

$384,635,833,942 for settlement to occur 

on a gross broker-to-broker basis. OCC 

estimates that the corresponding GSP in 

this scenario would have been 

$863,619,056. OCC also analyzed 

several other large liquidity demand 

amounts that were identified during the 

study if OCC effected settlement on a 

gross broker-to-broker basis.32 These 

liquidity demand amounts and the 

largest liquidity demand amount OCC 

observed of $384,635,833,942 

substantially exceed the amount of 

liquid resources currently available to 

OCC.33 By contrast, projected GSPs 

identified during the study ranged from 

$419,297,734 to $6,281,228,428. For 

each of these projected GSP amounts, 

OCC observed that the Margin Assets 

and OCC Clearing Fund contributions 

that would have been required of 

Clearing Members in these scenarios 

would have been sufficient to satisfy the 

amount of the projected GSPs. 

To help address the current 

technology constraint that prohibits 

NSCC from performing a precise 

calculation of the GSP on a daily basis 

for every Common Member, proposed 

Section 6(b)(i) of the Existing Accord 

and related Section 7(d) of the SLA 

would provide that with respect to a 

Mutually Suspended Member, either 

NSCC or OCC may require that the 

Required Fund Deposit portion of the 

GSP be re-calculated by calculating the 

Required Fund Deposit for the Mutually 

Suspended Member both before and 

after the delivery of the E&A/Delivery 

Transactions and utilize the precise 

amount that is attributable to that 

activity in the final GSP. If such a 

recalculation is required, the result 

would replace the Required Fund 

Deposit component of the GSP that was 

initially calculated. The SLD component 

of the GSP would be unchanged by such 

recalculation. 

As the above demonstrates, the GSP is 

intended to address the significant 

collateral and liquidity requirements 

that could be required of OCC Clearing 

Members in the event of a Common 

Member default. 

Allowing OCC to make a GSP 

payment also is intended to allow for 

settlement processing to take place 

through the facilities of NSCC to retain 

operational efficiencies associated with 

the settlement process. Alternative 

settlement means such as broker-tobroker settlement add operational 

burdens because transactions would 

need to be settled individually on oneoff bases. In contrast, NSCC’s netting 

reduces the volume and value of 

settlement obligations that would need 

to be closed out in the market.34

Because the clearance and settlement of 

obligations through NSCC’s facilities 

following a Common Member default, 

including netting of E&A/Delivery 

Transactions with a Common Member’s 

positions at NSCC, would avoid these 

potentially significant operational 

burdens for OCC and its Clearing 

Members, OCC and NSCC believe that 

the proposed changes would limit 

market disruption relating to a Common 

Member default. NSCC netting 

significantly reduces the total number of 

obligations that require the exchange of 

money for settlement. Allowing more 

activity to be processed through NSCC’s 

netting systems would minimize risk 

associated with the close out of those 

transactions following the default of a 

Common Member. 

Amending the Existing Accord to 

define the terms and conditions under 

which Guaranty Substitution may occur, 

at OCC’s election, with respect to 

Defaulted NSCC Member Transactions 

after a Common Member becomes a 

Mutually Suspended Member will also 

provide more certainty to both the 

Clearing Agencies and market 

participants generally about how a 

Mutually Suspended Member’s 

Defaulted NSCC Member Transactions 

may be processed. 

NSCC and OCC have agreed it is 

appropriate to limit the availability of 

the proposed provision to the day of the 

Common Member default and the next 

business day because, based on 

historical simulations of cease to act 

events involving Common Members, 

most activity of a Mutually Suspended 

Member is closed out on those days.35

Furthermore, the benefits of netting 

through NSCC’s systems would be 

reduced for any activity submitted to 

NSCC after that time. 

To implement these proposed changes 

to the Existing Accord, OCC and NSCC 

propose to make the following changes. 

Section 1—Definitions 

First, new definitions would be 

added, and existing definitions would 

be amended in Section 1, which is the 

Definitions section. 

The new defined terms would be as 

follows. 

• The term ‘‘Close Out Transaction’’ 

would be defined to mean ‘‘the 

liquidation, termination or acceleration 

of one or more exercised or matured 

Stock Options 36 or Stock Futures 37

contracts, securities contracts, 

commodity contracts, forward contracts, 

repurchase agreements, swap 

agreements, master netting agreements 

or similar agreements of a Mutually 

Suspended Member pursuant to OCC 

Rules 901, 1006 and 1101 through 1111 

(including but not limited to Rules 1104 

and 1107) and/or NSCC Rule 18.’’ This 

proposed definition would make it clear 

that the payment of the Guaranty 

Substitution Payment and NSCC’s 

subsequent acceptance of Defaulted 

NSCC Member Transactions for 

clearance and settlement are intended to 

fall within the ‘‘safe harbors’’ provided 


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38 11 U.S.C. 101 et seq., including §§ 362(b)(6), 

(7), (17), (25) and (27) (exceptions to the automatic 

stay), §§ 546(e)–(g) and (j) (limitations on avoiding 

powers), and §§ 555–556 and 559–562 (contractual 

right to liquidate, terminate or accelerate certain 

contracts). 

39 15 U.S.C. 78aaa–lll, including § 78eee(b)(2)(C) 

(exceptions to the stay). 

40The term ‘‘OCC Participating Member’’ is 

defined in the Existing Accord to mean ‘‘(i) a 

Common Member; (ii) an OCC Clearing Member 

that is an ‘Appointing Clearing Member’ (as defined 

in Article I of OCC’s By-Laws) and has appointed 

an Appointed Clearing Member that is an NSCC 

Member to effect settlement of E&A/Delivery 

Transactions through NSCC on the Appointing 

Clearing Member’s behalf; (iii) an OCC Clearing 

Member that is an Appointed Clearing Member; or 

(iv) a Canadian Clearing Member.’’ No changes are 

proposed to this definition. 

41The term ‘‘NSCC Participating Member’’ is 

defined in the Existing Accord to mean ‘‘(i) a 

Common Member; (ii) an NSCC Member that is an 

‘Appointed Clearing Member’ (as defined in Article 

I of OCC’s By-Laws); or (iii) [or Canadian 

Depository for Securities, or ‘‘CDS’’]. For the 

avoidance of doubt, the Clearing Agencies agree 

that CDS is an NSCC Member for purposes of this 

Agreement.’’ No changes are proposed to this 

definition. 

42See Rule 46 (Restrictions on Access to Services) 

of the NSCC Rules, supra note 8. 

43The section of the Existing Accord that 

addresses circumstances in which NSCC ceases to 

act and/or an NSCC Member defaults is currently 

part of Section 6(a). It would be re-designated as 

Section 6(b) for organizational purposes. 

44The Required Fund Deposit is calculated 

pursuant to Rule 4 (Clearing Fund) and Procedure 

XV (Clearing Fund Formula and Other Matters) of 

the NSCC Rules, see supra note 8. 

45The Supplemental Liquidity Deposit is 

calculated pursuant to Rule 4A (Supplemental 

Liquidity Deposits) of the NSCC Rules, see supra 

note 8. 

in the Bankruptcy Code,38 the Securities 

Investor Protection Act,39 and other 

similar laws. 

• The term ‘‘Guaranty Substitution 

Payment’’ would be defined to mean 

‘‘an amount calculated by NSCC in 

accordance with the calculations set 

forth in Appendix A [to the Existing 

Accord (as proposed to be amended)], to 

include two components: (i) a portion of 

the Mutually Suspended Member’s 

Required Fund Deposit deficit to NSCC 

at the time of the cease to act; and (ii) 

a portion of the Mutually Suspended 

Member’s unpaid Supplemental 

Liquidity Deposit obligation at the time 

of the cease to act.’’ 

• The term ‘‘Mutually Suspended 

Member’’ would mean ‘‘any OCC 

Participating Member 40 that has been 

suspended by OCC that is also an NSCC 

Participating Member 41 for which 

NSCC has ceased to act.’’ 

• The term ‘‘Required Fund Deposit’’ 

would have the meaning ‘‘provided in 

Rule 4 of NSCC’s Rules and Procedures 

(or any replacement or substitute rule), 

the version of which, with respect to 

any transaction or obligation incurred 

that is the subject of this Agreement, is 

in effect at the time of such transaction 

or incurrence of obligation.’’ 

• The term ‘‘Supplemental Liquidity 

Deposit’’ would have the meaning 

‘‘provided in Rule 4A of NSCC’s Rules 

and Procedures (or any replacement or 

substitute rule), the version of which, 

with respect to any transaction or 

obligation incurred that is the subject of 

this Agreement, is in effect at the time 

of such transaction or incurrence of 

obligation.’’ 

The defined terms that would be 

amended in Section 1 of the Existing 

Accord are as follows. 

• The definition for the term ‘‘E&A/ 

Delivery Transaction’’ generally 

contemplates a transaction that involves 

a delivery and receipt of stock in the 

settlement of physically settled options 

and futures that are cleared and settled 

by OCC and for which the underlying 

securities are eligible for clearing 

through the facilities of NSCC. The 

definition would be amended to make 

clear that it would apply in respect of 

a ‘‘Close Out Transaction’’ of a 

‘‘Mutually Suspended Member’’ as 

those terms are proposed to be defined 

(described above). 

• The definition for the term ‘‘Eligible 

Securities’’ generally contemplates the 

securities that are eligible to be used for 

physical settlement under the Existing 

Accord. The term would be modified to 

clarify that this may include, for 

example, equities, exchange-traded 

funds and exchange-traded notes that 

are underlying securities for options 

issued by OCC. 

Section 6—Default by an NSCC 

Participating Member or OCC 

Participating Member 

Section 6 of the Existing Accord 

provides that NSCC is required to 

provide certain notice to OCC in 

circumstances in which NSCC has 

ceased to act for a Common Member. 

Currently, Section 6(A)(ii) of the 

Existing Accord also requires NSCC to 

notify OCC if a Common Member has 

failed to satisfy its Clearing Fund 

obligations to NSCC, but for which 

NSCC has not yet ceased to act. In 

practice, this provision would trigger a 

number of obligations (described below) 

when a Common Member fails to satisfy 

its NSCC Clearing Fund obligations for 

any reason, including those due to an 

operational delay. Therefore, OCC and 

NSCC are proposing to remove the 

notification requirement under Section 

6(A)(ii) from the Existing Accord. Under 

Section 7(d) of the Existing Accord, 

NSCC and OCC are required to provide 

each other with general surveillance 

information regarding Common 

Members, which includes information 

regarding any Common Member that is 

considered by the other party to be in 

distress. Therefore, if a Common 

Member has failed to satisfy its NSCC 

Clearing Fund obligations and NSCC 

believes this failure is due to, for 

example, financial distress and not, for 

example, due to a known operational 

delay, and NSCC has not yet ceased to 

act for that Common Member, such 

notification to OCC would still occur 

but would be done pursuant to Section 

7(d) of the Existing Accord (as proposed 

to be amended), and not Section 

6(A)(ii). Notifications under Section 6 of 

the Existing Accord (as proposed to be 

amended) would be limited to instances 

when NSCC has actually ceased to act 

for a Common Member pursuant to the 

NSCC Rules.42

Following notice by NSCC that it has 

ceased to act for a Common Member, 

OCC is obligated in turn to deliver to 

NSCC a list of all E&A/Delivery 

Transactions (excluding certain 

transactions for which Guaranty 

Substitution does not occur) involving 

the Common Member.43 This provision 

would be amended to clarify that it 

applies in respect of such E&A/Delivery 

Transactions for the Common Member 

for which the NSCC Guaranty has not 

yet attached—meaning that Guaranty 

Substitution has not yet occurred. 

As described above in the summary of 

the Existing Accord, where NSCC has 

ceased to act for a Common Member, the 

Existing Accord refers to the Common 

Member as the Defaulting NSCC 

Member and also refers to the relevant 

E&A/Delivery Transactions in 

connection with that Defaulting NSCC 

Member for which a Guaranty 

Substitution has not yet occurred as 

Defaulted NSCC Member Transactions. 

If the Defaulting NSCC Member is also 

suspended by OCC, it would be covered 

by the proposed definition that is 

described above for a Mutually 

Suspended Member. For such a 

Mutually Suspended Member, the 

proposed changes in Section 6(b) would 

provide that NSCC, by a time agreed 

upon by the parties, would provide OCC 

with the amount of the Guaranty 

Substitution Payment as calculated by 

NSCC and related documentation 

regarding the calculation. The Guaranty 

Substitution Payment would be 

calculated pursuant to NSCC’s Rules as 

that portion of the unmet Required 

Fund Deposit 44 and Supplemental 

Liquidity Deposit 45 obligations of the 

Mutually Suspended Member 

attributable to the Defaulted NSCC 

Member Transactions. By a time agreed 


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46The time by which OCC would be required 

notify NSCC of its intent would be defined in the 

Service Level Agreement. As of the time of this 

filing, the parties intend to set that time as one hour 

after OCC’s receipt of the calculated Guaranty 

Substitution Payment from NSCC. 

47Under the current and proposed terms of the 

Existing Accord, NSCC would be permitted to 

voluntarily guaranty and settle the Defaulted NSCC 

Member Transactions. 

48Such amounts would be returned to OCC as 

appropriate and in accordance with a Netting 

Contract and Limited Cross-Guaranty, by and 

among the Depository Trust Company, Fixed 

Income Clearing Corporation, NSCC and OCC, 

dated as of January 1, 2003, as amended. 

49See supra note 40 defining OCC Participating 

Member. 

50See supra note 41 defining NSCC Participating 

Member. 

upon by the parties,46 OCC would then 

be required to either notify NSCC of its 

intent to make the full amount of the 

Guaranty Substitution Payment to NSCC 

or notify NSCC that it will not make the 

Guaranty Substitution Payment. If OCC 

makes the full amount of the Guaranty 

Substitution Payment, NSCC’s guaranty 

would take effect at the time of NSCC’s 

receipt of that payment and the OCC 

Guaranty would end. 

The proposed changes would further 

provide that if OCC does not suspend 

the Common Member (such that the 

Common Member would therefore not 

meet the proposed definition of a 

Mutually Suspended Member) or if OCC 

elects to not make the full amount of the 

Guaranty Substitution Payment to 

NSCC, then all of the Defaulted NSCC 

Member Transactions would be exited 

from NSCC’s CNS Accounting 

Operation and/or NSCC’s Balance Order 

Accounting Operation, as applicable, 

and Guaranty Substitution would not 

occur in respect thereof. Therefore, 

NSCC would continue to have no 

obligation to guarantee or settle the 

Defaulted NSCC Member Transactions, 

and the OCC Guaranty would continue 

to apply to them pursuant to OCC’s ByLaws and Rules.47

Proposed changes to the Existing 

Accord would also address the 

application of any Guaranty 

Substitution Payment by NSCC. 

Specifically, new Section 6(d) would 

provide that any Guaranty Substitution 

Payment made by OCC may be used by 

NSCC to satisfy any liability or 

obligation of the Mutually Suspended 

Clearing Member to NSCC on account of 

transactions involving the Mutually 

Suspended Clearing Member for which 

the NSCC Guaranty applies and to the 

extent that any amount of assets 

otherwise held by NSCC for the account 

of the Mutually Suspended Member 

(including any Required Fund Deposit 

or Supplemental Liquidity Deposit) are 

insufficient to satisfy its obligations 

related to transactions for which the 

NSCC Guaranty applies. Proposed 

changes to Section 6(d) would further 

provide for the return to OCC of any 

unused portion of the GSP. With regard 

to the portion of the Guaranty 

Substitution Payment that corresponds 

to a member’s Supplemental Liquidity 

Deposit obligation, NSCC must return 

any unused amount to OCC within 

fourteen (14) days following the 

conclusion of NSCC’s settlement, closeout and/or liquidation. With regard to 

the portion of the Guaranty Substitution 

Payment that corresponds to a Required 

Fund Deposit, NSCC must return any 

unused amount to OCC under terms 

agreed to by the parties.48

Other Proposed Changes 

Certain other technical changes are 

also proposed to the Existing Accord to 

conform it to the proposed changes 

described above. For example, the 

preamble and the ‘‘whereas’’ clauses in 

the Preliminary Statement would be 

amended to clarify that the agreement is 

an amended and restated agreement and 

to summarize that the agreement would 

be modified to contemplate the 

Guaranty Substitution Payment 

structure. Section 1(c), which addresses 

the terms in the Existing Accord that are 

defined by reference to NSCC’s Rules 

and Procedures and OCC’s By-Laws and 

Rules would be modified to state that 

such terms would have the meaning 

then in effect at the time of any 

transaction or obligation that is covered 

by the agreement rather than stating that 

such terms have the meaning given to 

them as of the effective date of the 

agreement. This change is proposed to 

help ensure that the meaning of such 

terms in the agreement will not become 

inconsistent with the meaning in the 

NSCC Rules and/or OCC By-Laws and 

Rules, as they may be modified through 

proposed rule changes with the 

Commission. 

Technical changes would be made to 

Sections 3(d) and (e) of the Existing 

Accord to provide that those provisions 

would not apply in the event new 

Section 6(b) described above, is 

triggered. Section 3(d) generally 

provides that OCC will no longer submit 

E&A/Delivery Transactions to NSCC 

involving a suspended OCC 

Participating Member.49 Similarly, 

Section 3(e) generally provides that OCC 

will no longer submit E&A/Delivery 

Transactions to NSCC involving an 

NSCC Participating Member 50 for 

which NSCC has ceased to act. A 

proposed change would also be made to 

Section 5 of the Existing Accord to 

modify a reference to Section 5 of 

Article VI of OCC’s By-Laws to instead 

provide that the updated cross-reference 

should be to Chapter IV of OCC’s Rules. 

Section 5 would also be amended to 

clarify that Guaranty Substitution 

occurs when NSCC has received both 

the Required Fund Deposit and 

Supplemental Liquidity Deposit, as 

calculated by NSCC in its sole 

discretion, from Common Members. The 

addition of the collection of the 

Supplemental Liquidity Deposit to the 

definition of the Guaranty Substitution 

Time in this Section 5 would reflect 

OCC and NSCC’s agreement that both 

amounts are components of the 

Guaranty Substitution Payment (as 

described above) and would make this 

definition consistent with that 

agreement. 

In Section 7 of the Existing Accord, 

proposed changes would be made to 

provide that NSCC would provide to 

OCC information regarding a Common 

Member’s Required Fund Deposit and 

Supplemental Liquidity Deposit 

obligations, to include the 

Supplemental Liquidity Deposit 

obligation in this notice requirement, 

and additionally that NSCC would 

provide OCC with information regarding 

the potential Guaranty Substitution 

Payment for the Common Member. On 

an options expiration date that is a 

Friday, NSCC would, by close of 

business on that day, also provide to 

OCC information regarding the intra-day 

liquidity requirement, intra-day 

liquidity resources and intra-day calls 

for a Common Member that is subject to 

a Supplemental Liquidity Deposit at 

NSCC. 

Finally, Section 14 of the Existing 

Accord would be modernized to provide 

that notices between the parties would 

be provided by email rather than by 

hand, overnight delivery service or firstclass mail. 

Proposed Changes to OCC By-Laws and 

Rules 

General Description 

OCC is also proposing certain changes 

to its By-Laws and Rules that are 

designed to complement the proposed 

changes described above regarding the 

Existing Accord. These proposed 

changes to the By-Laws and Rules are 

described below, and they generally 

cover the following four areas. First, the 

proposed changes would define 

Guaranty Substitution Payment. Second, 

the proposed changes would describe 

the circumstances under which OCC 

could make a Guaranty Substitution 

Payment to NSCC. Third, the proposed 

changes would specify what financial 


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51OCC would be permitted to borrow from the 

Clearing Fund and margin of a suspended Clearing 

Member, over which OCC has a general lien, where 

that Clearing Member is a Mutually Suspended 

Member. The change would merely expand the 

circumstances under which OCC’s current By-Laws 

and Rules permit OCC to borrow Clearing Fund and 

margin. The change would not affect the treatment 

of such borrowing under OCC’s default waterfall 

that determines how OCC allocates losses against 

available financial resources. The Mutually 

Suspended Member’s margin and Clearing Fund 

collateral would remain first in line to absorb 

losses. 

52The term ‘‘CCC-Eligible’’ as used herein has the 

meaning provided in OCC’s By-Laws, supra note 4. 

53For purposes of the proposed rule change 

process under Exchange Act Section 19(b), the 

agreement is treated as a rule of a clearing agency 

under Exchange Act Section 3(a)(27) and therefore 

any proposed changes to it by OCC are subject to 

the related rule change process and public notice 

and comment. OCC therefore believes that 

addressing the terms in the agreement and crossreferencing the agreement in OCC Rule 901 would 

not deprive the Commission or the public of notice 

regarding any future proposed changes. 

54See NSCC Rules 4 (defining ‘‘Required Fund 

Deposit’’) and 4A (defining ‘‘Supplemental 

Liquidity Deposit’’), supra note 8. 

resources could be used by OCC to make 

the Guaranty Substitution Payment.51

Fourth, the proposed changes to OCC’s 

Comprehensive Stress Testing and 

Clearing Fund Methodology, and 

Liquidity Risk Management Description 

would outline enhanced stress testing 

incorporating the GSP and OCC’s ability 

to call for additional resources from 

Clearing Members. OCC also is 

proposing changes to OCC’s Liquidity 

Risk Management Framework to 

account for OCC’s ability to make the 

GSP. 

Article I—Definitions 

OCC proposes to add ‘‘Guaranty 

Substitution Payment’’ as a new defined 

term under Article I of OCC’s By-Laws, 

which is the Definitions section. The 

term ‘‘Guaranty Substitution Payment’’ 

would be defined to mean: ‘‘a payment 

that may be made by [OCC] to [NSCC] 

under the terms of an agreement 

between them, as described in Rule 901, 

so that [NSCC] will not reject settlement 

obligations for CCC-eligible 52 securities 

that are directed by [OCC] for settlement 

through the facilities of [NSCC] on 

account of a Clearing Member that has 

been suspended, as described in Rule 

1102, and for which [NSCC] has ceased 

to act.’’ 

Chapter IX—Delivery of Underlying 

Securities and Payment 

Certain changes are also proposed to 

Chapter IX of OCC’s Rules. OCC 

proposes to add parenthetical language 

to the Introduction section of Chapter IX 

of OCC’s Rules. It would specify that a 

Guaranty Substitution Payment could be 

made by OCC to NSCC in connection 

with OCC’s general policy that to the 

extent a security to be delivered and 

received is CCC-eligible, OCC will direct 

the delivery and payment obligations to 

be settled through the facilities of NSCC 

where the obligations are physicallysettled and arise out of the exercise of 

stock option contracts or the maturity of 

stock futures contracts. 

Next, OCC proposes to delete certain 

provisions from Rule 901(b) regarding 

when a Guaranty Substitution occurs. 

Specifically, Rule 901(b) currently 

provides that unless otherwise agreed 

between OCC and NSCC, a Guaranty 

Substitution with respect to settlement 

obligations for CCC-eligible securities 

that settle ‘‘regular way’’ under NSCC’s 

Rules and Procedures will occur if: (i) 

the applicable settlement obligations are 

reported to and are not rejected by 

NSCC; (ii) NSCC has not notified OCC 

that it has ceased to act for the relevant 

Clearing Member or Appointed Clearing 

Member; and (iii) the NSCC Clearing 

Fund requirements of the relevant 

Clearing Member or Appointed Clearing 

Member owing to NSCC, as determined 

in accordance with NSCC’s Rules and 

Procedures, are received by NSCC. 

These considerations regarding when a 

Guaranty Substitution occurs are 

addressed under the terms of the 

Existing Accord, and they would 

continue to be relevant considerations 

regarding when a Guaranty Substitution 

occurs under the changes that OCC and 

NSCC are proposing to the Existing 

Accord. However, because additional 

considerations would be added to the 

Guaranty Substitution process in 

connection with the proposed ability for 

OCC in certain circumstances to make a 

Guaranty Substitution Payment to NSCC 

and also to eliminate the potential for a 

description of the Guaranty Substitution 

process in OCC’s Rules to become 

inconsistent with the process that OCC 

and NSCC have agreed to in the Existing 

Accord, as it would be amended, OCC 

is proposing to delete the discussion of 

these considerations in Rule 901(b) in 

favor of instead simply cross referencing 

the terms of the agreement.53

In addition, OCC proposes to add a 

new paragraph to the end of Rule 901(b) 

to provide that pursuant to the proposed 

changes to the Existing Accord, OCC 

would be permitted to make a Guaranty 

Substitution Payment to NSCC. The 

proposed changes would also describe 

the circumstances in which OCC may 

make a Guaranty Substitution Payment 

in connection with settlement 

obligations of a suspended Clearing 

Member, and that the amount of the 

Guaranty Substitution Payment under 

the terms of the Existing Accord, as 

amended, would be the amount 

required by NSCC to satisfy its deficit(s) 

regarding such Clearing Member’s 

‘‘Required Fund Deposit’’ and 

‘‘Supplemental Liquidity Deposit’’ as 

those terms are defined in NSCC’s Rules 

and Procedures.54 The changes would 

provide that any amount of a Guaranty 

Substitution Payment that NSCC does 

not use pursuant to its Rules and 

Procedures would subsequently be 

returned to OCC under such terms and 

within such times as are agreed by OCC 

and NSCC. OCC believes that it is useful 

to include this description of the 

proposed process for the Guaranty 

Substitution Payment and the 

circumstances in which it may be made 

so that a user of OCC’s publicly 

available By-Laws and Rules would 

have sufficient information to 

understand the existence of the 

Guaranty Substitution Payment 

mechanism, the general circumstances 

in which it may be made and the role 

that a Guaranty Substitution Payment 

would play in causing NSCC to accept 

obligations for CCC-eligible securities 

for clearance and settlement. 

Chapters X and XI—Clearing Fund 

Contributions and Suspension of a 

Clearing Member 

As generally described above, the 

proposed changes would also provide 

that OCC would be permitted to borrow 

from the OCC Clearing Fund, and also 

against certain Margin Assets, of a 

Clearing Member that has been 

suspended by OCC where that Clearing 

Member is a Mutually Suspended 

Member. To implement these changes, 

OCC is proposing the following 

amendments to OCC Rule 1006 and 

Rule 1104. 

OCC Rule 1006 addresses the purpose 

and permitted uses of the OCC Clearing 

Fund. OCC proposes to make 

amendments to paragraphs (a) and (f) to 

permit OCC to utilize assets in the 

Clearing Fund as a liquidity resource in 

connection with making a Guaranty 

Substitution Payment. Currently, OCC 

Rule 1006(a) states the conditions for 

use of the OCC Clearing Fund. These 

provide that the OCC Clearing Fund 

may be used for borrowings pursuant to 

OCC Rule 1006(f) or to make good losses 

or expenses suffered by OCC including: 

(i) as a result of the failure of any 

Clearing Member to discharge duly any 

obligation on or arising from any 

confirmed trade accepted by OCC, (ii) as 

a result of the failure of any Clearing 

Member (including any Appointed 

Clearing Member) or of CDS (Canada’s 

national securities depository) to 

perform its obligations under any 


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55The terms ‘‘Clearing Member’’ and ‘‘Appointed 

Clearing Member’’ as used herein have the 

meanings provided in OCC’s By-Laws, supra note 

4. 

56 In connection with these amendments, the 

reference in Rule 1006(b) to ‘‘clauses (i) through (vi) 

of paragraph (a)’’ would be changed to ‘‘clauses (i) 

through (vii) of paragraph (a)’’. 

57 If the defaulting OCC Clearing Member’s 

Margin Assets and OCC Clearing Fund contribution 

were insufficient to cover the associated losses, 

OCC would next look to certain OCC financial 

resources that are available for that purpose (e.g., 

OCC’s corporate contribution and Clearing Fund 

contributions of non-defaulting OCC Clearing 

Members). 

58Article I, Section 1.G.(1) of OCC’s By-Laws 

states that the ‘‘term ‘general lien’ means a security 

interest of [OCC] in all or specified assets in a 

Clearing Member account as security for all of the 

Clearing Member’s obligations to [OCC] regardless 

of the source or nature of such obligations.’’ See 

OCC By-Laws, supra note 4. 

59The Clearing Member accounts referenced 

herein are described in subparagraphs (a), (b), (c) 

and (h) of Article VI, Section 3 of OCC’s By-Laws. 

See OCC’s By-Laws, supra note 4. 

60Article I, Section 1.R.(8) of OCC’s By-Laws 

states that the ‘‘term ‘restricted lien’ means a 

security interest of [OCC] in specified assets 

(including any proceeds thereof) in an account of 

a Clearing Member with [OCC] as security for the 

Clearing Member’s obligations to [OCC] arising from 

such account or, to the extent so provided in the 

By-Laws or Rules, a specified group of accounts that 

includes such account including, without 

limitation, obligations in respect of all confirmed 

trades effected through such account or group of 

accounts, and exercise notices assigned to such 

account or group of accounts.’’ See OCC’s By-Laws, 

supra note 4. 

61For example, under the broker-dealer customer 

reserve account formula to SEC Rule 15c3–3 the 

broker-dealer takes a debit in the formula under 

Item 13 for margin that is ‘‘required and on deposit 

with OCC for all option contracts written or 

purchased in customer accounts.’’ This means that 

such margin in turn can be used by the brokerdealer Clearing Member as Margin Assets to support 

the securities customers’ account at OCC. 

contract or obligation issued, 

undertaken, or guaranteed by OCC or in 

respect of which OCC is otherwise 

liable, (iii) as a result of the failure of 

any Clearing Member to perform any of 

its obligations to OCC in respect of the 

stock loan and borrow positions of such 

Clearing Member, (iv) in connection 

with any liquidation of a Clearing 

Member’s open positions, (v) in 

connection with protective transactions 

effected for the account of OCC 

pursuant to Chapter XI of OCC’s Rules 

(delivery of underlying securities and 

payment), (vi) as a result of the failure 

of any Clearing Member to make any 

other required payment or render any 

other required performance or (vii) as a 

result of the failure of any bank, 

securities or commodities clearing 

organization, or investment 

counterparty, to perform its obligations 

to OCC for certain specified reasons. 55

OCC proposes to renumber clauses 

(iii) through (vii) in paragraph (a) as (iv) 

through (viii), and to insert as new 

clause (iii) a provision that the OCC 

Clearing Fund may be used ‘‘regarding 

any Guaranty Substitution Payment that 

[OCC] may make to [NSCC] under an 

agreement between them, as described 

in [OCC] Rule 901, so that [NSCC] will 

not reject settlement obligations for 

CCC-eligible securities involving a 

Clearing Member for which [NSCC] has 

ceased to act and that [OCC] directs to 

[NSCC] for settlement through its 

facilities.’’ 56 OCC also proposes to add 

parenthetical language to paragraphs 

(f)(1)(A) and f(2)(A)(ii) to further clarify 

that contributions to the OCC Clearing 

Fund may be borrowed by OCC for use 

in connection with making a Guaranty 

Substitution Payment to NSCC. Any 

borrowing from the OCC Clearing Fund 

by OCC to make a Guaranty Substitution 

Payment to NSCC would be subject to 

the existing terms of OCC Rule 

1006(f)(3) that provide that irrespective 

of how any such borrowings from the 

OCC Clearing Fund are applied by OCC, 

the borrowing for a period not to exceed 

thirty (30) days will not be deemed to 

result in charges against the OCC 

Clearing Fund under OCC’s default 

waterfall for allocating actual losses. For 

purposes of determining whether a loss 

resulting from a Guaranty Substitution 

Payment has occurred, OCC Rule 

1006(f)(3) would be amended to provide 

that the Guaranty Substitution Payment 

is deemed to be repaid by OCC at such 

time as under the Accord that it is 

NSCC’s obligation to return any portion 

of the Guaranty Substitution Payment 

that NSCC does not use pursuant to its 

rules. If, subsequent to the borrowing, 

OCC determines that the borrowing 

represents an actual loss or all or any 

part of the borrowing remains 

outstanding after thirty (30) days (or on 

the first Business Day thereafter if the 

thirtieth calendar day is not a Business 

Day) then the amount of OCC Clearing 

Fund assets used in the outstanding 

borrowing would be an actual loss that 

OCC would be required to immediately 

allocate under its By-Laws and Rules.57

As noted above, losses resulting from 

the borrowing of Clearing Fund or 

Margin Assets as a liquidity resource to 

facilitate OCC making a Guaranty 

Substitution Payment would be 

allocated in the same sequence as any 

other losses charged to the default 

waterfall. 

Consistent with these changes to 

permit OCC to use the OCC Clearing 

Fund as a borrowing resource to make 

a Guaranty Substitution Payment to 

NSCC, OCC is also proposing similar 

changes to OCC Rule 1104 that would 

permit OCC to borrow certain Margin 

Assets of a Clearing Member that has 

been suspended by OCC where that 

Clearing Member is a Mutually 

Suspended Member and OCC has a 

general lien 58 over the Margin Assets. 

Specifically, OCC proposes to add a 

new paragraph (g) to OCC Rule 1104 

that would provide that OCC may use 

specified Margin Assets of a suspended 

Clearing Member as a borrowing in 

order to use such borrowed Margin 

Assets to make a Guaranty Substitution 

Payment to NSCC. OCC would be 

permitted to use Margin Assets from the 

following accounts of a suspended 

Common Member: firm lien account and 

firm non-lien account; separate MarketMaker’s account; combined MarketMaker’s account; and JBO Participants’ 

account.59 OCC is not proposing at this 

time to have authority to borrow Margin 

Assets from other types of accounts over 

which OCC has a restricted lien 60 and 

for which the Margin Assets are security 

for the particular restricted lien 

accounts because of additional 

complexity that OCC believes would be 

associated with tracking NSCC’s use of 

Margin Assets associated with those 

accounts and also due to certain 

regulatory requirements under 

Commission Rule 15c3–3 that apply to 

broker-dealer Clearing Members and 

prohibit the use of customer property of 

the broker-dealer to support noncustomer activities.61

As with the terms that currently apply 

to any borrowing from the OCC Clearing 

Fund pursuant to OCC Rule 1006(f), 

new paragraph (g) in OCC Rule 1104 

would further provide that Margin 

Assets borrowed by OCC to make a 

Guaranty Substitution Payment to NSCC 

would not be deemed to be charges 

against the margin assets for the relevant 

account(s) for up to thirty (30) days; 

however, if all or a part of such 

borrowing were to be determined by 

OCC, in its discretion, to represent an 

actual loss, or if all or a part of the 

borrowing were to remain outstanding 

after such thirty (30)-day period, OCC 

would consider the amount of margin 

assets used to support OCC’s obligations 

under the outstanding borrowing or 

transaction as an actual loss and 

immediately allocate the loss in 

accordance with OCC’s By-Laws and 

Rules. 

OCC anticipates that in a scenario in 

which it would be permitted make a 

Guaranty Substitution Payment to NSCC 

under the proposed changes to the 

Existing Accord and OCC’s By-Laws and 

Rules, OCC would generally expect to 

borrow from the Clearing Fund as a 

primary liquidity resource. OCC could 

also borrow Margin Assets of the 

suspended Clearing Member that is a 


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62A Clearing Member Group is composed of a set 

of affiliated OCC Clearing Members. 

Common Member under the proposed 

terms described above. OCC is not 

proposing changes that would require a 

specific borrowing sequence because 

OCC believes that it is more appropriate 

to preserve flexibility to borrow from 

the available OCC Clearing Fund or 

Margin Assets as OCC determines 

appropriate under the circumstances. 

In addition, OCC proposes to specify 

in OCC Rule 1107(a)(1) that exercised 

option contracts and matured, 

physically-settled stock futures to which 

the suspended Clearing Member is a 

party may be settled in accordance with 

the terms of any agreement between 

OCC and NSCC governing the 

settlement of exercised option contracts 

and matured, physically-settled stock 

futures of a suspended Clearing 

Member. In such an event, settlement 

will be governed by and subject to the 

agreement between OCC and NSCC and 

the rules of NSCC. 

The purpose of the proposed changes 

to create the Guaranty Substitution 

Payment mechanism is to provide OCC 

and NSCC with an additional default 

management tool to help manage 

liquidity and settlement risks that OCC 

believes would be presented to each 

covered clearing agency in connection 

with a Mutually Suspended Member. 

OCC believes that having the ability to 

make a Guaranty Substitution Payment 

to NSCC in regard to any unmet 

Required Fund Deposit or Supplemental 

Liquidity Deposit obligations of a 

Mutually Suspended Member would 

promote prompt and accurate clearance 

and settlement in the national system 

for the settlement of securities 

transactions by causing NSCC to 

guarantee certain securities settlement 

obligations that result from exercised 

options and matured futures contracts 

that are cleared and settled by OCC. In 

the following ways, OCC believes that 

this would be beneficial to and 

protective of OCC, NSCC, their 

participants, and the markets they serve. 

First, OCC’s ability to make the 

Guaranty Substitution Payment would 

ensure that the relevant securities 

settlement obligations would be 

accepted by NSCC for clearance and 

settlement and therefore the size of the 

related settlement obligations could be 

decreased from netting through NSCC’s 

CNS Accounting Operation and/or 

NSCC’s Balance Order Accounting 

Operation. Second, this outcome would 

avoid a scenario in which OCC’s 

Guaranty would continue to apply and 

the settlement obligations would be 

settled on a broker-to-broker basis 

between OCC Clearing Members 

pursuant to the applicable provisions in 

Chapter IX of OCC’s Rules. As noted 

above, OCC believes that such a brokerto-broker settlement scenario could 

result in substantial collateral and 

liquidity requirements for OCC Clearing 

Members. OCC believes that these 

potential collateral and liquidity 

consequences would be due to the lost 

benefit of netting of the settlement 

obligations through NSCC’s facilities 

and also due to the short time (i.e., the 

T+2 standard settlement cycle) between 

a rejection by NSCC of the settlement 

obligations for clearing and the 

associated settlement date on which 

settlement would be otherwise required 

to be made bilaterally by OCC Clearing 

Members. This scenario also raises the 

potential for procyclical liquidity 

demands on OCC Clearing Members and 

participants during stressed market 

conditions. Third, OCC will plan to size 

its liquidity resource requirements to 

reasonable expectations with a high 

probability of making a Guaranty 

Substitution Payment in order to 

facilitate the settlement of a Mutually 

Suspended Member’s obligations 

through NSCC. Accounting for net 

liquidity demands from a Mutually 

Suspended Member’s settlement 

obligations at the central counterpartylevel enhances liquidity in the financial 

system and promotes the efficient use of 

capital by reducing the demand for 

liquidity associated with gross 

settlement of obligations and enabling 

the application of resources at both 

clearing agencies to satisfy the 

Member’s obligation. Fourth, OCC 

believes that the potential for the size of 

the settlement obligations to be 

comparatively larger than the Guaranty 

Substitution Payment coupled with the 

short time remaining to settlement 

could also increase the risk of default by 

the affected OCC Clearing Members at a 

time when a Common Member has 

already been suspended. Therefore, 

OCC believes that the proposed changes 

to implement the ability for OCC to 

make a Guaranty Substitution Payment 

to NSCC would allow OCC to avoid 

these risks by causing NSCC to accept 

the relevant obligations arising from 

exercised options and matured futures 

cleared and settled by OCC, as it 

ordinarily would, and guarantee their 

settlement, upon OCC making a 

Guaranty Substitution Payment to NSCC 

in accordance with the revised Accord. 

Comprehensive Stress Testing & 

Clearing Fund Methodology, and 

Liquidity Risk Management Description 

OCC proposes to revise the OCC 

Comprehensive Stress Testing & 

Clearing Fund Methodology, and 

Liquidity Risk Management Description 

to include the GSP in its liquidity risk 

management practices. Overall, the 

proposed changes would reflect that the 

GSP functions as an additional liquidity 

demand type at the Clearing Member 

Organization (‘‘CMO’’) Group level.62

OCC would include additional 

specifics to address the potential 

increased demand that the inclusion of 

the GSP may cause in its liquidity risk 

management practices in the Liquidity 

Risk Management section of the 

Comprehensive Stress Testing & 

Clearing Fund Methodology, and 

Liquidity Risk Management Description. 

Specifically, OCC proposes to amend 

the Liquidity Demand for Positions 

Rejected by NSCC subsection, which 

describes the Existing Accord, including 

the scenario in which NSCC could 

choose not to guaranty certain securities 

settlement obligations arising out of 

transactions cleared by OCC. This 

subsection would be retitled as the 

Liquidity Demand Associated with 

NSCC Performance of Physical 

Settlement Activities subsection to more 

clearly describe its content and 

incorporate the GSP, as further detailed 

below. Consistent with the changes to 

the Existing Accord described above, 

OCC proposes to clarify that the Accord 

allows NSCC to reject such obligations 

if OCC elects to not make a GSP. 

OCC proposes a new subsection, titled 

the Liquidity Demand GSP, to describe 

the GSP, which NSCC would calculate 

as defined in the proposed amendments 

to the Existing Accord. OCC would 

describe a GSP as a firm specific 

liquidity demand (i.e., the amount of 

cash OCC needs to pay NSCC on behalf 

of the defaulting Common Member). 

OCC would describe the components of 

the GSP under the Accord. OCC would 

explain how it accounts for the liquidity 

demand associated with a potential 

GSP. Specifically, OCC would apply an 

amount to account for a potential GSP 

obligation for every day on which 

option expirations occur. This amount 

would be based on peak GSP amounts 

from the prior 12 months in a given 

expiration category for the specific CMO 

Group for each forecasted liquidity 

demand calculation. OCC will use a 

one-year lookback time period to 

determine the appropriate GSP amount 

to apply. The one-year lookback allows 

for the best like-to-like application of a 

historical GSP as there is a cyclical 

nature to option standard expirations 

with quarterly (i.e., March, June, 

September, and December) and January 

generally being more impactful than 

non-quarterly expirations. The one-year 

lookback also allows behavior changes 


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63The Bank Holiday category recognizes that for 

Veterans Day and Columbus Day, the equity and 

equity derivative markets are open for trading, but 

the banking system is closed for the day. Since the 

banking system is closed while the aforementioned 

markets are open, settlement at NSCC encompasses 

two days of equity trading and equity derivative 

E&A activity. As OCC is using NSCC deficit 

numbers without regard for allocation, there is a 

possibility of a significant outlying GSP 

requirement due to the settlement of two days of 

activity simultaneously. Prudence dictates retaining 

the capability to risk manage a day with such 

disparate characteristics differently. Additional 

supporting data in support of the creation of the 

Bank Holiday Expiration category is included as 

Exhibit 3E to File No. SR–OCC–2023–007. 

64OCC provided its analysis of notional activity 

sent to NSCC by OCC in support of the creation of 

the five categories as Exhibit 3E to File No. SR– 

OCC–2023–007. This Exhibit 3E sets forth data 

related to OCC’s liquidity stress testing, including 

Available Liquidity Resources, Minimum Cash 

Requirement thresholds, and/or liquidity breaches, 

for Sufficiency and Adequacy scenarios with and 

without the inclusion of the GSP. 

65For example, the average notional transfer for 

Remaining Expiration Days is approximately 10% 

the size of Standard Expiration. 

66As an example, if the applicable GSP is $100 

and the (current) stressed liquidity demand is $150 

for a Clearing Member Group, the result after the 

application of the GSP for that Clearing Member 

Group would be a combined liquidity requirement 

of $250 versus $150 currently. 

67OCC provided its analysis of the impact of the 

GSP, including with respect to calls for collateral 

and liquidity demands as Exhibit 3E to File No. SR– 

OCC–2023–007. 

68This clarification would maintain OCC’s 

current process for settling transactions not 

processed through NSCC, and does not represent 

the adoption of a new process or settlement 

method. 

69 15 U.S.C. 78q–1(b)(3)(F). 

70 15 U.S.C. 78q–1(b)(3)(F). 

of a Clearing Member to be recognized 

within an annual cycle. OCC proposes 

to utilize a historical GSP based on 

current system capabilities and data that 

will be supplied by NSCC. 

OCC would use the total amount of 

Clearing Fund and SLD deficits at NSCC 

in its calculation to account for its 

obligation. However, in the event of a 

default, OCC would be responsible for a 

proportionate share of both NSCC 

Clearing Fund deficits (which are 

analogous to OCC margin deficits) and 

SLDs that are attributable to OCC E&A 

activity transmitted to NSCC for 

settlement, whereas NSCC will be 

responsible for the portion of the 

Clearing Fund and SLD deficits 

associated with activity that NSCC 

clears that is not transmitted by OCC. 

The amount of notional activity sent 

by OCC to NSCC informs the likelihood 

of a GSP. Namely, the potential amount 

of NSCC Clearing Fund and SLD deficits 

that are allocable to OCC increases as 

the amount of activity OCC sends to 

NSCC increases. Since not all types of 

expirations are the same with respect to 

the notional amount of activity sent by 

OCC to NSCC, OCC proposes to use five 

separate categories of expirations with 

potentially different GSP amounts to 

apply. Each day on which expirations 

occur would fall into one of five 

categories as follows: 

• Standard Monthly Expiration: 

typically the third Friday of each month 

from the previous twelve months; 

• Non-Standard Monthly Expiration 

Fridays (‘‘End of Week Expirations’’): 

the last business day of every week, 

typically a Friday, excluding the third 

Friday of each month from the previous 

twelve months; 

• End of Month Expirations: the last 

trading day of every month from the 

previous twelve months; 

• Expirations falling on Bank 

Holidays where Markets Are Open 

(‘‘Bank Holiday Expirations’’): days 

where banks are closed but the markets 

are open from the previous twelve 

months; 63

• Remaining Expiration Days (‘‘Daily 

Expirations’’): All other days with an 

expiration from the previous twelve 

months that do not fall into any of the 

categories above (typically most 

Mondays through Thursdays) from the 

previous twelve months. 

OCC believes these five categories are 

appropriate after an analysis of notional 

activity sent to NSCC by OCC.64 More 

specifically, the standard Friday 

monthly expiration far exceeds the 

needs associated with any other 

category.65 The remaining categories are 

intended to capture like time periods 

that will appropriately account for the 

GSP. 

OCC would apply the peak GSP 

amounts from the prior twelve months 

in a given expiration category for the 

specific CMO Group for each forecasted 

liquidity demand calculation by adding 

the GSP amounts to the CMO Group’s 

other forecasted liquidity demands for 

the relevant expiration day.66 If a 

Clearing Member defaults, OCC may 

have to pay a GSP to NSCC on two 

successive days to facilitate the closeout of the defaulted Clearing Member’s 

positions. To account for this possibility 

in its liquidity risk management 

process, OCC contemplates the payment 

of a GSP on expirations that result in 

settlements on the first and second days 

of the default management process. As 

described above, this GSP amount may 

serve to only increase liquidity 

demands.67

Furthermore, as stated in the new 

Liquidity Demand GSP subsection, OCC 

would apply a floor to certain 

expirations. At a minimum, the GSPs 

applied to the End of Week, End of 

Month, and Bank Holiday Expirations 

will be no lower than the peak of the 

Daily Expirations category. If a GSP 

pertaining to the End of Week, End of 

Month, and Bank Holiday Expiration 

category is higher than the peak of the 

Daily Expirations category, then OCC 

will apply that higher GSP. Standard 

Monthly Expirations will be floored by 

End of Week, End of Month, and Daily 

Expirations. If a GSP pertaining to any 

of these categories is higher than the 

Standard Monthly Expiration category, 

then OCC will apply that higher GSP. 

OCC would set out formulas 

representing the floors for the Standard 

Monthly, End of Week, End of Month, 

and Bank Holiday Expirations. Finally, 

OCC also proposes a minor change to 

clarify that it would attempt to effect 

alternative settlement if OCC elected not 

to make a GSP.68

Liquidity Risk Management Framework 

OCC proposes changes to the 

Liquidity Risk Management Framework 

to incorporate the GSP. In the Liquidity 

Risk Identification section, OCC would 

specify that, in the situation where a 

member defaults immediately 

preceding, or during the expiration, of 

physically-settled E&A activity, OCC 

may elect to make a GSP to NSCC to 

compel NSCC to accept and process the 

E&A activity. If OCC elects to not make 

a GSP, OCC would complete settlement 

of the defaulted Clearing Member’s E&A 

transactions through its current process. 

Relatedly, OCC would include a minor 

clarification to a footnote in this section 

to note that NSCC is not acting on behalf 

of a defaulting Clearing Member ‘‘in this 

situation.’’ 

(2) Statutory Basis 

OCC believes the proposed changes 

are consistent with the requirements of 

the Act and the rules and regulations 

thereunder applicable to a registered 

clearing agency. In particular, OCC 

believes the proposed changes are 

consistent with Section 17A(b)(3)(F) of 

the Act.69 Section 17A(b)(3)(F) 70 of the 

Act requires, among other things, that 

the rules of a clearing agency be 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions and, in general, 

to protect investors and the public 

interest. As described above, OCC 

believes that modifying its stress testing 

procedures to enhance its ability to call 

for additional liquidity resources and 

having the ability to make a Guaranty 

Substitution Payment to NSCC with 

respect to any unmet obligations of a 

Mutually Suspended Member would 

promote prompt and accurate clearance 

and settlement because it would ensure 


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71 17 CFR 240.17Ad–22(a)(5). 72 17 CFR 240.17Ad–22(e)(20). 

73See The Options Clearing Corporation 

Disclosure Framework for Financial Market 

Infrastructures, pg. 108, (2022), available at https:// 

www.theocc.com/risk-management/pfmidisclosures. 

74 17 CFR 240.17Ad–22(e)(3), (7). 

75 17 CFR 240.17Ad–22(e)(3). 

76 17 CFR 240.17Ad–22(e)(7). 

77 15 U.S.C. 78q–1(b)(3)(I). 

78Notwithstanding its immediate effectiveness, 

implementation of this rule change will be delayed 

until this change is deemed certified under CFTC 

Regulation 40.6. 

that NSCC accepts the relevant 

securities settlement obligations for 

clearance and settlement and therefore 

the size of the related settlement 

obligations for both the Mutually 

Suspended Member and its assigned 

delivery counterparties could be 

decreased from netting through NSCC’s 

CNS Accounting Operation and/or 

NSCC’s Balance Order Accounting 

Operation. This would also avoid a 

scenario in which OCC’s Guaranty 

would continue to apply and the 

settlement obligations would be settled 

on a broker-to-broker basis between 

OCC Clearing Members, which OCC 

believes could result in substantial 

collateral and liquidity requirements for 

OCC Clearing Members and that, in 

turn, could also increase a risk of 

default by the affected OCC Clearing 

Members at a time when a Common 

Member has already been suspended. 

For these reasons, OCC believes that the 

proposed changes would be beneficial 

to and protective of OCC, NSCC, their 

participants, and the markets that they 

serve and that the proposed changes are 

therefore designed, in general, to protect 

investors and the public interest. 

OCC believes that the proposed 

changes are also consistent with the SEC 

rules that apply to OCC as a covered 

clearing agency.71 In particular, SEC 

Rule 17Ad–22(e)(20) requires OCC to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, monitor 

and manage risks related to any link that 

OCC establishes with one or more other 

clearing agencies, financial market 

utilities, or trading markets.72 As 

described in OCC’s publicly available 

disclosure framework for financial 

market infrastructures,73 the Existing 

Accord between OCC and NSCC is one 

such link. As described above, OCC 

believes (i) the proposed modifications 

to OCC’s stress testing procedures that 

are designed to enhance its ability to 

call for additional liquidity resources, 

and (ii) that implementation of the 

ability for OCC to make a Guaranty 

Substitution Payment to NSCC in the 

relevant circumstances involving a 

Mutually Suspended Member would 

help manage the risks presented to OCC 

and its Clearing Members by the 

settlement link with NSCC because the 

Guaranty Substitution Payment would 

ensure that the relevant securities 

settlement obligations would be 

accepted by NSCC for clearance and 

settlement and therefore the size of the 

related settlement obligations could be 

decreased from netting through NSCC’s 

CNS Accounting Operation and/or 

NSCC’s Balance Order Accounting 

Operation. 

For this same reason, OCC also 

believes that the proposed changes are 

consistent with the requirements of SEC 

Rules 17Ad–22(e)(3) and (7).74 SEC Rule 

17Ad–22(e)(3) requires OCC to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain a 

sound risk management framework for 

comprehensively managing, among 

other things, liquidity, credit and other 

risks that arise in or are borne by OCC.75

SEC Rule 17Ad–22(e)(7) requires OCC, 

in relevant part, to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

effectively measure, monitor and 

manage the liquidity risk that arises in 

or is borne by OCC and to, among other 

things, address foreseeable liquidity 

shortfalls that would not be covered by 

OCC’s liquid resources.76 As noted, 

OCC believes the proposed stress testing 

enhancements and the ability to make a 

Guaranty Substitution Payment to NSCC 

would allow OCC to better manage 

liquidity and credit risks related to the 

settlement link with NSCC by ensuring 

that the relevant securities settlement 

obligations would be accepted by NSCC 

for clearance and settlement. It would 

avoid a scenario in which OCC’s 

Guaranty would continue to apply and 

the settlement obligations would be 

settled on a broker-to-broker basis 

between OCC Clearing Members, which 

OCC believes could result in substantial 

collateral and liquidity requirements for 

OCC Clearing Members that, in turn, 

could also increase a risk of default by 

the affected OCC Clearing Members, 

particularly in circumstances where the 

prior suspension of a Mutually 

Suspended Member relates to broader 

stress in the financial system. Moreover, 

the incorporation of the Guarantee 

Substitution Payment into OCC’s 

liquidity risk management practices 

would enhance OCC’s ability to 

maintain additional liquidity resources 

to effect the settlement of exercise and 

assignment activity in the event of a 

Common Member default, and therefore, 

potentially increasing the promotion of 

market stability. 

(B) Clearing Agency’s Statement on 

Burden on Competition 

Section 17A(b)(3)(I) of the Act 77

requires that the rules of a clearing 

agency not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. OCC does not 

believe that the proposal would impose 

any burden on competition. The 

proposed changes would implement 

changes that would permit OCC in 

certain circumstances to make a 

Guaranty Substitution Payment to NSCC 

so that the NSCC Guaranty would take 

effect for the Defaulted NSCC Member 

Transactions and the OCC Guaranty 

would end. The proposed changes 

would not inhibit access to OCC’s 

services in any way, applies to all 

Clearing Members and does not 

disadvantage or favor any particular 

user in relationship to another user. 

Accordingly, OCC does not believe that 

the proposed rule change would have 

any impact or impose a burden on 

competition. 

(C) Clearing Agency’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 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the self-regulatory organization 

consents, the Commission will: 

(A) by order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed.78


lotter on DSK11XQN23PROD with NOTICES1
59988 Federal Register / Vol. 88, No. 167 / Wednesday, August 30, 2023 / Notices 

79 17 CFR 200.30–3(a)(12). 

1 12 U.S.C. 5465(e)(1). 

2 17 CFR 240.19b–4(n)(1)(i). 

3 15 U.S.C. 78a et seq. 

4The Existing Accord was previously approved 

by the Commission. See Securities Exchange Act 

Release Nos. 81266, 81260 (July 31, 2017) (File Nos. 

SR–NSCC–2017–007; SR–OCC–2017–013), 82 FR 

36484 (Aug. 4, 2017). 

5OCC By-Laws are available at https://

www.theocc.com/getmedia/3309eceb-56cf-48fcb3b3-498669a24572/occ_bylaws.pdf and OCC Rules 

are available at https://www.theocc.com/getmedia/ 

9d3854cd-b782-450f-bcf7-33169b0576ce/occ_

rules.pdf. 

6NSCC also has filed a proposed rule change with 

the Commission in connection with this proposal. 

See SR–NSCC–2023–007. 

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 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

OCC–2023–007 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–OCC–2023–007. This file 

number should be included on the 

subject line if email 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 website (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 website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of OCC and on OCC’s website at 

https://www.theocc.com/CompanyInformation/Documents-and-Archives/ 

By-Laws-and-Rules. 

Do not include personal identifiable 

information in submissions; you should 

submit only information that you wish 

to make available publicly. We may 

redact in part or withhold entirely from 

publication submitted material that is 

obscene or subject to copyright 

protection. All submissions should refer 

to File Number SR–OCC–2023–007 and 

should be submitted on or before 

September 20, 2023. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.79

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–18673 Filed 8–29–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–98214; File No. SR–OCC– 

2023–801] 

Self-Regulatory Organizations; the 

Options Clearing Corporation; Notice 

of Filing and Extension of Review 

Period of Advance Notice Concerning 

Modifications to the Amended and 

Restated Stock Options and Futures 

Settlement Agreement Between the 

Options Clearing Corporation and the 

National Securities Clearing 

Corporation 

August 24, 2023. 

Pursuant to Section 806(e)(1) of Title 

VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 

entitled Payment, Clearing and 

Settlement Supervision Act of 2010 

(‘‘Clearing Supervision Act’’) 1 and Rule 

19b–4(n)(1)(i) 2 under the Securities 

Exchange Act of 1934 (‘‘Exchange 

Act’’),3 notice is hereby given that on 

August 10, 2023, the Options Clearing 

Corporation (‘‘OCC’’) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) an advance 

notice as described in Items I, II and III 

below, which Items have been prepared 

by OCC. The Commission is publishing 

this notice to solicit comments on the 

advance notice from interested persons 

and to extend the review period of the 

advance notice. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Advance 

Notice 

This advance notice is submitted by 

OCC in connection with a prosed 

change to its operations to (1) modify 

the Amended and Restated Stock 

Options and Futures Settlement 

Agreement dated August 5, 2017 

between OCC and National Securities 

Clearing Corporation (‘‘NSCC,’’ and 

together with OCC, the ‘‘Clearing 

Agencies’’) (‘‘Existing Accord’’) 4 and (2) 

make certain revisions to OCC By-Laws, 

OCC Rules,5 OCC’s Comprehensive 

Stress Testing & Clearing Fund 

Methodology, and Liquidity Risk 

Management Description and OCC’s 

Liquidity Risk Management Framework 

in connection with the proposed 

modifications to the Existing Accord, as 

described in greater detail below.6

The proposed changes would permit 

OCC to elect to make a cash payment to 

NSCC following the default of a 

common clearing participant that would 

cause NSCC’s central counterparty trade 

guaranty to attach to certain obligations 

of that participant, as described in 

greater detail below. 

The proposed changes are included in 

Exhibits 5A and 5B and confidential 

Exhibits 5C, 5D, and 5E to File No. SR– 

OCC–2023–801. Material proposed to be 

added is underlined and material 

proposed to be deleted is marked in 

strikethrough text. 

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Advance Notice 

In its filing with the Commission, 

OCC included statements concerning 

the purpose of and basis for the advance 

notice and discussed any comments it 

received on the advance notice. 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) and (B) below, of the 

most significant aspects of these 

statements. 

(A) Clearing Agency’s Statement on 

Comments on the Advance Notice 

Received From Members, Participants or 

Others 

Written comments were not and are 

not intended to be solicited with respect 

to the proposed changes, and none have 

been received. 

(B) Advance Notices Filed Pursuant to 

Section 806(e) of the Payment, Clearing, 

and Settlement Supervision Act 

Description of Proposed Change 

Background 

OCC is filing this advance notice to 

(1) modify the Existing Accord between 

OCC and NSCC and (2) make certain 

revisions to OCC By-Laws, OCC Rules, 

OCC’s Comprehensive Stress Testing & 

Clearing Fund Methodology, and 


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