Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 37839 

26 Id. 

27 15 U.S.C. 78f(b)(5). 

28 17 CFR 240.19b–4. 

29Section 19(b)(2) of the Exchange Act, as 

amended by the Securities Acts Amendments of 

1975, Pub. L. 94–29 (June 4, 1975), grants the 

Commission flexibility to determine what type of 

proceeding—either oral or notice and opportunity 

for written comments—is appropriate for 

consideration of a particular proposal by a selfregulatory organization. See Securities Acts 

Amendments of 1975, Senate Comm. on Banking, 

Housing & Urban Affairs, S. Rep. No. 75, 94th 

Cong., 1st Sess. 30 (1975). 

30 17 CFR 200.30–3(a)(57). 

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

2 17 CFR 240.19b–4. 

3On December 8, 2017, OCC also filed this 

proposal as an advance notice SR–OCC–2017–809 

(‘‘Advance Notice’’) with the Commission pursuant 

to Section 806(e)(1) of Title VIII of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act, 

entitled the Payment, Clearing, and Settlement 

Supervision Act of 2010 (12 U.S.C. 5465(e)(1)) and 

Rule 19b–4(n)(1)(i) of the Act (17 CFR 240.19b– 

4(n)(1)(i)). Notice of filing of the Advance Notice 

was published for comment in the Federal Register 

on January 23, 2018. Securities Exchange Act 

Release No. 82513 (Jan. 17, 2018), 83 FR 3244 (Jan. 

23, 2018) (SR–OCC–2017–809). 

4Securities Exchange Act Release No. 82531 (Dec. 

19, 2017), 82 FR 61107 (Dec. 26, 2017) (SR–OCC– 

2017–020) (‘‘Initial Filing’’). 

5 15 U.S.C. 78s(b)(2)(B)(i). 

below, the Commission seeks and 

encourages interested persons to 

provide comments on the proposed rule 

change. 

Pursuant to Section 19(b)(2)(B) of the 

Exchange Act,26 the Commission is 

providing notice of the grounds for 

disapproval under consideration. The 

Commission is instituting proceedings 

to allow for additional analysis of the 

proposal’s consistency with Section 

6(b)(5) of the Exchange Act, which 

requires, among other things, that the 

rules of a national securities exchange 

be designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, and to protect investors and the 

public interest.27 In light of the 

portfolio’s potential exposure to the 

permitted investments identified above 

(including junior loans, ABS, MBS, and 

interests in investment pools in 

particular), the Commission seeks 

commenters’ views on the sufficiency of 

the information provided in the 

proposed rule change to support a 

determination that the listing and 

trading of the Shares would be 

consistent with Section 6(b)(5) of the 

Exchange Act as modified by 

Amendment No. 1. The Commission 

notes that the Exchange proposes to 

exempt equity interests in investment 

pools from all of the requirements of 

Commentary .01(a)(1) to NYSE Arca 

Rule 8.600–E.In light of the portfolio’s 

potential exposure to the permitted 

investments identified above, the 

Commission seeks commenters’ views 

on the sufficiency of the information 

provided in the proposed rule change to 

support a determination that the listing 

and trading of the Shares would be 

consistent with Section 6(b)(5) of the 

Exchange Act as modified by 

Amendment No. 1. 

IV. Procedure: Request for Written 

Comments 

Interested persons are invited to 

submit written views, data, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change as modified by Amendment No. 

1 is consistent with Section 6(b)(5) or 

any other provision of the Exchange 

Act, or the rules and regulations 

thereunder. Although there do not 

appear to be any issues relevant to 

approval or disapproval that would be 

facilitated by an oral presentation of 

views, data, and arguments, the 

Commission will consider, pursuant to 

Rule 19b–4 under the Exchange Act,28

any request for an opportunity to make 

an oral presentation.29

Interested persons are invited to 

submit written data, views, and 

arguments regarding whether the 

proposal should be approved or 

disapproved by August 23, 2018. Any 

person who wishes to file a rebuttal to 

any other person’s submission must file 

that rebuttal by September 6, 2018. 

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– 

NYSEArca–2018–25 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–NYSEArca–2018–25. 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 the Exchange. All comments 

received will be posted without change. 

Persons submitting comments are 

cautioned that we do not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make available publicly. All 

submissions should refer to File 

Number SR–NYSEArca-2018–25 and 

should be submitted on or before 

August 23, 2018. Rebuttal comments 

should be submitted by September 6, 

2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.30

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2018–16536 Filed 8–1–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83725; File No. SR–OCC– 

2017–020] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Amendments No. 1 and 2 

to Proposed Rule Change Concerning 

Enhanced and New Tools for Recovery 

Scenarios 

July 27, 2018. 

On December 18, 2017, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–OCC–2017–020 

(‘‘Proposed Rule Change’’) pursuant to 

Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’),1 and 

Rule 19b–4 thereunder,2 concerning 

enhanced and new tools for recovery 

scenarios.3 The Proposed Rule Change 

was published for comment in the 

Federal Register on December 26, 

2017.4 On March 22, 2018, the 

Commission instituted proceedings 

under Section 19(b)(2)(B)(i) of the Act 5

to determine whether to approve or 


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6See Securities Exchange Act Release No. 82926 

(Mar. 22, 2018), 83 FR 13171 (Mar. 27, 2018) (SR– 

OCC–2018–020). 

7See Securities Exchange Act Release No. 83484 

(Jun. 20, 2018), 83 FR 29846 (Jun. 26, 2018) (SR– 

OCC–2017–020). 

8 15 U.S.C. 78s(b)(1). 

9 17 CFR 240.19b–4. 

10 17 CFR 240.17Ad–22. 

11 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii), 

(e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii). 

12 15 U.S.C. 78q–1. 

13 12 U.S.C. 5461 et seq. 

14 17 CFR 240.17Ad–22(a)(5). 

15 17 CFR 240.17Ad–22(e)(3)(ii). 

16 17 CFR 240.17Ad–22(e)(v)(viii). 

17 17 CFR 240.17Ad–22(e)(4)(ix). 

disapprove the Proposed Rule Change.6

On June 20, 2018 the Commission 

designated a longer period for 

Commission action on proceedings to 

determine whether to approve or 

disapprove the Proposed Rule Change.7

On July 11, 2018, OCC filed 

Amendment No. 1 to the Proposed Rule 

Change. On July 12, 2018, OCC filed 

Amendment No. 2 to the Proposed Rule 

Change to supersede and replace 

Amendment No. 1 in its entirety, due to 

technical defects in Amendment No. 1. 

Therefore, the Initial Filing, as modified 

by Amendment No. 2, reflects the 

changes proposed. 

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

Act 8 and Rule 19b–4 thereunder 9 the 

Commission is publishing notice of 

these Amendments No. 1 and 2 to 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, as modified by Amendments 

No. 1 and 2, from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

This proposed rule change by the 

OCC would make certain revisions to 

OCC’s Rules and By-Laws to enhance 

OCC’s existing tools to address the risks 

of liquidity shortfalls and credit losses 

and to establish new tools by which 

OCC could re-establish a matched book 

following a default. Each of the tools 

proposed herein is contemplated to be 

deployed by OCC in an extreme stress 

event that has placed OCC into a 

recovery or orderly wind-down 

scenario. 

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. 

Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

1. Purpose 

Background 

The purpose of this proposed rule 

change is to make certain revisions to 

OCC’s Rules and By-Laws Laws that are 

designed to enhance OCC’s existing 

tools to address the risks of liquidity 

shortfalls and credit losses and to 

establish tools by which OCC could reestablish a matched book following a 

default. Each of the tools proposed 

herein is contemplated to be deployed 

by OCC in an extreme stress event that 

has placed OCC into a recovery or 

orderly wind-down scenario. Each of 

the proposed revisions also is designed 

to further OCC’s compliance, in whole 

or in part, with the provisions of the 

Commission’s rules identified 

immediately below. 

On September 28, 2016, the 

Commission adopted amendments to 

Rule 17Ad–2210 and added new Rules 

17Ad–22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), 

(e)(7)(ix), (e)(13), (e)(23)(i) and 

(e)(23)(ii) 11 pursuant to Section 17A of 

the Securities Exchange Act of 1934 12

and the Payment, Clearing, and 

Settlement Supervision Act of 2010 

(‘‘Payment, Clearing and Settlement 

Supervision Act’’).13 In relevant part, 

these new rules collectively require a 

covered clearing agency (‘‘CCA’’), as 

defined by Rule 17Ad–22(a)(5),14 to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to: (1) Maintain a 

risk management framework including 

plans for recovery and orderly winddown necessitated by credit losses, 

liquidity shortfalls, general business risk 

losses or any other losses, (2) effectively 

identify, measure, monitor and manage 

its credit exposures to participants and 

those arising from its payment, clearing 

and settlement processes, including by 

addressing the allocation of credit losses 

a CCA might face if its collateral and 

other resources are insufficient to fully 

cover its credit exposures, (3) effectively 

identify, measure, monitor and manage 

credit exposures, including by 

describing the process to replenish any 

financial resource that a CCA may use 

following a default event or other event 

in which use of such resource is 

contemplated, (4) effectively identify, 

measure, monitor and manage liquidity 

risks that arises or is borne by the CCA 

by, at a minimum, describing the 

process for replenishing any liquid 

resource that a CCA may employ during 

a stress event, (5) ensure it has the 

authority and operational capacity to 

take timely action to contain losses and 

liquidity demands and continue to meet 

its obligations, (6) publicly disclose 

relevant rules and material procedures, 

including key aspects of its default rules 

and procedures, and (7) provide 

sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 

incur by participating in the CCA. The 

relevant portions of each of these new 

requirements is restated below: 

• Rule 17Ad–22(e)(3)(ii) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [m]aintain a sound risk 

management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by the [CCA], 

which . . . [i]ncludes plans for the 

recovery and orderly wind-down of the 

[CCA] necessitated by credit losses, 

liquidity shortfalls, losses from general 

business risk, or any other losses.’’ 15

• Rule 17Ad–22(e)(4)(viii) requires 

that each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [e]ffectively identify, measure, 

monitor, and manage its credit 

exposures to participants and those 

arising from its payment, clearing, and 

settlement processes, including by . . . 

[a]ddressing allocation of credit losses 

the [CCA] may face if its collateral and 

other resources are insufficient to fully 

cover its credit exposures, including the 

repayment of any funds the [CCA] may 

borrow from liquidity providers.’’ 16

• Rule 17Ad–22(e)(4)(ix) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [e]ffectively identify, measure, 

monitor, and manage its credit 

exposures to participants and those 

arising from its payment, clearing, and 

settlement processes, including by . . . 

[d]escribing the [CCA’s] process to 

replenish any financial resources it may 

use following a default or other event in 

which use of such resources is 

contemplated.’’ 17

• Rule 17Ad-22(e)(7)(ix) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 


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18 17 CFR 240.17Ad–22(e)(7)(ix). 

19 17 CFR 240.17Ad–22(e)(13). 

20 17 CFR 240.17Ad–22(e)(23)(i). 

21 17 CFR 240.17Ad–22(e)(23)(ii). 

22 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii), 

(e)(4)(ix) and (e)(7)(ix). 

23OCC is amending the Initial Filing to renumber 

proposed Rule 1009 to proposed Rule 1011 and 

updated related cross references in Rule 1111 to 

reflect this renumbering. OCC is also amending the 

Default Management Policy as submitted in the 

Initial Filing to update similar cross references. 

24Under the Initial Filing, OCC’s authority to 

conduct Partial Tear-Ups, as well as call for 

voluntary payments or to conduct Voluntary TearUps, would be conditioned in part on OCC having 

determined that, notwithstanding the availability of 

any remaining resources, OCC may not have 

sufficient resources to satisfy its obligations and 

liabilities resulting from such default. Under the 

Initial Filing, the proposed text of Rules 1009(a), 

1111(a) and 1111(b) incorrectly transcribed this 

condition to require that OCC determine that, 

notwithstanding the availability of any remaining 

resources, OCC does not have sufficient resources 

to satisfy its obligations and liabilities resulting 

from such default (emphasis added). In each such 

instance, OCC is amending the proposed text of 

Rules 1009(a) (which is being renumbered as Rule 

1011(a)), 1111(a) and 1111(b) in Exhibit 5B of the 

Initial Filing to delete the word ‘‘does’’ and insert 

in its place the word ‘‘may.’’ 

and procedures reasonably designed 

to. . . [e]ffectively measure, monitor, 

and manage the liquidity risk that arises 

in or is borne by the [CCA], including 

measuring, monitoring, and managing 

its settlement and funding flows on an 

ongoing and timely basis, and its use of 

intraday liquidity by, at a minimum, 

doing the following . . . [d]escribing the 

[CCA’s] process to replenish any liquid 

resources that the clearing agency may 

employ during a stress event.’’ 18

• Rule 17Ad–22(e)(13) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [e]nsure the covered clearing 

agency has the authority and 

operational capacity to take timely 

action to contain losses and liquidity 

demands and continue to meet its 

obligations. . .’’ 19

• Rule 17Ad–22(e)(23)(i) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [p]ublicly disclos[e] all relevant 

rules and material procedures, 

including key aspects of its default rules 

and procedures.’’ 20

• Rule 17Ad–22(e)(23)(ii) requires 

that each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed 

to. . . [p]rovid[e] sufficient information 

to enable participants to identify and 

evaluate the risks, fees, and other 

material costs they incur by 

participating in the covered clearing 

agency.’’ 21

OCC meets the definition of a CCA 

and is therefore subject to the 

requirements of the CCA rules, 

including new Rules 17Ad–22(e)(3)(ii), 

(e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), 

(e)(23)(i) and (e)(23)(ii).22

Proposed Changes 

Summary of Proposed Changes 

In order to enhance OCC’s existing 

tools to address the risks of liquidity 

shortfalls and credit losses and to 

establish new tools by which OCC could 

re-establish a matched book following a 

default, OCC is proposing to make the 

following revisions to its Rules and ByLaws: 

(1) Revise the existing assessment 

powers in Section 6 of Article VIII of 

OCC’s By-Laws, specifically to: 

(a) Establish a rolling ‘‘cooling-off 

period’’ that would be triggered by the 

payment of a proportionate charge 

against the Clearing Fund (‘‘triggering 

proportionate charge’’), during which 

period the aggregate liability of a 

Clearing Member to replenish the 

Clearing Fund (inclusive of 

assessments) would be 200% of the 

Clearing Member’s required 

contribution as of the time immediately 

preceding the triggering proportionate 

charge; 

(b) Clarify that a Clearing Member that 

chooses to terminate its membership 

status during a cooling-off period will 

not be liable for replenishment of the 

Clearing Fund immediately following 

the expiration of such cooling-off 

period, provided that the withdrawing 

Clearing Member satisfies enumerated 

criteria, including providing notice of 

such termination by no later than the 

end of the cooling-off period and by 

closing-out and/or transferring of all its 

open positions with OCC by no later 

than the last day of the cooling-off 

period; and 

(c) Delineate between the obligation of 

a Clearing Member to replenish its 

contributions to the Clearing Fund and 

its obligations to meet additional 

‘‘assessments’’ that may be levied 

following a proportionate charge to the 

Clearing Fund. 

(2) Adopt a new Rule 1011 23 that 

would provide OCC with discretionary 

authority to call for voluntary payments 

from non-defaulting Clearing Members 

in a circumstance where one or more 

Clearing Members has already defaulted 

and OCC has determined that it may not 

have sufficient resources to satisfy its 

obligations and liabilities resulting from 

such default.24 Rule 1011 also would 

establish that OCC would prioritize 

compensation of Clearing Members that 

made voluntary payments from any 

amounts recovered from the defaulted 

Clearing Members. 

(3) Adopt a new Rule 1111 that would 

provide authority to: 

(a) Allow OCC to call for voluntary 

tear-ups (‘‘Voluntary Tear-Up,’’ as 

defined below) of non-defaulting 

Clearing Member and/or customer 

positions at any time following the 

suspension or default of a Clearing 

Member, with the scope of any such 

Voluntary Tear-Ups being determined 

by the Risk Committee of OCC’s Board 

(‘‘Risk Committee’’); 

(b) Allow OCC’s Board to vote to tearup the ‘‘Remaining Open Positions’’ 

(defined below) of a defaulted Clearing 

Member, as well as any ‘‘Related Open 

Positions’’ (defined below) in a 

circumstance where OCC has attempted 

one or more auctions of such defaulted 

Clearing Member’s remaining open 

positions and OCC has determined that 

it may not have sufficient resources to 

satisfy its obligations and liabilities 

resulting from such default with the 

scope of any such tear-up (‘‘Partial TearUp’’) being determined by the Risk 

Committee; and 

(c) Allow OCC’s Board to vote to reallocate losses, costs and fees imposed 

upon holders of positions extinguished 

in a Partial Tear-Up through a special 

charge levied against remaining nondefaulting Clearing Members. 

(4) Revise the descriptions and 

authorizations in Article VIII of OCC’s 

By-Laws concerning the use of the 

Clearing Fund to reflect the discretion of 

OCC to use remaining Clearing Fund 

contributions to re-allocate losses 

imposed on non-defaulting Clearing 

Members and customers from a 

Voluntary Tear-Up or a mandatory tearup (‘‘Partial Tear-Up,’’ as defined 

below). 

Discussion of Proposed Changes 

Each of the proposed revisions to 

OCC’s Rules and By-Laws is described 

in more detail in the following subsections: 

1. Proposed Changes to OCC’s 

Assessment Powers 

a. Current Assessment Powers 

OCC’s current assessment powers are 

described in Section 6 of Article VIII of 

OCC’s By-Laws. Section 6 establishes a 

general requirement for each Clearing 

Member to promptly make good any 

deficiency in its required contribution 

to the Clearing Fund whenever an 

amount is paid out of its Clearing Fund 

contribution (whether by proportionate 


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25Under Article VIII, Section 6 of OCC’s By-Laws, 

OCC currently has authority to assess proportionate 

charges against Clearing Members’ contributions to 

the Clearing Fund in certain enumerated situations. 

For example, Section 6 generally provides that if 

the conditions regarding a Clearing Member default 

specified in subparagraphs (a)(i) through (vi) of 

Article VIII, Section 5 of OCC’s By-Laws are 

satisfied, OCC will make good resulting losses or 

expenses that are suffered by OCC by applying the 

defaulting Clearing Member’s Clearing Fund 

contribution after first applying other funds 

available to OCC in the accounts of the Clearing 

Member. If the sum of the obligations, however, 

exceeds the total Clearing Fund contribution and 

other funds of the defaulting Clearing Member 

available to OCC, then OCC will charge the amount 

of the remaining deficiency on a proportionate basis 

against all non-defaulting Clearing Members’ 

required contributions to the Clearing Fund at the 

time. Section 5(b) of Article VIII of OCC’s By-Laws 

similarly provides for proportionate charges against 

Clearing Members’ contributions to the Clearing 

Fund when certain conditions are met that involve 

a failure by a bank or a securities or commodities 

clearing organization to perform obligations to OCC 

when they are due. 

26After a cooling-off period has ended, the 

occurrence of any event described in clauses (i) 

through (iv) of Article VIII, Section 5(a) of OCC’s 

By-Laws that results in a proportionate charge 

against the Clearing Fund would trigger a new 

cooling off period, and thusly, a cap of 200% of 

each Clearing Member’s then-required contribution 

would again apply. 

27This assumes that the proportionate charge 

resulted in the Clearing Member’s actual Clearing 

Fund contribution dropping below the amount of 

its required contribution (i.e., that the Clearing 

Member did not have excess above its required 

contribution that was sufficient to cover the amount 

of the proportionate charge allocated to such 

Clearing Member). 

28Rule 707 addresses the treatment of funds in a 

Clearing Member’s X–M accounts. Rule 1001 

addresses the size of OCC’s Clearing Fund and the 

amount of a Clearing Member’s contribution. Rules 

1104 through 1107 concern the treatment of the 

portfolio of a defaulted Clearing Member. Rules 

2210 and 2211 concern the treatment of Stock Loan 

positions of a defaulted Clearing Member. 

charge or otherwise).25 In this regard, a 

Clearing Member’s obligation to 

replenish the Clearing Fund is not 

currently subject to any pre-determined 

limit. Notwithstanding the foregoing, a 

Clearing Member can limit the amount 

of its liability for replenishing the 

Clearing Fund (at an additional 100% of 

the amount of its then-required Clearing 

Fund contribution) by winding-down its 

clearing activities and terminating its 

status as a Clearing Member. Any 

Clearing Member seeking to so limit its 

liability for replenishing the Clearing 

Fund must: (i) notify OCC in writing not 

later than the fifth business day after the 

proportionate charge that it is 

terminating its status as a Clearing 

Member, (ii) not initiate any opening 

purchase or opening writing transaction, 

and, if the Clearing Member is a Market 

Loan Clearing Member or a Hedge 

Clearing Member, not initiate any Stock 

Loan transaction, through any of its 

accounts, and (iii) close out or transfer 

all of its open positions as promptly as 

practicable after giving notice to OCC. 

Thus, withdrawal from clearing 

membership is the only means by which 

a Clearing Member currently can limit 

its liability for replenishing the Clearing 

Fund. 

b. Proposed Changes to Assessment 

Powers 

OCC proposes to revise Section 6 of 

Article VIII of OCC’s By-Laws to make 

three primary modifications regarding 

its existing authority to assess 

proportionate charges against Clearing 

Members’ contributions to the Clearing 

Fund. First, the proposal introduces an 

automatic minimum fifteen calendar 

day ‘‘cooling-off’’ period that begins 

when a proportionate charge is assessed 

by OCC against Clearing Members’ 

Clearing Fund contributions. While the 

cooling-off period will continue for a 

minimum of fifteen consecutive 

calendar days, if one or more of the 

events described in clauses (i) through 

(iv) of Article VIII, Section 5(a) of OCC’s 

By-Laws occur(s) during that fifteen 

calendar day period and result in one or 

more proportionate charges against the 

Clearing Fund, the cooling-off period 

shall be extended through either (i) the 

fifteenth calendar day from the date of 

the most recent proportionate charge 

resulting from the subsequent event, or 

(ii) the twentieth day from the date of 

the proportionate charge that initiated 

the cooling-off period, whichever is 

sooner. 

During a cooling-off period, each 

Clearing Member would have its 

aggregate liability to replenish the 

Clearing Fund capped at 200% of the 

Clearing Member’s then-required 

contribution to the Clearing Fund. Once 

the cooling-off period ends each 

remaining Clearing Member would be 

required to replenish the Clearing Fund 

in the amount necessary to meet its 

then-required contribution. Once the 

cooling-off period ends, any remaining 

losses or expenses suffered by OCC as 

a result of any event described in 

clauses (i) through (iv) of Article VIII, 

Section 5(a) of OCC’s By-Laws that 

occurred during such cooling-off period 

could not be charged against the 

amounts Clearing Members have 

contributed to replenish the Clearing 

Fund upon the expiration of the 

cooling-off period.26

Second, in connection with the 

cooling-off period, the proposal would 

extend the time frame within which a 

Clearing Member may provide a 

termination notice to OCC to avoid 

liability for replenishment of the 

Clearing Fund after the cooling-off 

period and would modify the 

obligations of such a terminating 

Clearing Member for closing-out and 

transferring its remaining open 

positions. Specifically, to effectively 

terminate its status as a Clearing 

Member and not be liable for 

replenishing the Clearing Fund after the 

cooling-off period, a Clearing Member 

would be required to: (i) notify OCC in 

writing of its intent to terminate not 

later than the last day of the cooling-off 

period, (ii) not initiate any opening 

purchase or opening writing transaction, 

and, if the Clearing Member is a Market 

Loan Clearing Member or a Hedge 

Clearing Member, not initiate any Stock 

Loan transaction, through any of its 

accounts, and (iii) close-out or transfer 

all of its open positions by no later than 

the last day of the cooling-off period. If 

a Clearing Member fails to satisfy all of 

these conditions by the end of a given 

cooling-off period, it would not have 

completed all of the requirements 

necessary to terminate its status as a 

Clearing Member under Article VIII, 

Section 6 of OCC’s By-Laws and 

therefore it would remain subject to the 

obligation to replenish the Clearing 

Fund after the end of the cooling-off 

period. 

Third, the proposal would clarify the 

distinction between ‘‘replenishment’’ of 

the Clearing Fund and a Clearing 

Member’s obligation to answer 

‘‘assessments.’’ In this context, the term 

‘‘replenish’’ (and its variations) shall to 

refer to a Clearing Member’s standing 

duty, following any proportionate 

charge against the Clearing Fund, to 

return its Clearing Fund contribution to 

the amount required from such Clearing 

Member for the month in question.27

The term ‘‘assessment’’ (and its 

variations) shall refer to the amount, 

during any cooling-off period, that a 

Clearing Member would be required to 

contribute to the Clearing Fund in 

excess of the amount of the Clearing 

Member’s pre-funded required Clearing 

Fund contribution. 

Proposed Addition of Ability To 

Request Voluntary Payments 

OCC proposes to add new Rule 1011, 

which will provide a framework by 

which OCC could receive voluntary 

payments in a circumstance where a 

Clearing Member has defaulted and 

OCC has determined that, 

notwithstanding the availability of any 

remaining resources under OCC Rules 

707, 1001, 1104 through 1107, 2210 and 

2211,28 OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default. 

Under new Rule 1011, OCC will initiate 

a call for voluntary payments by issuing 


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29Notwithstanding the discretion that would be 

afforded by the text of proposed Rule 1111(c), OCC 

anticipates that the scope of voluntary tear-ups 

likely would be dictated by the cleared contracts 

remaining in the portfolio(s) of the defaulted 

Clearing Member(s). 30Since OCC does not know the identities of 

Clearing Members’ customers, OCC would depend 

on each Clearing Member to notify its customers 

with positions in scope of the Voluntary Tear-Up 

of the opportunity to participate in such tear-up. 31 In general, forced gains haircutting is a tool that 

can be more easily applied to products whose gains 

are settled at least daily, like futures through an 

exchange of variation margin, and by central 

counterparties with comparatively large daily 

settlement flows. Listed options, which constitute 

the vast majority of the contracts cleared by OCC, 

do not have daily settlement flows and any attempt 

to reduce the ‘‘unrealized gains’’ of a listed options 

contract would require the reduction of the option 

premium that is embedded within the required 

margin (such a process would effectively require 

haircutting the listed option’s initial margin). 

32OCC anticipates that it would determine the 

date on which to initiate Partial Tear-Ups by 

monitoring its remaining financial resources against 

the potential exposure of the remaining 

unauctioned positions from the portfolio(s) of the 

defaulted Clearing Member(s). 

33This change does not impact the statutory basis 

for the proposed rule change. 

34 In order to effect re-allocation of the losses, 

costs or expenses imposed upon the holders of tornup positions, OCC expects that after it has 

completed its tear-up process and re-established a 

matched book, holders of both voluntarily torn-up 

and mandatorily torn-up positions would be 

provided with a limited opportunity to re-establish 

positions in the contracts that were voluntarily or 

mandatorily extinguished. After the expiration of 

such period, OCC would seek to collect the 

information on the losses, costs or expenses that 

had been imposed on the holders of torn-up 

positions. Based on the information collected, OCC 

would determine whether it can reasonably 

determine the losses, costs and expenses 

sufficiently to re-allocate such amounts. 

a ‘‘Voluntary Payment Notice’’ inviting 

all non-defaulting Clearing Members to 

make payments to the Clearing Fund in 

addition to any amounts they are 

otherwise required to contribute 

pursuant to Rule 1001. The Voluntary 

Payment Notice would specify the terms 

applicable to any voluntary payment, 

including but not limited to, that any 

voluntary payment may not be 

withdrawn once made, that no Clearing 

Member shall be obligated to make a 

voluntary payment and that OCC shall 

retain full discretion to accept or reject 

any voluntary payment. Rule 1011 

specifies that if OCC subsequently 

recovers from the defaulted Clearing 

Member or the estate(s) of the defaulted 

Clearing Member(s), OCC would seek to 

compensate first from such recovery all 

non-defaulting Clearing Members that 

made voluntary payments (and if the 

amount recovered from the defaulted 

Clearing Member(s) is less than the 

aggregate amount of voluntary 

payments, non-defaulting Clearing 

Members that made voluntary payments 

each would receive a percentage of the 

recovery that corresponds to that 

Clearing Member’s percentage of the 

total amount of voluntary payments 

received). 

Proposed Addition of Ability To 

Conduct Voluntary Tear-Ups 

OCC proposes to add new Rule 1111, 

which, in relevant part, will establish a 

framework by which non-defaulting 

Clearing Members and non-defaulting 

customers of Clearing Members could be 

given an opportunity to voluntarily 

extinguish (i.e., voluntarily tear-up) 

their open positions at OCC in a 

circumstance where a Clearing Member 

has defaulted and OCC has determined 

that, notwithstanding the availability of 

any remaining resources under OCC 

Rules 707, 1001, 1104 through 1107, 

2210 and 2211, OCC may not have 

sufficient resources to satisfy its 

obligations and liabilities resulting from 

such default. 

While Risk Committee approval is not 

needed to commence a voluntary tearup, the Risk Committee would be 

responsible for determining the 

appropriate scope of each voluntary 

tear-up. To ensure OCC retains 

sufficient flexibility to effectively 

deploy this tool in an extreme stress 

event, proposed Rule 1111(c) is drafted 

to provide the Risk Committee with 

discretion to determine the appropriate 

scope of each voluntary tear-up.29 New 

Rule 1111(c) also would impose 

standards designed to circumscribe the 

Risk Committee’s discretion, requiring 

that any determination regarding the 

scope of a voluntary tear-up shall (i) be 

based on then-existing facts and 

circumstances, (ii) be in furtherance of 

the integrity of OCC and the stability of 

the financial system, and (iii) take into 

consideration the legitimate interests of 

Clearing Members and market 

participants. 

Once the Risk Committee has 

determined the scope of the Voluntary 

Tear-Up, OCC will initiate the call for 

voluntary tear-ups by issuing a 

‘‘Voluntary Tear-Up Notice.’’ The 

Voluntary Tear-Up Notice shall inform 

all non-defaulting Clearing Members of 

the opportunity to participate in a 

Voluntary Tear-Up.30 The Voluntary 

Tear-Up Notice would specify the terms 

applicable to any voluntary tear-up, 

including but not limited to, that no 

Clearing Member or customers of a 

Clearing Member shall be obligated to 

participate in a voluntary tear-up and 

that OCC shall retain full discretion to 

accept or reject any voluntary tear-up. 

OCC is not proposing a tear-up 

process that would require the 

imposition of ‘‘gains haircutting’’ (i.e., 

the reduction of unpaid gains) on a 

portion of OCC’s cleared contracts.31

Instead, OCC has determined that its 

tear-up process—for both Voluntary 

Tear-Ups as well as Partial Tear-Ups— 

should be initiated on a date sufficiently 

in advance of the exhaustion of OCC’s 

financial resources such that OCC 

would be expected to have adequate 

remaining resources to cover the 

amount it must pay to extinguish the 

positions of Clearing Members and 

customers without haircutting gains.32

In OCC’s proposed tear-up process, 

the holders of torn-up positions would 

be assigned a Tear-Up Price and OCC 

would draw on its remaining financial 

resources in order to extinguish the 

torn-up positions at the assigned TearUp Price without forcing a reduction in 

the amount of unpaid value of such 

positions. OCC is amending the Initial 

Filing to clarify that while OCC does not 

intend, in the first instance, for its tearup process to serve as a means of loss 

allocation, circumstances may arise 

such that, despite best efforts, OCC has 

inadequate remaining financial 

resources to extinguish torn-up 

positions at their assigned Tear-Up Price 

without forcing a reduction in the 

amount of unpaid value of such 

positions (e.g., despite best efforts, 

market movements not accounted for by 

monitoring, additional Clearing Member 

defaults occur immediately preceding a 

tear-up). In such circumstances, despite 

best efforts, OCC would use its partial 

tear-up process as a means of loss 

allocation.33

The proposed changes would provide 

OCC with two separate and nonexclusive means of equitably reallocating the losses, costs or expenses 

imposed upon the holders of torn-up 

positions as a result of the tear-up(s). 

First, the proposed changes to Article 

VIII would provide OCC discretion to 

use remaining Clearing Fund 

contributions to re-allocate losses 

imposed on non-defaulting Clearing 

Members and customers from such tearup(s). Second, Rule 1111(a) would 

provide that if OCC subsequently 

recovers from the defaulted Clearing 

Member or the estate(s) of the defaulted 

Clearing Member(s) and the amount of 

such recovery exceeds the amount OCC 

received in voluntary payments, then 

non-defaulting Clearing Members and 

non-defaulting customers that 

voluntarily tore-up open positions and 

incurred losses from such tear-ups 

would be repaid from the amount of the 

recovery in excess of the amount OCC 

received in voluntary payments.34 If the 

amount recovered is less than the 

aggregate amount of Voluntary Tear-Up, 


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35Since OCC does not know the identities of 

Clearing Members’ customers, OCC would depend 

on each Clearing Member to notify its customers 

with positions in scope of the Partial Tear-Up of the 

possibility of tear-up. 

36For example, OCC has observed certain rare 

circumstances in which a closing price for an 

underlying security of an option may be stale or 

unavailable. A stale or unavailable closing price 

could be the result of a halt on trading in the 

underlying security, or a corporate action resulting 

in a cash-out or conversion of the underlying 

security (but that has not yet been finalized), or the 

result of an ADR whose underlying security is being 

impacted by certain provisions under foreign laws. 

OCC would consider the presence of these factors 

on its end-of-day prices in determining whether use 

of the discretion that would be afforded under 

proposed Rule 1111(f) might be warranted. 

37 In relevant part, subpart (c) reads as follows: 

‘‘In determining a close-out amount, the 

Corporation may consider any information that it 

deems relevant, including, but not limited to, any 

of the following: (1) Prices for underlying interests 

in recent transactions, as reported by the market or 

markets for such interests; (2) quotations from 

leading dealers in the underlying interest, setting 

forth the price (which may be a dealing price or an 

indicative price) that the quoting dealer would 

charge or pay for a specified quantity of the 

underlying interest; (3) relevant historical and 

current market data for the relevant market, 

provided by reputable outside sources or generated 

internally; and (4) values derived from theoretical 

pricing models using available prices for the 

underlying interest or a related interest and other 

relevant data. Amounts stated in a currency other 

than U.S. Dollars shall be converted to U.S. Dollars 

at the current rate of exchange, as determined by 

the Corporation. A position having a positive closeout value shall be an ‘asset position’ and a position 

having a negative close-out value shall be a ‘liability 

position.’ ’’ 

38OCC is amending the Initial Filing to reflect 

that after further evaluation of its proposed recovery 

tools and the proposed tear-up process, OCC does 

not believe there would be a need to assign or 

transfer any hedging transactions established with 

relation to tear-up positions. OCC is therefore 

amending the Initial Filing to remove text in 

proposed Rule 1111(e) concerning proposed 

authority for OCC to offer to assign or transfer any 

hedging transactions related to Remaining Open 

Positions with related Tear-Up Positions. This 

change does not impact the statutory basis for the 

proposed rule change. 

39Since, as stated in the Initial Filing, the 

objective of Partial Tear-Ups is to extinguish the 

Remaining Open Positions cleared by the defaulted 

Clearing Member(s) or customer of such defaulted 

Clearing Member(s) (emphasis added), OCC does 

not believe there would be a need to designate TearUp Positions to the non-defaulted customers of a 

defaulted Clearing Member. OCC is therefore 

amending the Initial Filing to remove references to 

non-defaulted customers of defaulted Clearing 

Members. 

40OCC is amending the Initial Filing to clarify 

that a non-defaulted Clearing Member would be 

required to allocate the assigned Tear-Up Positions 

on a pro rata basis across those customers that have 

open positions in such Cleared Contract or Cleared 

Security in such account, and for any listed option 

positions being extinguished, allocation across 

customer accounts should occur in accordance with 

such Clearing Member’s procedures for allocating 

exercises and assignments. This change does not 

impact the statutory basis for the proposed rule 

change. 

each non-defaulting Clearing Member 

and non-defaulting customer that 

incurred losses from voluntarily torn-up 

positions would be repaid in an amount 

proportionate to the percentage of its 

total amount of losses, costs and fees 

imposed on Clearing Members or 

customers as a result of the Voluntary 

Tear-Ups. 

With respect to Voluntary Tear-Ups, 

new Rule 1111(h) would clarify that no 

action or omission by OCC pursuant to 

and in accordance Rule 1111 shall 

constitute a default by OCC. 

Proposed Addition of Ability To 

Conduct Partial Tear-Ups 

OCC proposes to add new Rule 1111, 

which, in relevant part, will provide the 

Board with discretion to extinguish the 

remaining open positions of any 

defaulted Clearing Member or customer 

of such defaulted Clearing Member(s) 

(such positions, ‘‘Remaining Open 

Positions’’), as well as any related open 

positions as necessary to mitigate 

further disruptions to the markets 

affected by the Remaining Open 

Positions (such positions, ‘‘Related 

Open Positions’’), in a circumstance 

where a Clearing Member has defaulted 

and OCC has determined that, 

notwithstanding the availability of any 

remaining resources under OCC Rules 

707, 1001, 1104 through 1107, 2210 and 

2211, OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default 

(such tear-ups hereinafter collectively 

referred to as ‘‘Partial Tear-Ups’’). Like 

the determination for Voluntary TearUps, the Risk Committee shall 

determine the appropriate scope of each 

Partial Tear-Up and such determination 

shall (i) be based on then-existing facts 

and circumstances, (ii) be in furtherance 

of the integrity of OCC and the stability 

of the financial system, and (iii) take 

into consideration the legitimate 

interests of Clearing Members and 

market participants. Once the Risk 

Committee has determined the scope of 

the Partial Tear-Up, OCC will initiate 

the Partial Tear-Up process by issuing a 

‘‘Partial Tear-Up Notice.’’ The Partial 

Tear-Up Notice shall (i) identify the 

Remaining Open Positions and Related 

Open Positions designated for tear-up, 

(ii) identify the open positions of nondefaulting Clearing Members and nondefaulting customers that will be subject 

to Partial Tear-Up (such positions, 

‘‘Tear-Up Positions’’), (iii) specify the 

termination price (‘‘Partial Tear-Up 

Price’’) for each position to be torn-up, 

and (iv) list the date and time as of 

which the Partial Tear-Up will occur.35

With regard to the date and time of a 

Partial Tear-Up, Rule 1111(d) specifies 

that the Risk Committee shall set the 

date and time. With regard to the Partial 

Tear-Up Price, OCC anticipates that it is 

likely to use the last established end-ofday settlement price, in accordance with 

its existing practices concerning pricing 

and valuation. However, given that it is 

not possible to know in advance the 

precise circumstances that would cause 

OCC to conduct a tear-up, Rule 1111(f) 

has been drafted to allow OCC to 

exercise reasonable discretion, if 

necessary, in establishing the Partial 

Tear-Up Price by some means other than 

its existing practices concerning pricing 

and valuation.36 Specifically, Rule 

1111(f) would require that OCC, in 

exercising any such discretion, would 

act in good faith and in a commercially 

reasonable manner to adopt methods of 

valuation expected to produce 

reasonably accurate substitutes for the 

values that would have been obtained 

from the relevant market if it were 

operating normally, including but not 

limited to the use of pricing models that 

use the market price of the underlying 

interest or the market prices of its 

components. Rule 1111(f) further 

specifies that OCC may consider the 

same information set forth in subpart (c) 

of Section 27, Article VI of OCC’s ByLaws.37

The scope of any Partial Tear-Up will 

be determined in accordance with Rule 

1111(e).38 With respect to the 

extinguishment of Remaining Open 

Positions, OCC will designate Tear-Up 

Positions in identical Cleared Contracts 

and Cleared Securities on the opposite 

side of the market and in an aggregate 

amount equal to that of the Remaining 

Open Positions. OCC will only 

designate Tear-Up Positions in the 

accounts of non-defaulting Clearing 

Members (inclusive of such Clearing 

Members’ customer accounts) with an 

open position in the applicable Cleared 

Contract or Cleared Security.39 Tear-Up 

Positions shall be designated and 

applied by OCC on a pro rata basis 

across all the identical positions in 

Cleared Contracts and Cleared 

Securities on the opposite side of the 

market in the accounts of non-defaulted 

Clearing Members and their 

customers.40

Rule 1111(e)(iii) provides that every 

Partial Tear-Up position is 

automatically terminated upon and with 

effect from the Partial Tear-Up Time, 

without the need for any further step by 

any party to such Cleared Contract or 

Cleared Security, and that upon 

termination, either OCC or the relevant 

Clearing Member (as the case may be) 

shall be obligated to pay the other the 

applicable Partial Tear-Up Price. Rule 


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41OCC is amending the Initial Filing and the 

proposed text of Rule 1111(e)(iii) to clarify that if, 

in certain circumstances discussed above (see fn. 27 

and associated text), OCC, in its discretion, 

determines that its remaining resources are 

inadequate to pay the applicable Partial Tear-Up 

Price for each position being extinguished in the 

Partial Tear-Up, OCC shall be obligated to pay each 

relevant Clearing Member a pro rata amount of the 

applicable Partial Tear-Up Price based on OCC’s 

remaining resources, and the relevant Clearing 

Member shall have a claim against the Corporation 

for the value of the difference between the pro rata 

amount received and the Partial Tear-Up Price. This 

change does not impact the statutory basis for the 

proposed rule change. 

42For the avoidance of doubt, the special charge 

would be distinct and separate from a Clearing 

Member’s obligation to satisfy Clearing Fund 

assessments, and therefore, would not be subject to 

the aforementioned assessment cap in the amount 

of 200% of a Clearing Member’s then-required 

contribution to the Clearing Fund. 

43 15 U.S.C. 78q–1(b)(3)(F). 

44 Id. 

45OCC notes that the very nature of an extreme 

stress and unprecedented loss event means that its 

impact is difficult to predict and quantify in 

advance. 

46Absent a means of re-allocating the potential 

losses, costs and fees imposed upon holders of 

positions extinguished during tear-ups, the holders 

of such positions would be left to individually 

address such losses, costs and fees. 

47 15 U.S.C. 78q–1(b)(3)(F). 

48 Id. 

49 Id. 

1111(e)(iii) further provides that the 

corresponding open position shall be 

deemed terminated at the Partial TearUp Price.41

Rule 1111(g) provides that to the 

extent losses imposed upon nondefaulting Clearing Members and nondefaulting customers resulting from a 

Partial Tear-Up can reasonably be 

determined, the Board may elect to reallocate such losses among all nondefaulting Clearing Members through a 

special charge to all non-defaulting 

Clearing Members in an amount 

corresponding to each such nondefaulting Clearing Member’s 

proportionate share of the variable 

amount of the Clearing Fund at the time 

such Partial Tear-Up is conducted.42

With respect to Partial Tear-Ups, new 

Rule 1111(h) would clarify that no 

action or omission by OCC pursuant to 

and in accordance Rule 1111 shall 

constitute a default by OCC. 

2. Statutory Basis 

Section 17A(b)(3)(F) of the Securities 

Exchange Act of 1934 (‘‘Act’’),43

requires, among other things, that the 

rules of a clearing agency be designed to 

foster cooperation and coordination 

with persons engaged in the clearance 

and settlement of securities 

transactions, to remove impediments to 

and perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions, and, in general, to protect 

investors and the public interest. OCC 

believes that the proposed rule change 

is consistent with the requirements of 

Section 17A(b)(3)(F) of the Act 44 and 

the rules thereunder applicable to OCC 

for the reasons set forth below. 

As stated above, each of the changes 

is designed to provide OCC with tools 

to address the risks OCC might confront 

in a recovery and orderly wind-down 

scenario. In this regard, the proposed 

changes are designed to further address 

the risks of liquidity shortfalls and 

credit losses resulting from a Clearing 

Member default or certain other loss 

events and to establish tools to enable 

OCC to re-establish a matched book and 

limit OCC’s potential exposure to losses 

from a Clearing Member default, in each 

case as might result from an 

unprecedented loss scenario that 

exceeds OCC’s standard risk 

management and default management 

procedures. OCC’s process in crafting 

the proposed changes was informed by 

published guidance from OCC’s primary 

regulators (the Commission and the 

Commodity Futures Trading 

Commission), the publications of key 

international organizations (including 

the Bank for International Settlements, 

the International Organization of 

Securities Commissions and the 

Financial Stability Board) and the 

publications of key industry trade 

organizations. OCC’s proposal was 

further informed by conversations with, 

among others, OCC’s Board, OCC’s Risk 

Committee, Clearing Members and 

market participants. 

Informed by these perspectives, OCC 

has crafted the proposed changes with 

the aim of enhancing its ability to 

address an unprecedented loss event but 

also, to the extent possible, providing a 

reasonable amount of certainty to 

Clearing Members, customers and other 

stakeholders about the potential 

consequences of such an event and the 

resources and tools that would be 

expected to be available to OCC in 

support of its clearing operations.45

Accordingly, the proposed changes 

should leave Clearing Members, 

customers and other stakeholders in a 

position to better evaluate the risks and 

benefits of clearing in order to facilitate 

their own risk management, and to the 

extent applicable, their own regulatory 

and capital considerations. The 

proposed changes also seek to avoid a 

result that would force only particular 

clearing participants to shoulder certain 

losses in an extreme stress scenario (i.e., 

holders of positions extinguished in 

Partial Tear-Ups),46 and instead leaves 

OCC and its Board with discretionary 

tools that could provide a more 

equitable method of allocating the losses 

from such an event more broadly, 

consistent with the general principle of 

mutualized loss that upon which central 

clearing rests. In this regard, OCC 

believes the proposed changes foster 

cooperation and coordination with 

participants in the clearing system, 

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

the Act.47

As stated above, the proposed changes 

are designed to enable OCC to further 

address the risks of liquidity shortfalls 

and credit losses resulting from a 

Clearing Member default or certain 

other loss events and to re-establish a 

matched book and limit OCC’s potential 

exposure to losses from a Clearing 

Member default, in each case as might 

result from an unprecedented loss 

scenario that exceeds OCC’s standard 

risk management and default 

management procedures. OCC believes 

that the proposed changes will facilitate 

its ability to fully allocate, and 

ultimately extinguish, the loss so that it 

has a better opportunity of withstanding 

an extreme stress scenario without 

sacrificing its viability as a going 

concern or its ability to continue to 

provide its critical clearing services. In 

this regard, OCC believes that the 

proposed changes remove impediments 

to and perfect the mechanism of a 

national system for the prompt and 

accurate clearance and settlement of 

securities transactions, consistent with 

Section 17A(b)(3)(F) of the Act.48

The proposed changes are designed to 

enhance the stability of the clearing 

system generally and are aimed at 

ensuring that OCC has adequate tools 

and resources to better protect market 

participants from the risks of extreme 

stress scenarios and unprecedented loss 

events. In this regard, OCC believes that 

the proposed changes are reasonably 

designed to protect investors and the 

public interest, consistent with Section 

17A(b)(3)(F) of the Act.49

The proposed changes also are 

designed to further OCC’s compliance, 

in whole or in part, with the provisions 

of the Commission’s rules discussed 

immediately below: 

Recovery and Orderly Wind-Down 

In relevant part, Rule 17Ad– 

22(e)(3)(ii) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . plan[] for 

the recovery and orderly wind-down of 

the [CCA] necessitated by credit losses, 

liquidity shortfalls, losses from general 


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50 17 CFR 240.17Ad–22(e)(3)(ii). 

51 Indeed, the OCC’s separately filed recovery and 

orderly wind-down plan identifies OCC’s 

assessment powers, ability to call for voluntary 

payments, ability to call for Voluntary Tear-Ups and 

ability to impose Partial Tear-Ups among its 

‘‘Recovery Tools.’’ OCC has filed a proposed rule 

change with the Commission in connection with 

this proposal. See Securities Exchange Act Release 

No. 82352 (December 19, 2017), 82 FR 61072 

(December 26, 2017) (SR–OCC–2017–021). On 

March 22, 2018, the Commission instituted 

proceedings to determine whether to approve or 

disapprove the proposed rule change. See Securities 

Exchange Act Release No. 82927 (March 22, 2018), 

83 FR 13176 (March 27, 2018) (SR–OCC–2017–021). 

52 17 CFR 240.17Ad–22(e)(3)(ii). 

53 17 CFR 240.17Ad–22(e)(3)(ii). 

54 17 CFR 240.17Ad–22(e)(v)(viii). 

55Rule 707 addresses the treatment of funds in a 

Clearing Member’s X–M accounts. Rule 1001 

addresses the size of OCC’s Clearing Fund and the 

amount of a Clearing Member’s contribution. Rules 

1104 through 1107 concern the treatment of the 

portfolio of a defaulted Clearing Member. Rules 

2210 and 2211 concern the treatment of Stock Loan 

positions of a defaulted Clearing Member. 

56Rule 1111(g), which would provide the Board 

authority to equitably re-allocate losses, costs and 

fees directly imposed as a result of a Partial TearUp among all non-defaulting Clearing Members 

through a special charge, would serve as a 

discretionary tool to redistribute the credit losses 

allocated through Partial Tear-Up. 

57 17 CFR 240.17Ad–22(e)(v)(viii). 

58 17 CFR 240.17Ad–22(e)(4)(ix). 

59Under the existing approach, it is less certain 

from OCC’s standpoint regarding whether Clearing 

Members would reasonably be able to cap their 

liability to proportionate charges within five 

business days. 

business risk, or any other losses.’’ 50 As 

stated above, each of the proposed 

changes is designed to provide OCC 

with tools to address the risks OCC 

might confront in a recovery and orderly 

wind-down scenario.51 Consistent with 

the requirements of Rule 17Ad– 

22(e)(3)(ii), the proposed tools would 

enable OCC to better address the risks 

of liquidity shortfalls and credit losses 

resulting from a Clearing Member 

default or certain other loss events and, 

if necessary, to ultimately re-establish a 

matched book in a recovery or orderly 

wind-down scenario.52 In this context, 

the proposed changes serve as a critical 

component of OCC’s recovery and 

orderly wind-down plan. As a result, in 

OCC’s view, the proposed changes are 

consistent with the requirements of Rule 

17Ad–22(e)(3)(ii) as to the recovery and 

orderly wind-down plan.53

Allocation of Credit Losses Above 

Available Resources 

In relevant part, Rule 17Ad– 

22(e)(4)(viii) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [a]ddress[

] allocation of credit losses the [CCA] 

may face if its collateral and other 

resources are insufficient to fully cover 

its credit exposures . . .’’ 54 The 

proposed changes would provide OCC 

with three distinct tools that could be 

used to allocate any credit losses OCC 

may face in excess of collateral and 

other resources available to OCC. First, 

new Rule 1011 would provide a 

framework by which OCC could receive 

voluntary payments in a circumstance 

where a Clearing Member has defaulted 

and OCC has determined that, 

notwithstanding the availability of any 

remaining resources under OCC Rules 

707, 1001, 1104 through 1107, 2210 and 

2211,55 OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default. 

Second, new Rule 1111 would establish 

a framework by which non-defaulting 

Clearing Members and non-defaulting 

customers of Clearing Members could be 

given an opportunity to participate in 

Voluntarily Tear-Ups in a circumstance 

where a Clearing Member has defaulted 

and OCC has determined that, 

notwithstanding the availability of any 

remaining resources under OCC Rules 

707, 1001, 1104 through 1107, 2210 and 

2211, OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default. 

Finally, new Rule 1111 also would 

provide the Board with discretion to 

mandatorily tear-up Remaining Open 

Positions and Related Open Positions, 

in a circumstance where a Clearing 

Member has defaulted and OCC has 

determined that, notwithstanding the 

availability of any remaining resources 

under OCC Rules 707, 1001, 1104 

through 1107, 2210 and 2211, OCC may 

not have sufficient resources to satisfy 

its obligations and liabilities resulting 

from such default.56 In OCC’s view, 

each of these tools could be deployed by 

OCC, if necessary, to allocate credit 

losses in excess of the collateral and 

other resources available to OCC, in 

accordance with Rule 17Ad– 

22(e)(4)(viii).57

Replenishment of Financial Resources 

Following a Default 

In relevant part, Rule 17Ad– 

22(e)(4)(ix) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [d]escrib[e] 

the [CCA’s] process to replenish any 

financial resources it may use following 

a default or other event in which use of 

such resources is contemplated.’’ 58

OCC’s Clearing Members have a 

standing obligation to replenish the 

Clearing Fund following any 

proportionate charge. The proposed 

changes would establish a rolling 

cooling-off period, triggered by the 

payment of a proportionate charge 

against the Clearing Fund, during which 

period the aggregate liability of a 

Clearing Member to replenish the 

Clearing Fund (inclusive of 

assessments) would be 200% of the 

Clearing Member’s required 

contribution as of the time immediately 

preceding the triggering proportionate 

charge. Compared to the current 

requirement under which a Clearing 

Member may cap its liability to 

proportionate charges at an additional 

100% of its then-required contribution, 

a Clearing Member would instead be 

permitted to cap its liability for 

proportionate charges at an additional 

200% of its then-required Clearing Fund 

contribution. 

OCC believes that the proposed 

approach improves predictability for 

OCC and for Clearing Members 

regarding the size of Clearing Fund 

contributions that are likely to be 

subject to assessments for proportionate 

charges. Additionally, replacing the five 

business day withdrawal period with 

the withdrawal period commensurate 

with the cooling-off period (which, as 

proposed would be a minimum of 

fifteen calendar days) would give 

Clearing Members a more reasonable 

period in which to meet the wind-down 

and termination requirements necessary 

to cap their liability. OCC believes that 

this would afford them greater certainty 

regarding their maximum liability with 

respect to the Clearing Fund during 

extreme stress events, which in turn, 

facilitates Clearing Members’ 

management of their own risk 

management, and to the extent 

applicable, regulatory capital 

considerations. And OCC believes this 

increased predictability would also be 

beneficial to OCC by helping it to more 

reliably understand the amount of 

Clearing Fund contributions that will 

likely be available to it after a 

proportionate charge is assessed.59

OCC believes that the relative 

certainty provided by the proposed 

cooling-off period and 200% cap on 

assessments ultimately could reduce the 

risks of successive or ‘‘cascading’’ 

defaults, in which the financial 

demands on remaining non-defaulting 

Clearing Members to continually 

replenish OCC’s Clearing Fund (and 

similar guaranty funds at other CCPs to 

which such Clearing Members might 

belong) have the effect of further 

weakening such Clearing Members to 

the point of default. In this regard, the 

proposed changes are designed to 

provide OCC, Clearing Members and 

other stakeholders with sufficient time 

to manage the ongoing default(s) 


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Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 37847 

60Rule 603 provides that ‘‘[t]he Risk Committee 

may, from time to time, increase the amount of 

margin which may be required in respect of a 

cleared contract, open short position or exercised 

contract if, in its discretion, it determines that such 

increase is advisable for the protection of [OCC], the 

Clearing Members or the general public.’’ 

61OCC initially considered a fixed 15-calendar 

day cooling-off period; however, OCC concluded 

that a fixed 15-calendar day cooling-off period may 

increase the risks of successive or cascading 

Clearing Member defaults and may perversely 

incentivize Clearing Members to seek to withdraw 

from clearing membership. Through conversations 

with Clearing Members, OCC believes that these 

potentially disruptive consequences are mitigated 

by the proposed rolling cooling-off period. 

62 17 CFR 240.17Ad–22(e)(4)(ix). 

63 17 CFR 240.17Ad–22(e)(7)(ix). 

64 17 CFR 240.17Ad–22(e)(7)(ix). 

65 17 CFR 240.17Ad–22(e)(13). 

66 17 CFR 240.17Ad–22(e)(13). 

67 17 CFR 240.17Ad–22(e)(23)(i). 

without further aggravating the extreme 

stresses facing market participants. 

OCC recognizes that the proposed 

changes would limit the maximum 

amount of Clearing Fund resources that 

could be available to OCC in an extreme 

stress scenario, which introduces the 

possibility, however remote, that the 

proposed 200% cap ultimately could be 

reached. If during any cooling-off period 

the amount of aggregate proportionate 

charges against the Clearing Fund 

approaches the 200% cap, the amount 

remaining in the Clearing Fund may no 

longer be sufficient to comply with the 

applicable minimum regulatory 

financial resources requirements in the 

CCAs. In any such event, OCC’s existing 

authority under Rule 603 would permit 

OCC to call on participants for 

additional initial margin, which could 

ensure that OCC’s minimum financial 

resources remain in excess of applicable 

CCA requirements.60 OCC recognizes 

that the imposition of increased margin 

requirements could have an immediate 

pro-cyclical impact on participants (and 

consequential impacts on the broader 

financial system) that is potentially 

greater than the impact of replenishing 

the Clearing Fund. These risks would be 

limited to a specific extreme stress event 

and could be mitigated by certain 

factors. First, OCC, in coordination with 

its regulators, would carefully evaluate 

any potential increase in the context of 

then-existing facts and circumstances. 

Second, during the cooling-off period, 

Clearing Members and their customers 

will have the opportunity to reduce or 

rebalance their respective portfolios in 

order to mitigate their exposures to 

stress losses and initial margin 

increases. Finally, since initial margin is 

not designed to be subject to mutualized 

loss, the risk of loss faced by Clearing 

Members for amounts posted as 

additional margin would be 

substantially less than for 

replenishments of the Clearing Fund. 

Given the products cleared by OCC 

and the composition of its clearing 

membership, OCC has determined that 

a minimum 15-calendar day cooling-off 

period, rolling up to a maximum of 20 

calendar days, is likely to be a sufficient 

amount of time for OCC to manage the 

ongoing default(s) and take necessary 

steps in furtherance of stabilizing the 

clearing system. Further, through 

conversations with Clearing Members, 

OCC believes that the proposed coolingoff period is likely to be a sufficient 

amount for Clearing Members (and their 

customers) to orderly reduce or 

rebalance their positions, in an attempt 

to mitigate stress losses and exposure to 

potential initial margin increases as they 

navigate the stress event. Through 

conversations with Clearing Members, 

OCC also believes that the proposed 

cooling-off period is likely to be a 

sufficient amount for certain Clearing 

Members to orderly close-out their 

positions and transfer customer 

positions as they withdraw from 

clearing membership. OCC believes the 

proposed cooling-off period, coupled 

with the other proposed changes to 

OCC’s assessment powers, is likely to 

provide Clearing Members with an 

adequate measure of stability and 

predictability as to the potential use of 

Clearing Fund resources, which OCC 

believes removes the existing incentive 

for Clearing Members to withdraw 

following a proportionate charge.61

In light of the foregoing, OCC believes 

that the proposed changes would 

enhance and strengthen its process to 

replenish the Clearing Fund following a 

default or other event in which use of 

the Clearing Fund is contemplated, in 

accordance with Rule 17Ad– 

22(e)(4)(ix).62

Replenishment of Liquid Resources 

In relevant part, Rule 17Ad– 

22(e)(7)(ix) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [d]escrib[e] 

the [CCA’s] process to replenish any 

liquid resources that the clearing agency 

may employ during a stress event.’’ 63

Since the use any part of the cash 

portion of OCC’s Clearing Fund would 

constitute a depletion of one of OCC’s 

liquid resources, OCC’s assessment 

power, discussed above, is the primary 

means of replenishing the Clearing 

Fund cash that OCC used to address the 

stress event. For the same reasons stated 

above, OCC believes that the proposed 

changes enhance and strengthen its 

process to replenish the Clearing Fund, 

as necessary, following a default or 

other stress event in which the Clearing 

Fund is used, and therefore, OCC views 

the proposed changes as consistent with 

Rule 17Ad–22(e)(7)(ix).64

Timely Action to Contain Losses 

In relevant part, Rule 17Ad–22(e)(13) 

requires that each CCA ‘‘establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to . . . [e]nsure the 

[CCA] has the authority and operational 

capacity to take timely action to contain 

losses and liquidity demands and 

continue to meet its obligations . . .’’ 65

The proposed changes would provide 

OCC with the authority to call for 

Voluntary Tear-Ups and OCC’s Board 

with the discretion to impose Partial 

Tear-Ups, which would provide OCC 

with authority necessary to extinguish 

certain losses (and attendant liquidity 

demands) thereby potentially enabling 

OCC to continue to meet its remaining 

obligations to participants. As designed, 

Voluntary Tear-Ups and Partial TearUps would be initiated on a date 

sufficiently in advance of the 

exhaustion of OCC’s financial resources 

such that OCC is expected to have 

adequate resources remaining to cover 

the amount it must pay to extinguish the 

positions of Clearing Members and 

customers without haircutting gains. 

Accordingly, OCC believes that its 

authority and capacity to conduct a 

Partial Tear-Up should be timely, 

relative to the adequacy of OCC’s 

remaining financial resources. Finally, 

OCC believes it has the operational and 

systems capacity sufficient to support 

the proposed changes, and OCC’s 

policies and procedures will be updated 

accordingly to reflect the existence of 

these new tools. As a result, OCC 

believes that the proposed changes 

conform to the relevant requirements in 

Rule 17Ad–22(e)(13).66

Public Disclosure of Key Aspects of 

Default Rules 

In relevant part, Rule 17Ad– 

22(e)(23)(i) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [p]ublicly 

disclos[e] all relevant rules and material 

procedures, including key aspects of its 

default rules and procedures.’’ 67 As 

stated above, each of the tools discussed 

herein are contemplated to be deployed 

by OCC if an extreme stress event has 

placed OCC into a recovery or orderly 

wind-down scenario, and therefore, the 

tools discussed herein constitute key 

aspects of OCC’s default rules. By 


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37848 Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 

68 17 CFR 240.17Ad–22(e)(13). 

69 17 CFR 240.17Ad–22(e)(23)(ii). 

70 17 CFR 240.17Ad–22(e)(23)(ii). 

71 15 U.S.C. 78q–1(b)(3)(I). 

incorporating the proposed changes into 

OCC’s Rules and By-Laws, as further 

supplemented by the discussion in 

OCC’s public rule filing, OCC believes 

that proposed changes would conform 

to the relevant requirements in Rule 

17Ad–22(e)(23)(i).68

Sufficient Information Regarding the 

Risks, Fees and Costs of Clearing 

In relevant part, Rule 17Ad– 

22(e)(23)(ii) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [p]rovid[e] 

sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 

incur by participating in the covered 

clearing agency.’’ 69 The proposed 

changes would clearly explain to 

Clearing Members and market 

participants that an extreme stress 

scenario could result in the use—and 

theoretically the exhaustion—of OCC’s 

financial resources, inclusive of OCC’s 

proposed assessment powers. Proposed 

changes to Section 6, Article VIII of 

OCC’s By-Laws would explain Clearing 

Members’ replenishment obligation and 

liability for assessments. The proposed 

changes also would clearly explain, 

through proposed Rules 1011 and 1111, 

that as OCC nears the exhaustion of its 

assessment powers, Clearing Members 

may be asked for voluntary payments 

and, if necessary, Clearing Members and 

customers may be asked to participate 

in a Voluntary Tear-Up and/or subject to 

a Partial Tear-Up. Proposed Rules 

1011(b) and 1111(a)(ii) also would make 

clear that Clearing Members that made 

voluntary payments and Clearing 

Members and customers whose 

tendered positions were extinguished in 

the Voluntary Tear-Up would be 

prioritized in the distribution of any 

recovery from the defaulted Clearing 

Member(s). Proposed changes to Article 

VIII would clarify that the Clearing 

Fund contributions remaining after OCC 

has conducted a Voluntary Tear-Up or 

Partial Tear-Up could be used to 

compensate the non-defaulting Clearing 

Members and non-defaulting customers 

for the losses, costs or fees imposed 

upon them as a result of such Voluntary 

Tear-Up or Partial Tear-Up. Proposed 

Rule 1111(g) would make clear that, 

following a Partial Tear-Up, OCC’s 

Board may seek to equitably re-allocate 

losses, costs and fees directly imposed 

as a result of a Partial Tear-Up among 

all non-defaulting Clearing Members 

through a special charge. By 

incorporating the proposed changes into 

OCC’s Rules and By-Laws, as further 

supplemented by the discussion in 

OCC’s public rule filing, OCC believes 

that is has provided sufficient 

information to enable participants to 

identify and evaluate the risks, fees, and 

other material costs they could incur by 

participating OCC, consistent with the 

requirements in Rule 17Ad– 

22(e)(23)(ii).70

(B) Clearing Agency’s Statement on 

Burden on Competition 

Section 17A(b)(3)(I) of the Act 71

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 the proposed rule change would 

have any impact or impose any burden 

on competition. The primary purpose of 

the proposed changes is to make certain 

revisions to OCC’s Rules and By-Laws 

Laws that are designed to enhance 

OCC’s existing tools to address the risks 

of liquidity shortfalls and credit losses 

and to establish tools by which OCC 

could re-establish a matched book 

following a default. As explained above, 

each of the tools proposed herein is 

contemplated to be deployed by OCC in 

an extreme stress event that has placed 

OCC into a recovery or orderly winddown scenario. The proposed rule 

change is intended to provide Clearing 

Members, market participants and other 

stakeholders with greater certainty as to 

their liabilities and potential exposure 

to OCC in the event of an 

unprecedented loss scenario. OCC does 

not believe that the proposed changes 

would discriminatorily impact any 

Clearing Member’s access to OCC’s 

services or unnecessarily disadvantage 

or favor any particular user in 

relationship to another user. OCC 

recognizes that the nature of a Partial 

Tear-Up means that only particular 

Clearing Members and market 

participants holding certain positions 

may be impacted; however, the risk of 

Partial Tear-Ups is extremely remote, 

and even then, the proposed changes 

seek to provide means of equitably reallocating the losses, costs and fees 

imposed by Voluntary Tear-Up or 

Partial Tear-Up. Therefore, OCC 

believes that the proposed changes 

would not have any impact or impose 

any 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 

the 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 Commissions 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–2017–020 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–OCC–2017–020. 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 


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Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 37849 

72 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See MIAX Regulatory Circular 2016–43, October 

20, 2016. 

4See Securities Exchange Act Release No. 79072 

(October 7, 2016), 81 FR 71131 (October 14, 2016) 

(SR–MIAX–2016–26). 

5The term ‘‘System’’ means the automated 

trading system used by the Exchange for the trading 

of securities. See Exchange Rule 100. 

6The term ‘‘Member’’ means an individual or 

organization approved to exercise the trading rights 

associated with a Trading Permit. Members are 

deemed ‘‘members’’ under the Exchange Act. See 

Exchange Rule 100. 

7See supra note 4. 

8A ‘‘Vertical Spread’’ is a complex strategy 

consisting of the purchase of one call (put) option 

and the sale of another call (put) option overlying 

the same security that have the same expiration but 

different strike prices. See Exchange Rule 518.05(a). 

9A ‘‘Calendar Spread’’ is a complex strategy 

consisting of the purchase of one call (put) option 

and the sale of another call (put) option overlying 

the same security that have different expirations but 

the same strike price. See Exchange Rule 518.05(b). 

10See Exchange Rule 518.05(a). 

11See Exchange Rule 518.05(b). 

12See Exchange Rule 518.05(c). 

13The standard stock deliverable is 100 shares. 

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 Section, 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/about/ 

publications/bylaws.jsp. 

All comments received will be posted 

without change. Persons submitting 

comments are cautioned that we do not 

redact or edit personal or identifying 

information from comment submissions. 

You should submit only information 

that you wish to make available 

publicly. 

All submissions should refer to File 

Number SR–OCC–2017–020 and should 

be submitted on or before August 17, 

2018. 

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.72

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2018–16535 Filed 8–1–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83726; File No. SR–MIAX– 

2018–16] 

Self-Regulatory Organizations; Miami 

International Securities Exchange LLC; 

Notice of Filing and Immediate 

Effectiveness of a Proposed Rule 

Change To Amend Exchange Rule 518, 

Complex Orders 

July 27, 2018. 

Pursuant to the provisions of Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on July 16, 2018, Miami International 

Securities Exchange, LLC (‘‘MIAX 

Options’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) a proposed rule change 

as described in Items I and II below, 

which Items have been prepared by the 

Exchange. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is filing a proposal to 

amend Exchange Rule 518, Complex 

Orders, to update its rule text regarding 

stock-option orders, in connection with 

the upcoming launch of such orders on 

the Exchange. 

The text of the proposed rule change 

is available on the Exchange’s website at 

http://www.miaxoptions.com/rulefilings/ at MIAX Options’ principal 

office, and at the Commission’s Public 

Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange 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. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to amend 

Exchange Rule 518, Complex Orders, to 

update its rule text regarding stockoption orders, in connection with the 

upcoming launch of such orders on the 

Exchange. In particular, the Exchange is 

proposing to (i) adopt new rule text to 

introduce a new price protection feature 

for certain stock-option strategies, (ii) 

delete certain existing rule text to 

eliminate an unnecessary execution 

price restriction for the stock 

component of a stock-option strategy, 

and (iii) make certain minor clarifying 

edits to existing rule text. 

Complex orders began trading on the 

Exchange on October 24, 2016.3 In its 

rule filing to establish the trading of 

complex orders, the Exchange adopted 

rules for handling stock-option orders.4

The Exchange also indicated that it 

would determine when stock-option 

orders would be made available for 

trading in the System 5 and would 

communicate such determination to 

Members 6 via Regulatory Circular.7 The 

Exchange is now proposing to make 

certain changes to its rule text, in 

connection with the upcoming launch 

of such orders on the Exchange, which 

is scheduled for the third quarter of 

2018. 

Currently, the Exchange provides 

price protection for certain complex 

option trading strategies such as Vertical 

Spreads 8 and Calendar Spreads 9 to 

prevent executions at potentially 

erroneous prices. Specifically, the 

Exchange provides a Vertical Spread 

Variance (‘‘VSV’’) price protection and a 

Calendar Spread Variance (‘‘CSV’’) price 

protection. The VSV establishes 

minimum and maximum trading price 

limits for Vertical Spreads.10 The CSV 

establishes a minimum trading price 

limit for Calendar Spreads.11 If the 

execution price of a complex order 

would be outside of the limits 

established for Vertical Spreads and 

Calendar Spreads, such complex order 

will be placed on the Strategy Book and 

will be managed to the appropriate 

trading price limit as described in Rule 

518(c)(4), Managed Interest Process for 

Complex Orders. Orders to buy below 

the minimum trading price limit and 

orders to sell above the maximum 

trading price limit (in the case of 

Vertical Spreads) will be rejected by the 

System.12

The Exchange now proposes to adopt 

new subsection (g) in Rule 518, 

Interpretations and Policies .01, to 

provide a price protection feature for 

certain stock-option strategies that have 

a single option component tied to a 

stock component with a standard 

deliverable.13 The proposed price 

protection feature, named ‘‘Parity Price 

Protection,’’ will provide price 

protection for strategies that consist of a 


daltland on DSKBBV9HB2PROD with NOTICES