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###### Securities and Exchange Commission

          - [Release No. 34-83761; File No. SR-OCC-2017-809]

                    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) of the Securities Exchange Act of 1934 (“Act”),[2]                                          The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) an advance notice concerning updates to                           ( print page 38739)                        and formalization of OCC's Recovery and Orderly Wind-Down Plan (“Advance Notice”). The Advance Notice was published for public comment in the                     **Federal Register**                     on January 23, 2018.[3]                                          On January 23, 2018, the Commission requested OCC provide it with additional information regarding the Advance Notice.[4]                                          OCC responded to this request for information, and the information was received on July 13, 2018.[5]                                          On July 11, 2018, OCC filed Amendment No. 1 to the Advance Notice, and subsequently filed Amendment No. 2 to the advance notice 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 being proposed.                

                    Pursuant to Section 806(e)(1) of the Clearing Supervision Act [6]                                          and Rule 19b-4(n)(1)(i) of the Act,[7]                                          the Commission is hereby publishing notice of these Amendments No. 1 and 2 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, as amended by Amendments No. 1 and 2, from interested persons.                

## I. Clearing Agency's Statement of the Terms of Substance of the Advance Notice

This Amendment No. 2 to the advance notice is filed in connection with a proposed change to 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.

                    The proposed changes to OCC's By-Laws and Rules were submitted as Exhibits 5A and 5B of the filing, respectively, and proposed changes to OCC's Default Management Policy were submitted as confidential Exhibit 5C of the filing.[8]                                          OCC also has attached as Exhibits 4A and 4B the proposed amendments to the rule text in Exhibits 5A and 5B of the Initial Filing, respectively. Material proposed to be added to the proposed rule text in the Initial Filing is marked by double underlining and material proposed to be deleted is marked by double strikethrough text.                

                    The proposed change is described in detail in Item II below. All terms with initial capitalization not defined herein have the same meaning as set forth in OCC's By-Laws and Rules.[9] 

## 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 advance notice and none have been received. OCC will notify the Commission of any written comments received by OCC.

### (B) Advance Notices Filed Pursuant to Section 806(e) of the Payment, Clearing, and Settlement Supervision Act

#### Purpose of the Proposed Change

#### Background

The purpose of this advance notice 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. 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-22 [10]                                          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 wind-down 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,       ( print page 38740)                          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 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 By-Laws:

(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 tear-up 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                           ( print page 38741)                        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 Tear-Up”) being determined by the Risk Committee; and                

(c) Allow OCC's Board to vote to re-allocate losses, costs and fees imposed upon holders of positions extinguished in a Partial Tear-Up through a special charge levied against remaining non-defaulting 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 tear-up (“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 sub-sections:

#### 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 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                           ( print page 38742)                        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 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 tear-up, 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 Tear-Up 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 tear-up 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                           ( print page 38743)                        tear-up process as a means of loss allocation.[33] 

                    The proposed changes would provide OCC with two separate and non-exclusive means of equitably re-allocating 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 tear-up(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, 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 with 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 Tear-Ups, 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 non-defaulting Clearing Members and non-defaulting 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-of-day 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 By-Laws.[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                           ( print page 38744)                        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 1111(e)(iii) further provides that the corresponding open position shall be deemed terminated at the Partial Tear-Up Price.[41] 

                    Rule 1111(g) provides that to the extent losses imposed upon non-defaulting Clearing Members and non-defaulting customers resulting from a Partial Tear-Up can reasonably be determined, the Board may elect to re-allocate such losses among all non-defaulting Clearing Members through a special charge to all non-defaulting Clearing Members in an amount corresponding to each such non-defaulting 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 with Rule 1111 shall constitute a default by OCC.

#### Expected Effect on and Management of Risk

OCC believes that the proposed changes would reduce the nature and level of risk presented to OCC in three primary ways: (i) By providing greater certainty regarding what financial resources will be available to OCC after a proportionate charge is assessed; (ii) by providing additional tools by which to allocate credit losses in excess of OCC's available financial resources; and (iii) by enhancing OCC's ability to re-establish a matched book. First, OCC believes the imposition of a 200% cap on OCC's assessment powers during any cooling-off period provides Clearing Members with 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 risks, and to the extent applicable, regulatory capital considerations. Further, OCC believes that extending the window for Clearing Member withdrawal following a proportionate charge to be equivalent with the cooling-off period would afford a Clearing Member a more reasonable period in which to evaluate whether the withdrawal from clearing membership would be necessary to cap its liability for proportionate charges at 200% of its then-required Clearing Fund contributions. With this change, OCC believes the increased predictability would help it to more reliably understand the amount of Clearing Fund contributions that will likely be available to it after a proportionate charge is assessed. Second, the introduction of rules to allow for voluntary payments, Voluntary Tear-Ups and Partial Tear-Ups 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. Finally, in the event that OCC believes its obligations and liabilities arising from remaining positions in the portfolio of a defaulted Clearing Member may exceed its remaining available financial resources, the proposed changes ultimately would enable OCC to extinguish those positions, thereby re-establishing a matched book.

The risks of a Partial Tear-Up are extremely remote; nonetheless, OCC believes that the express authority to conduct a Partial Tear-Up may be viewed as increasing Clearing Members' and customers' exposure to an extreme stress scenario. As explained above, the proposed Partial Tear-Up authority is consistent with regulatory requirements, as well as with the expectations of CCPs of various international organizations. OCC further believes that its proposed Partial Tear-Up authority strikes an appropriate balance between seeking to protect the interests of Clearing Members and customers and the need to have appropriate tools to stabilize a systemically important financial market utility and minimize the risk of disruption to the broader financial system. To address the potential impact of a Partial Tear-Up on Clearing Members and customers, OCC has proposed two tools that would enable it to equitably re-allocate the losses, costs and fees imposed upon holders of torn-up positions.

#### Consistency With the Clearing Supervision Act

                    The stated purpose of the Clearing Supervision Act is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.[43]                                          Section 805(a)(2) of the Clearing Supervision Act [44]                                          also authorizes the Commission to prescribe risk management standards for the payment, clearing and settlement activities of designated clearing entities, like OCC, for which the Commission is the supervisory agency. Section 805(b) of the Clearing Supervision Act [45]                                          states that the objectives and principles for risk management standards prescribed under Section 805(a) shall be to:                
    - Promote robust risk management;       ( print page 38745)      
    - promote safety and soundness;
    - reduce systemic risks; and
    - support the stability of the broader financial system.

                    The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act and the Act in furtherance of these objectives and principles, including those standards adopted pursuant to the Commission rules cited below.[46]                                          For the reasons set forth below, OCC believes that the proposed change is consistent with the risk management standards promulgated under Section 805(a) of the Clearing Supervision Act.[47] 

#### 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 business risk, or any other losses.” [48]                                          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.[49]                                          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.[50]                                          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.[51] 

#### 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 . . .” [52]                                          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,[53]                                          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.[54]                                          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).[55] 

#### 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.” [56]                                          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                           ( print page 38746)                        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.[57] 

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) 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.[58]                                          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 cooling-off 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.[59] 

                    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).[60] 

#### 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.” [61]                                          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).[62] 

#### 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 . . .” [63]                                          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 Tear-Ups 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                           ( print page 38747)                        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).[64] 

#### 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.” [65]                                          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 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).[66] 

#### 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.” [67]                                          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).[68] 

## III. Date of Effectiveness of the Advance Notice and Timing for Commission Action

The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date the proposed change was filed with the Commission or (ii) the date any additional information requested by the Commission is received. OCC shall not implement the proposed change if the Commission has any objection to the proposed change.

The Commission may extend the period for review by an additional 60 days if the proposed change raises novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission.

OCC shall post notice on its website of proposed changes that are implemented. The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed.

## IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the advance notice is consistent with the Clearing Supervision 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-2017-809 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-OCC-2017-809. 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 advance notice that are filed with the Commission, and all written communications relating to the advance notice 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                           ( print page 38748)                        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-2017-809 and should be submitted on or before August 22, 2018.

By the Commission.

Brent J. Fields,

Secretary.

# Footnotes

1.                             12 U.S.C. 5465(e)(1).                    
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2.                             17 CFR 240.19b-4(n)(1)(i).                    
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3.                                                     *See*                         Securities Exchange Act Release No. 82513 (January 17, 2018), 83 FR 3244 (January 23, 2018) (SR-OCC-2017-809) (hereinafter referred to as the “Initial Filing”).                    
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4.                                                     *See*                         Memorandum from Office of Clearance and Settlement, Division of Trading and Markets, dated January 23, 2018,                         *available at https://www.sec.gov/​comments/​sr-occ-2017-809/​occ2017809-2948229-161855.pdf.*
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5.                                                     *See*                         Memorandum from Office of Clearance and Settlement, Division of Trading and Markets, dated July 17, 2018,                         *available at https://www.sec.gov/​comments/​sr-occ-2017-809/​occ2017809-4062512-169148.pdf.*
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6.                             12 U.S.C. 5465(e)(1).                    
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7.                             17 CFR 240.19b-4(n)(1)(i).                    
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8.                             OCC has filed a proposed rule change with the Commission in connection with the proposed change.                         *See*                         SR-OCC-2017-020.                    
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9.                             OCC's By-Laws and Rules can be found on OCC's public website:                         *http://optionsclearing.com/​about/​publications/​bylaws.jsp.*
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10.                             17 CFR 240.17Ad-22.                    
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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).                    
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12.                             15 U.S.C. 78q-1.                    
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13.                             12 U.S.C. 5461 et. seq.                    
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14.                             17 CFR 240.17Ad-22(a)(5).                    
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15.                             17 CFR 240.17Ad-22(e)(3)(ii).                    
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16.                             17 CFR 240.17Ad-22(e)(v)(viii).                    
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17.                             17 CFR 240.17Ad-22(e)(4)(ix).                    
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18.                             17 CFR 240.17Ad-22(e)(7)(ix).                    
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19.                             17 CFR 240.17Ad-22(e)(13).                    
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20.                             17 CFR 240.17Ad-22(e)(23)(i).                    
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21.                             17 CFR 240.17Ad-22(e)(23)(ii).                    
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22.                             17 CFR 240.17Ad-22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix) and (e)(7)(ix).                    
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23.                             OCC 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.                    
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24.                             Under the Initial Filing, OCC's authority to conduct Partial Tear-Ups, as well as call for voluntary payments or to conduct Voluntary Tear-Ups, 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.”                     
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25.                             Under 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.                    
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26.                             After 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.                    
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27.                             This 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).                    
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28.                             Rule 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.                    
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29.                             Notwithstanding 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).                    
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30.                             Since 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.                    
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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).                    
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32.                             OCC 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).                    
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33.                             This change does not impact the statutory basis for the advance notice filing.                    
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34.                             In order to effect re-allocation of the losses, costs or expenses imposed upon the holders of torn-up 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.                    
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35.                             Since 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.                    
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36.                             For 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.                    
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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 close-out value shall be an `asset position' and a position having a negative close-out value shall be a `liability position.' ”                    
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38.                             OCC 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 advance notice filing.                    
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39.                             Since, 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 Tear-Up 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.                    
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40.                             OCC 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 advance notice filing.                    
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41.                             OCC is amending the Initial Filing and the proposed text of Rule 1111(e)(iii) to clarify that if, in the circumstances discussed in fn. 26 (above), 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 an unsecured claim against the Corporation for the value of the difference between the pro rata amount received and the Partial Tear-Up Price. With regard to amounts recovered from a suspended or defaulted Clearing Member (or from the estate of a suspended or defaulted Clearing Member) Rules 1011(b) and 111(a)(ii) would continue to apply. This change does not impact the statutory basis for the advance notice filing.                    
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42.                             For 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.                    
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43.                             12 U.S.C. 5461(b).                    
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44.                             12 U.S.C. 5464(a)(2).                    
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45.                             12 U.S.C. 5464(b).                    
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46.                             17 CFR 240.17Ad-22.                         *See*                         Securities Exchange Act Release Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11) (“Clearing Agency Standards”); 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (“Standards for Covered Clearing Agencies”). The Standards for Covered Clearing Agencies became effective on December 12, 2016. OCC is a “covered clearing agency” as defined in Rule 17Ad-22(a)(5) and therefore is subject to section (e) of Rule 17Ad-22.                    
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47.                             12 U.S.C. 5464(b)(1) and (4).                    
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48.                             17 CFR 240.17Ad-22(e)(3)(ii).                    
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49.                             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 U.S. Securities and Exchange Commission (“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).                    
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50.                             17 CFR 240.17Ad-22(e)(3)(ii).                    
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51.                             17 CFR 240.17Ad-22(e)(3)(ii).                    
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52.                             17 CFR 240.17Ad-22(e)(v)(viii).                    
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53.                             Rule 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.                    
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54.                             Rule 1111(g), which would provide the Board authority 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, would serve as a discretionary tool to redistribute the credit losses allocated through Partial Tear-Up.                    
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55.                             17 CFR 240.17Ad-22(e)(v)(viii).                    
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56.                             17 CFR 240.17Ad-22(e)(4)(ix).                    
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57.                             Under 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.                    
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58.                             Rule 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.”                    
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59.                             OCC 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.                    
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60.                             17 CFR 240.17Ad-22(e)(4)(ix).                    
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61.                             17 CFR 240.17Ad-22(e)(7)(ix).                    
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62.                             17 CFR 240.17Ad-22(e)(7)(ix).                    
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63.                             17 CFR 240.17Ad-22(e)(13).                    
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64.                             17 CFR 240.17Ad-22(e)(13).                    
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65.                             17 CFR 240.17Ad-22(e)(23)(i).                    
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66.                             17 CFR 240.17Ad-22(e)(13).                    
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67.                             17 CFR 240.17Ad-22(e)(23)(ii).                    
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68.                             17 CFR 240.17Ad-22(e)(23)(ii).                    
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[FR Doc. 2018-16824 Filed 8-6-18; 8:45 am]

BILLING CODE 8011-01-P