Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 44091 

proposed rule change including, among other 

things, a 300 percent cap on non-defaulting 

participants’ liability during a cooling-off period). 

49 17 CFR 240.17Ad–22(e)(13). 

50 Id. 

51 17 CFR 240.17Ad–22(e)(23)(i) and (ii). 

52 17 CFR 240.17Ad–22(e)(23)(i) and (ii). 

53 12 U.S.C. 5465(e)(1)(I). 

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

2 17 CFR 240.19b–4. 

3See Notice infra note 4, 82 FR 61072. 

4Securities Exchange Act Release No. 82352 (Dec. 

19, 2017), 82 FR 61072 (Dec. 26, 2017) (File No. SR– 

OCC–2017–021) (‘‘Notice’’). On December 8, 2017, 

OCC also filed a related advance notice (SR–OCC– 

2017–810) (‘‘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 

and Rule 19b–4(n)(1)(i) under the Exchange Act. 12 

U.S.C. 5465(e)(1) and 17 CFR 240.19b–4(n)(1)(i), 

respectively. The Advance Notice was published in 

the Federal Register on January 23, 2018. Securities 

Exchange Act Release No. 82514 (Jan. 17, 2017), 83 

FR 3224 (Jan. 23, 2018) (SR–OCC–2017–810). 

The Financial Stability Oversight Council 

designated OCC a systemically important financial 

market utility on July 18, 2012. See Financial 

Stability Oversight Council 2012 Annual Report, 

Appendix A, available at http://www.treasury.gov/ 

initiatives/fsoc/Documents/2012%20Annual

%20Report.pdf. Therefore, OCC is required to 

comply with the Payment, Clearing and Settlement 

Supervision Act and file advance notices with the 

Commission. See 12 U.S.C. 5465(e). 

5Securities Exchange Act Release No. 82586 (Jan. 

25, 2018), 83 FR 4527 (Jan. 31, 2018) (File No. SR– 

OCC–2017–021). 

6Securities Exchange Act Release No. 82927 

(Mar. 22, 2018), 83 FR 13176 (Mar. 27, 2018) (File 

No. SR–OCC–2017–021). 

7 In Partial Amendment No. 1, OCC made three 

modifications to the Notice: (1) Removal of sections 

of the RWD Plan concerning OCC’s proposed 

authority to require cash settlement of certain 

physically delivered options and single stock 

futures; (2) updating the list of OCC’s Critical 

Support Functions; and (3) making three changes to 

the RWD Plan to conform to a change 

contemporaneously proposed in Partial 

Amendment No. 2 to OCC filing SR–OCC–2017–020 

concerning enhanced and new tools for recovery 

scenarios. 

8Partial Amendment No. 2 superseded and 

replaced Partial Amendment No. 1 in its entirety, 

due to technical defects in Partial Amendment No. 

1. 

9See Securities Exchange Act Release No. 83732 

(Jul. 27, 2018), 83 FR 37864 (Aug. 2, 2018) (‘‘Notice 

of Amendment’’). 

Commission believes that the 200 

percent cap in the proposed changes is 

consistent with Rule 17Ad–22(e)(4)(ix). 

5. Authority To Take Timely Action To 

Contain Losses and Liquidity Demands 

and Continue To Meet Obligations 

Rule 17Ad–22(e)(13) requires, in 

relevant part, that OCC establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to ensure that it has 

the authority and operational capacity 

to take timely action to contain losses 

and liquidity demands and continue to 

meet its obligations.49 As described 

above, OCC’s proposal would provide 

OCC with modified assessment powers 

and new tools of Voluntary Payments, 

Voluntary Tear-Ups, and Partial TearUps. 

As discussed above, the Commission 

recognizes that a tear-up would result in 

termination of positions of nondefaulting Clearing Members. However, 

because OCC would only be able to use 

its tear-up authority after it has 

conducted an auction pursuant to its 

Rules and when OCC has determined 

that it may not have sufficient financial 

resources to meet its obligations, a tearup would only arise in an extreme stress 

scenario. Further, use of tear-up in such 

circumstances could potentially return 

OCC to a matched book quickly, thereby 

containing its losses. 

The Commission believes that these 

tools are designed to provide greater 

certainty to Clearing Members seeking 

to estimate the potential risks and losses 

arising from their use of OCC, while 

enabling OCC to promptly return to a 

matched book. The Commission 

believes that returning to a matched 

book pursuant to these provisions in the 

context of OCC’s default management 

and recovery facilitates OCC’s 

operational capacity to timely contain 

losses and liquidity demands while 

continuing to meet its obligations. Thus, 

the Commission believes that the 

proposed changes are consistent with 

Rule 17Ad–22(e)(13).50

6. Public Disclosure of Key Aspects of 

Default Rules 

Rules 17Ad–22(e)(23)(i) and (ii) 

require, in relevant part, that OCC 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to provide for the 

public disclosure of all relevant rules 

and material procedures, including key 

aspects of default rules and procedures, 

as well as sufficient information to 

enable participants to identify and 

evaluate the risks, fees and other 

material costs they incur by 

participating in OCC.51 The 

Commission believes that the proposed 

changes address key aspects of OCC’s 

default rules and procedures, thereby 

providing Clearing Members with a 

better understanding of the potential 

risks and costs they might face in an 

extreme event where OCC may use its 

proposed recovery tools, including the 

potential use of the Special Charge. 

Accordingly, the Commission believes 

that OCC has disclosed these key 

aspects of its default rules and 

procedures, consistent with Rule 17Ad– 

22(e)(23)(i) and (ii).52

IV. Conclusion 

It is therefore noticed, pursuant to 

Section 806(e)(1)(I) of the Clearing 

Supervision Act,53 that the Commission 

does not object to Advance Notice (SR– 

OCC–2017–809), as modified by 

Amendment No. 2, and that OCC is 

authorized to implement the proposed 

change as of the date of this notice or 

the date of an order by the Commission 

approving proposed rule change SR– 

OCC–2017–020, as modified by 

Amendment No. 2, whichever is later. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18655 Filed 8–28–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83918; File No. SR–OCC– 

2017–021] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Approving Proposed Rule Change, as 

Modified by Partial Amendment No. 2, 

Concerning Updates to and 

Formalization of OCC’s Recovery and 

Orderly Wind-Down Plan 

August 23, 2018. 

I. Introduction 

On December 8, 2017, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change SR–OCC–2017– 

021 (‘‘Proposed Rule Change’’) pursuant 

to Section 19(b) of the Securities 

Exchange Act of 1934 (‘‘Exchange 

Act’’),1 and Rule 19b–4 2 thereunder to 

propose to formalize and update its 

Recovery and Orderly Wind-Down Plan 

(‘‘RWD Plan’’).3 The Proposed Rule 

Change was published for comment in 

the Federal Register on December 26, 

2017.4 On January 25, 2018, the 

Commission designated a longer period 

of time for Commission action on the 

Proposed Rule Change.5 On March 22, 

2018, the Commission published an 

order to institute proceedings to 

determine whether to approve or 

disapprove the Proposed Rule Change.6

On July 11, 2018, OCC filed Partial 

Amendment No. 1 to the Proposed Rule 

Change.7 On July 13, 2018, OCC filed 

Partial Amendment No. 2 to the 

Proposed Rule Change.8 Notice of 

Partial Amendments No. 1 and 2 to the 

Proposed Rule Change was published 

for public comment in the Federal 

Register on August 2, 2018,9 and the 

Commission has received no comments 


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44092 Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 

10Capitalized terms used but not defined herein 

have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/ 

publications/bylaws.jsp. 

11For the purposes of the RWD Plan, OCC defines 

‘‘recovery’’ as ‘‘the actions of [a financial market 

utility], consistent with its rules, procedures, and 

other ex-ante contractual arrangements, to address 

any uncovered credit loss, liquidity shortfall, 

capital inadequacy, or business, operational or 

other structural weakness, including the 

replenishment of any depleted pre-funded financial 

resources and liquidity arrangements, as necessary 

to maintain the [financial market utility’s] viability 

as a going concern.’’ 

12See OCC By-Laws, Art. VIII, Section 3(a)(i). The 

Commission recently approved a proposal by OCC 

that, after implementation, would move this section 

of the OCC By-Laws to OCC Rule 1002(a)(i). See 

Securities Exchange Act Release No. 83735 (Jul. 27, 

2018), 83 FR 37855, 37859 (Aug. 2, 2018) (SR–OCC– 

2018–008) (‘‘Order Approving Proposed Rule 

Change, as Modified by Amendments No. 1 and 2, 

Related to OCC’s Stress Testing and Clearing Fund 

Methodology’’). 

13See OCC By-Laws, Art. VIII, Section 3(a)(i). 

in response. This order approves the 

Proposed Rule Change as modified by 

Partial Amendment No. 2 (‘‘Amended 

Proposed Rule Change’’). 

II. Description of the Amended 

Proposed Rule Change 10

OCC’s proposal would formalize and 

update its RWD Plan. The purpose of 

the RWD Plan is to: (i) Demonstrate that 

OCC has considered the scenarios 

which may potentially prevent it from 

being able to provide the services OCC 

determined to be critical as a goingconcern; (ii) provide appropriate plans 

for OCC’s recovery or orderly winddown based on the results of such 

consideration; and (iii) impart to 

relevant authorities the information 

reasonably anticipated to be necessary 

for purposes of recovery and orderly 

wind-down planning. 

The RWD Plan would identify the 

services provided by OCC that OCC has 

determined to be critical, and it would 

set forth five qualitative events that 

could trigger a recovery scenario and six 

qualitative events that could trigger an 

orderly wind-down. It would also 

address six scenarios that describe 

OCC’s possible responses to series of 

stresses. The RWD Plan would also 

include an overview designed to 

provide information that OCC believes 

would be essential to relevant 

authorities for purposes of recovery and 

orderly wind-down planning, as well as 

to provide readers of the Plan with 

necessary context for subsequent 

discussion and analysis. The overview 

would also include a detailed 

description of OCC’s business, 

summarizing the role OCC has in the 

options market as well as the services 

and products it provides to its clearing 

members and market participants. The 

RWD Plan would identify fourteen 

internal support functions at OCC and 

provide a brief description of the 

activities performed by each support 

function. Similar to the information 

regarding OCC’s business, this 

information is designed to inform the 

relevant authorities for orderly winddown planning and as necessary context 

for understanding other elements of the 

RWD Plan. 

A. Designating Critical Services and 

Critical Support Functions 

The RWD Plan would define the 

terms ‘‘Critical Services’’ and ‘‘Critical 

Support Functions.’’ Specifically, a 

Critical Service would be a service 

provided by OCC that, if interrupted, 

would likely have a material negative 

impact on participants or significant 

third parties, give rise to contagion, or 

undermine the general confidence of 

markets that OCC serves. A Critical 

Support Function would be a function 

within OCC that must continue in some 

capacity for OCC to be able to continue 

providing its Critical Services. 

The RWD Plan would describe the 

framework that OCC uses to determine 

whether a service is critical. This 

framework includes four criteria to 

determine if failure or discontinuation 

of a particular service would impact 

financial and operational capabilities of 

OCC’s clearing members, other FMUs, 

or the broader financial system: (1) 

Market dominance, (2) substitutability, 

(3) interconnectedness, and (4) barriers 

to entry. The current set of services 

designated as Critical Services under the 

RWD Plan is based on the analysis of 

these measureable indicators and 

subsequent internal discussion at OCC. 

The Critical Services currently include, 

but are not limited to, clearance services 

for listed options and clearance services 

for futures. 

B. Recovery Plan 

The RWD Plan would include plans 

for recovery from scenarios that could 

prevent OCC from providing Critical 

Services.11 After discussing particular 

scenarios, the RWD Plan identifies the 

tools that OCC could use as warranted 

in such scenarios. These tools fall into 

two categories: (1) Enhanced Risk 

Management Tools, and (2) Recovery 

Tools. An Enhanced Risk Management 

Tool is a tool that is designed to 

supplement OCC’s existing processes 

and other existing tools in scenarios 

where OCC faces heightened stresses, 

while a Recovery Tool is a tool that is 

generally limited to a scenario in which 

a specific trigger has occurred. In its 

RWD Plan, OCC would define a set of 

five such qualitative trigger events 

(‘‘Recovery Trigger Events’’). 

The sequence and timing of the 

deployment of each Recovery Tool is 

more structured and lacks the flexibility 

inherent in the sequence and timing for 

use of the Enhanced Risk Management 

Tools. For each tool, the RWD Plan 

provides an overview of the tool, and, 

as appropriate, a discussion of its 

implementation with an estimated time 

frame for use of the tool, key risks 

associated with use of the tool, and the 

expected impact and incentives of using 

the tool. 

1. Enhanced Risk Management Tools 

OCC stated that the Enhanced Risk 

Management Tools would be used 

prophylactically in an effort to prevent 

the occurrence of a Recovery Trigger 

Event and would not be limited to 

recovery. OCC would not anticipate 

applying a rigid order or timing for the 

deployment of the Enhanced Risk 

Management Tools. The RWD Plan 

would include five Enhanced Risk 

Management Tools: (1) Use of Current/ 

Retained Earnings; (2) Minimum 

Clearing Fund Cash Contribution; (3) 

Borrowing Against Clearing Fund; (4) 

Credit Facility; and (5) Non-Bank 

Facility. 

Use of Current/Retained Earnings. 

Under its By-Laws, OCC may use 

current and/or retained earnings to 

discharge a loss that would be 

chargeable against the Clearing Fund, 

but would require unanimous consent 

from the holders of OCC’s Class A and 

Class B common stock. The RWD Plan 

acknowledges that the utility of this tool 

is limited by the requirement for 

shareholder consent and that OCC’s 

retained earnings presently amount to a 

small fraction of OCC’s existing 

prefunded Clearing Fund resources. 

OCC stated that, given this amount, the 

maximum utility of this tool may be 

realized in specific circumstances at 

either the beginning of OCC’s loss 

waterfall or toward the end of OCC’s 

loss waterfall, where it would be 

sufficient to fully extinguish liabilities 

without triggering the use of another 

tool. 

Minimum Clearing Fund Cash 

Contribution. Under its current rules, 

OCC Clearing Members collectively 

contribute $3 billion in cash to OCC’s 

Clearing Fund.12 In addition, OCC may, 

in certain limited circumstances, 

increase the minimum cash requirement 

up to the then-minimum size of the 

Clearing Fund.13 The RWD Plan would 

acknowledge that increasing the 

minimum cash requirement would 

require preparation of OCC 

documentation that considers the 


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14See OCC By-Laws, Art. VIII, Section 5(e). The 

Commission recently approved a proposal by OCC 

that, after implementation, would move this section 

of the OCC By-Laws to OCC Rule 1006(f). See Order 

Approving Proposed Rule Change Related to OCC 

Stress Testing and Clearing Fund Methodology, 

supra note 12, 83 FR at 37859. 

15For a more detailed description of the Recovery 

Tools numbered (2) through (5) here, please see 

Securities Exchange Act Release No. 83916 (Aug. 

23, 2018) (SR–OCC–2017–020). 

16The requirement to replenish OCC’s capital was 

adopted as part of OCC’s plan to raise and maintain 

capital at a specified level (‘‘Capital Plan’’). See 

Securities Exchange Act Release No. 77112 (Feb. 11, 

2016), 81 FR 8294 (Feb. 18, 2016) (SR–OCC–2015– 

02). The Capital Plan was later subject to judicial 

review by the U.S. Court of Appeals for the District 

of Columbia Circuit, which remanded for the 

Commission to further analyze whether the Capital 

Plan is consistent with the Exchange Act. 

Susquehanna Int’l Grp., LLP v . SEC, 866 F.3d 442 

(D.C. Cir. 2017). The Commission’s review of the 

Capital Plan on remand is ongoing, and the Capital 

Plan remains in effect during this ongoing review. 

17The cooling-off period is the period following 

a proportionate charge assessed by OCC against the 

Clearing Members’ Clearing Fund contributions. It 

is a minimum of fifteen days, but could extend to 

as much as twenty days from the date of the 

proportionate charge based on intervening events. 

18A Clearing Member may avoid liability for 

replenishment by terminating its membership in 

OCC prior to the end of the cooling-off period. 

projected liquidity demands for 

successful management of a defaulted 

Clearing Member. 

Borrowing Against Clearing Fund. 

OCC has the authority to borrow against 

the Clearing Fund in three 

circumstances: (1) To meet obligations 

arising out of the default or suspension 

of a Clearing Member or any action 

taken by OCC under Chapter XI of its 

rules pertaining to the suspension of a 

clearing member; (2) to borrow or 

otherwise obtain funds from third 

parties in lieu of immediately charging 

the Clearing Fund for a loss that is 

reimbursable out of the Clearing Fund; 

and (3) to meet liquidity needs for sameday settlement as a result of the failure 

of any bank or securities or commodities 

clearing organization to achieve daily 

settlement.14 The RWD Plan would 

acknowledge that any borrowing would 

require preparation of OCC 

documentation in accordance with OCC 

procedures. Further, the RWD Plan 

would recognize that the availability of 

this tool in advance of a heightened 

stress scenario would be unknown 

because OCC’s primary liquidity 

facilities could already be fully or 

partially utilized. 

Credit Facility and Non-Bank 

Liquidity Facility. OCC maintains a $2 

billion dollar senior secured 364-day 

revolving credit facility with a syndicate 

of lenders for the purpose of providing 

OCC with liquidity to meet settlement 

obligations as a central counterparty. 

The RWD Plan would recognize that an 

inherent risk of the credit facility is that 

a portion of the syndicate may not 

provide funds in timely response to 

OCC’s request. OCC also maintains a $1 

billion dollar secured non-bank 

liquidity facility for the purpose of 

providing OCC with a non-bank 

liquidity resource to meet settlement 

obligations as a central counterparty. 

Similar to the risk associated with the 

credit facility, the RWD Plan would 

recognize the risk that OCC’s 

counterparty may not timely execute the 

transaction under the non-bank 

liquidity facility. 

2. Recovery Tools 

Under the RWD Plan, Recovery Tools 

would be different from Enhanced Risk 

Management Tools because OCC’s use 

of a Recovery Tool is generally limited 

to a scenario in which a Recovery 

Trigger has occurred. The RWD Plan 

would identify five Recovery Tools, the 

last four of which would generally be 

deployed in the order they are described 

here: (1) Replenishment Capital; (2) 

Assessment Powers; (3) Voluntary 

Payments; (4) Voluntary Tear-Up; and 

(5) Partial Tear-Up.15 As noted above, 

the sequence and timing of deployment 

of the Recovery Tools would be more 

structured than the sequence and timing 

of the use of Enhanced Risk 

Management Tools. 

Replenishment Capital. OCC holds 

capital contributed by its stockholder 

exchanges who have committed to 

replenish OCC’s capital if it falls below 

a certain threshold.16 The RWD Plan 

would include the replenishment of 

capital by OCC’s stockholder exchanges 

as a recovery tool. 

Assessment Powers. Under OCC’s 

rules, OCC has authority to assess a nondefaulting Clearing Member during any 

cooling-off period for an amount equal 

to 200 percent of the Clearing Member’s 

then-required contribution to the 

Clearing Fund.17 Following the end of 

the cooling-off period, each remaining 

Clearing Member must replenish the 

Clearing Fund in the amount necessary 

to meet its then-required contribution.18

The RWD Plan would recognize the risk 

that the use of assessment powers may 

incentivize Clearing Members to 

withdraw from membership in OCC to 

avoid replenishment, and that such 

withdrawals would limit the resources 

available to OCC for future assessments. 

Voluntary Payments. OCC’s rules 

provide a framework by which OCC can 

receive voluntary payments in response 

to a Clearing Member default. Use of 

this tool is permissible only where OCC 

has determined that it may not have 

sufficient resources to satisfy its 

obligations and liabilities arising out of 

the default. The RWD Plan would 

describe the processes involved in 

calling for and receiving voluntary 

payments, including the issuance of a 

notice to Clearing Members. The RWD 

Plan would recognize the risk that 

Clearing Members would be unwilling 

or unable to make voluntary payments. 

As an incentive for Clearing Members to 

provide voluntary payments, a nondefaulting Clearing Member who made 

a voluntary payment would receive 

priority in reimbursement from amounts 

recovered by OCC from the estate of a 

defaulting Clearing Member. 

Voluntary Tear-up. OCC’s rules 

provide a framework by which nondefaulting Clearing Members and 

customers could be permitted to 

voluntarily extinguish (i.e., voluntarily 

tear-up) open positions in response to a 

Clearing Member default. Voluntary 

Tear-up is permissible only where OCC 

has determined that it may not have 

sufficient resources to satisfy its 

obligations and liabilities arising out of 

the default. The RWD Plan would 

contemplate that OCC would initiate 

any tear-up process after the market 

close on the day that OCC determines it 

may have insufficient resources. The 

RWD Plan would further anticipate that 

OCC would publish notice of tear-up no 

later than the following morning (prior 

to the market open), and that positions 

would be extinguished following the 

market close. The RWD Plan would also 

recognize the risk that Clearing 

Members would be unwilling or unable 

to participate in the voluntary tear-up 

process. A non-defaulting Clearing 

Member that faced losses, costs, or 

expenses in reestablishing voluntarily 

torn-up positions could receive 

compensation from amounts recovered 

by OCC from the estate of a defaulting 

Clearing Member ahead of other 

Clearing Members that faced such 

losses, costs, or expenses after 

reestablishing torn up positions. 

Partial Tear-up. OCC’s rules provide a 

framework by which OCC could 

extinguish the remaining open positions 

of a defaulted Clearing Member or its 

customers (i.e., Partial Tear-up) in 

response to a Clearing Member default. 

The RWD Plan would anticipate that the 

Partial Tear-up process would be 

intertwined with the Voluntary Tear-up 

process described above. The RWD Plan 

also would contemplate the 

compensation of Clearing Members 

facing losses, costs, or expenses after 

reestablishing torn up positions from 

Clearing Fund contributions. 

The RWD Plan also would provide a 

mapping of Enhanced Risk Management 

Tools and Recovery Tools to different 

types of risk exposures. Such risk 


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19The RWD Plan also would discuss notification 

of regulators, including the Commission, the U.S. 

Commodity Futures Trading Commission, and the 

Federal Deposit Insurance Corporation, in response 

to the occurrence of a Recovery Trigger. 

20See also OCC By-Laws, Art. VI, Section 27. 

21 15 U.S.C. 78s(b)(2)(C). 

22 15 U.S.C. 78q–1(b)(3)(F). 

23 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v); 

(e)(3)(ii); (e)(15)(i). 

24 15 U.S.C. 78q–1(b)(3)(F). 

exposures include: (1) Uncovered credit 

losses; (2) liquidity shortfalls; (3) 

replenishment of financial resource; (4) 

losses related to business, operational, 

or other structural weaknesses; and (5) 

re-establishment of a matched book. The 

RWD Plan discusses how each tool 

would apply to these risk categories and 

would reference the stress scenarios 

contemplated by the RWD Plan. 

The RWD Plan would outline an 

escalation process for the occurrence of 

each Recovery Trigger.19 Under the 

RWD Plan, OCC’s Enterprise Risk 

Management and Financial Risk 

Management groups would be 

responsible for recommending which, if 

any, of the tools described above should 

be used in a given situation. Further, 

OCC’s Chief Executive Officer and 

Executive Chairman would be 

responsible for approval of such 

recommendations, and OCC’s Chief Risk 

Officer and Management Committee 

would be responsible for overseeing 

deployment of such tools. Finally, 

OCC’s Board and the Risk Committee of 

the Board would be responsible for 

generally overseeing OCC’s recovery 

efforts. 

C. Orderly Wind-Down Plan 

The RWD Plan would also include 

OCC’s wind-down plan and include 

scenarios that could prevent OCC from 

being able to provide Critical Services as 

a going-concern. OCC would identify its 

wind-down objective as the pursuit of 

financial stability and ensuring the 

continuity of critical functions. The 

RWD Plan would provide OCC’s 

assumptions concerning the wind-down 

process regarding: (1) Duration of winddown; (2) cost of wind-down; (3) OCC’s 

capitalization; and (4) the maintenance 

of Critical Services and Critical Support 

Functions. It also would identify six 

wind-down triggers (‘‘WDP Trigger 

Events’’), the occurrence of which could 

jeopardize the viability of OCC’s 

recovery. Under the RWD Plan, the 

occurrence of a WDP Trigger Event 

would necessitate notification of 

regulators, including the Commission, 

the U.S. Commodity Futures Trading 

Commission, and the Federal Deposit 

Insurance Corporation, as well as 

internal notifications to OCC senior 

management. 

The RWD Plan would reference 

critical interconnections and key 

agreements for consideration in the 

context of wind-down. The RWD Plan 

also would discuss OCC’s key actions in 

wind-down including the: (1) Decision 

by OCC’s Board to initiate wind-down; 

(2) institution of heightened clearing 

member requirements; (3) imposition of 

heightened capital requirements for 

clearing members; (4) imposition of 

increased margin requirements; (5) 

cessation of investment by OCC; (6) 

institution of new operational practices; 

and (7) targeted reductions in force. 

The RWD Plan also would identify 

transactions that could be entered into 

to accomplish OCC’s wind-down 

objectives: (1) Stock transactions; (2) 

merger transactions; and (3) asset 

transactions. The RWD Plan focuses 

discussion of wind-down transactions 

on issues including, but not limited to, 

governance and regulatory issues. The 

goal of any such transaction would be 

to transfer ownership of OCC in a 

manner that ensures the continuation of 

OCC’s critical services; however, the 

RWD Plan also would contemplate the 

cessation of Critical Services through 

OCC’s existing close-out netting rules.20

D. Governance 

The RWD Plan would also 

memorialize the governance processes 

for maintenance, review, and approval 

of the RWD Plan. Under the RWD Plan, 

all changes would originate in a 

recommendation from OCC’s RWD 

Working Group. Changes would go 

through a series of consecutive rounds 

of review and approval by OCC’s 

Management Committee, the Risk 

Committee of OCC’s Board of Directors, 

and the full Board of Directors, which 

would have final approval authority. 

III. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Exchange 

Act directs the Commission to approve 

a proposed rule change of a selfregulatory organization if it finds that 

such proposed rule change is consistent 

with the requirements of the Exchange 

Act and the rules and regulations 

thereunder applicable to such 

organization.21 After carefully 

considering the Amended Proposed 

Rule Change, the Commission believes 

the proposal is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

applicable to OCC. More specifically, 

the Commission finds that the Amended 

Proposed Rule Change is consistent 

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

Exchange Act 22 and Rules 17Ad– 

22(e)(2)(i), (iii), and (v), 17Ad– 

22(e)(3)(ii), and 17Ad–22(e)(15)(i) 

thereunder.23

A. Consistency With Section 

17A(b)(3)(F) of the Exchange Act 

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

Act requires that the rules of a clearing 

agency be designed to, among other 

things, promote the prompt and 

accurate clearance and settlement of 

securities transactions, assure the 

safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible, and, in general, to protect 

investors and the public interest.24

As described above, the RWD Plan 

would specify the Enhanced Risk 

Management Tools and Recovery Tools 

available to OCC in recovery and in an 

orderly wind-down, as well as the 

governance framework applicable to the 

use of such tools. The RWD Plan would 

analyze the use of the Enhanced Risk 

Management Tools and Recovery Tools, 

the incentives created by such tools, and 

the risks associated with using such 

tools. The Commission believes that by 

specifying the tools that OCC would 

take in either a recovery or a winddown, the RWD Plan would enhance 

OCC’s ability to address circumstances 

specific to an extreme stress event, 

thereby increasing the likelihood that 

OCC could execute a successful 

recovery or orderly wind-down in such 

an event. In increasing the likelihood 

that OCC could execute a successful 

recovery or orderly wind-down, the 

RWD Plan would enhance OCC’s ability 

to maintain continuity of its critical 

services (including clearance and 

settlement services) during, through, 

and following periods of extreme stress 

giving rise to the need for recovery, 

thereby promoting the prompt and 

accurate clearance and settlement of 

securities transactions. The Commission 

also believes that the rules proposed in 

the RWD Plan are designed to assure the 

safeguarding of securities or funds in 

the custody or control of OCC by 

reducing the likelihood of a disorderly 

or unsuccessful recovery or wind-down, 

which could otherwise disrupt access to 

such securities or funds. 

Further, the Commission believes that 

the RWD Plan is designed, in general, to 

protect investors and the public interest 

by establishing a plan to effectuate an 

orderly wind-down. The RWD Plan’s 

governance processes and regulatory 

notice provisions could facilitate either 

the orderly transfer of OCC’s Critical 

Services to another entity or the orderly 


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Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 44095 

25 15 U.S.C. 78q–1(b)(3)(F). 

26 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v). 

27 Id. 

28 17 CFR 240.17Ad–22(e)(3)(ii). 

29 Id. 

30 Id. 

31 Id. 

32 Id. 

33 Id. 

34 17 CFR 240.17Ad–22(e)(15)(i). 

close-out of positions. Providing 

additional information regarding the 

potential orderly transfer of services or 

close-out of positions would benefit 

Clearing Members and their customers 

by providing greater transparency and 

certainty regarding the potential 

disposition or treatment of their 

positions and assets at OCC, thereby 

benefiting market participants more 

broadly. 

Therefore, the Commission believes 

that the Amended Proposed Rule 

Change would promote the prompt and 

accurate clearance and settlement of 

securities transactions, assure the 

safeguarding of securities and funds in 

OCC’s custody and control, and, in 

general, protect investors and the public 

interest, consistent with the Section 

17A(b)(3)(F) of the Act.25

B. Consistency With Rules 17Ad– 

22(e)(2)(i), (iii), and (v) Under the 

Exchange Act 

Rules 17Ad–22(e)(2)(i), (iii), and (v) 

require that OCC establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide for governance arrangements 

that are clear and transparent, that 

support the public interest requirements 

in Section 17A of the Exchange Act 

applicable to clearing agencies, and the 

objectives of owners and participants, 

and that specify clear and direct lines of 

responsibility.26

The RWD Plan would outline an 

escalation process for the occurrence of 

a Recovery Trigger Event, which would 

provide a governance framework for the 

use and functioning of the Enhanced 

Risk Management Tools and Recovery 

Tools in addition to those specified 

elsewhere in OCC’s rules. It would also 

identify the internal notification 

requirements that would apply to WDP 

Trigger Events and establish the role of 

the Board in determining whether to 

enter into a wind-down or take other 

key actions, consistent with the 

governance specified elsewhere in 

OCC’s rules. 

Moreover, the RWD Plan would 

identify the internal governance process 

for the approval of subsequent changes 

to OCC’s RWD Plan. The RWD Plan 

would also specify the process OCC 

would take to receive input from 

various parties at OCC, including 

management and the Board. 

Taken together, the Commission 

believes that these lines of control could 

contribute to establishing, 

implementing, maintain and enforcing 

clear and transparent governance 

arrangements that support the public 

interest requirements in Section 17A of 

the Exchange Act applicable to clearing 

agencies, and the objectives of owners 

and participants. 

Therefore, the Commission believes 

that the proposed changes are consistent 

with Rules 17Ad–22(e)(2)(i), (iii), and 

(v).27

C. Consistency With Rule 17Ad– 

22(e)(3)(ii) Under the Exchange Act 

Rule 17Ad–22(e)(3)(ii) requires that 

OCC establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain 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 OCC, which 

includes plans for the recovery and 

orderly wind-down of OCC necessitated 

by credit losses, liquidity shortfalls, 

losses from general business risk, or any 

other losses.28

The Commission believes that the 

information the RWD Plan would 

provide about the OCC’s recovery tools 

would enhance OCC’s ability to recover 

from credit losses, liquidity shortfalls, 

general business risk losses, or other 

losses, consistent with Rule 17Ad– 

22(e)(3)(ii).29 Specifically, the 

information from the RWD Plan would 

enable OCC to prepare in advance for 

the use of such tools, which would in 

turn enhance OCC’s ability to use such 

tools effectively to carry out a successful 

recovery. In addition, by establishing a 

single source of information about, and 

steps needed to effectuate, a recovery of 

OCC, the RWD Plan would allow OCC 

personnel to effectuate a recovery in a 

consistent and coordinated fashion, and 

would thereby increase the likelihood of 

a successful recovery. Moreover, by 

identifying and assessing available 

Enhanced Risk Management Tools and 

Recovery Tools, the Commission 

believes that the RWD Plan would 

enhance OCC’s ability to use such tools 

effectively to bring about a recovery by 

identifying in advance which tools may 

be most effective for different situations 

or needs, consistent with Rule 17Ad– 

22(e)(3)(ii).30

Similarly, in providing detailed 

information about the assumptions, 

actions, and objectives related to 

triggering and implementing the winddown portion of the RWD Plan, 

discussed in more detail above, the 

Commission believes that the RWD Plan 

would enhance OCC’s ability to 

effectuate an orderly wind-down, 

consistent with Rule 17Ad– 

22(e)(3)(ii).31 Specifically, by setting out 

in advance the potential events that 

could cause OCC to trigger, and 

transactions by which OCC would 

effectuate, a wind-down, the RWD Plan 

would enable OCC to prepare in 

advance for a wind-down, which the 

Commission believes would enhance 

OCC’s ability to use the RWD Plan 

effectively to carry-out an orderly winddown. In addition, by establishing a 

single source of information about, and 

steps needed to effectuate, a wind-down 

of OCC, the Commission believes the 

RWD Plan would allow OCC personnel 

to effectuate a wind-down in a 

consistent and coordinated fashion, and 

would thereby increase the likelihood of 

an orderly wind-down. Finally, the 

RWD Plan would identify the legal basis 

for OCC’s actions with respect to a 

potential wind-down, including 

relevant citations to provisions of the 

rule books of its various clearing 

services and contractual agreements, 

which the Commission believes would 

further facilitate an orderly wind-down 

process by providing OCC with a single 

source of information and steps needed 

for a wind-down, consistent with Rule 

17Ad–22(e)(3)(ii).32

Therefore, the Commission believes 

that the proposed changes to adopt 

plans for the recovery and orderly winddown of OCC are consistent with Rule 

17Ad–22(e)(3)(ii).33

D. Consistency With Rules 17Ad– 

22(e)(15)(i) Under the Exchange Act 

Rule 17Ad–22(e)(15)(i) requires OCC 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage its general 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

OCC can continue operations and 

services as a going concern if those 

losses materialize, including by 

determining the amount of liquid net 

assets funded by equity based upon its 

general business risk profile and the 

length of time required to achieve a 

recovery or orderly wind-down, as 

appropriate, of its critical operations 

and services if such action is taken.34

OCC’s RWD Plan would estimate 

costs related to a wind-down based on 

a series of assumptions laid out in the 

RWD Plan. These assumptions include 


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35 Id. 

36 Id. 

37 In approving this Proposed Rule Change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

38 15 U.S.C. 78s(b)(2). 

39 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(ii). 

4 17 CFR 240.19b–4(f)(2). 

5 ‘‘ADAV’’ means average daily added volume 

calculated as the number of shares added per day 

and ‘‘ADV’’ means average daily volume calculated 

as the number of shares added or removed, 

combined, per day. See BYX Fee Schedule, 

Definitions. ADAV and ADV are calculated on a 

monthly basis. The Exchange excludes from its 

calculation of ADAV and ADV shares added or 

removed on any day that the Exchange’s system 

experiences a disruption that lasts for more than 60 

minutes during regular trading hours (‘‘Exchange 

System Disruption’’), on any day with a scheduled 

early market close and on the last Friday in June 

(the ‘‘Russell Reconstitution Day’’). Routed shares 

are not included in ADAV or ADV calculation. With 

prior notice to the Exchange, a Member may 

aggregate ADAV or ADV with other Members that 

control, are controlled by, or are under common 

control with such Member (as evidenced on such 

Member’s Form BD). 

6W is associated with orders that remove 

liquidity from BYX in Tape A securities. 

7BB is associated with orders that remove 

liquidity from BYX in Tape B securities. 

8N is associated with orders that remove liquidity 

from BYX in Tape C securities. 

9 Destination Specific is a routing option under 

which an order checks the System for available 

shares and then is sent to an away trading center 

or centers specified by the User. See Rule 

11.13(b)(3)(E). 

10 IX is associated with orders routed to IEX using 

the Destination Specific, TRIM or TRIM2 routing 

strategies. 

duration of the wind-down process, 

OCC’s capitalization through the winddown process, the maintenance of 

Critical Services and Critical Support 

Functions, and the retention of 

personnel and contractual relationships. 

OCC also provided information 

regarding its assumption about the cost 

of the wind-down process. Further, the 

RWD Plan identifies potential 

transactions that could be effected to 

accomplish the objectives of wind-down 

with the ultimate goal of transferring 

ownership of OCC itself by the 

consummation or a consensual sale or 

similar transaction, in a manner that 

ensures the continuation of OCC’s 

Critical Services. The Commission 

considered the assumptions that the 

RWD Plan makes regarding wind-down 

as well as the potential transactions in 

which OCC might engage in the event of 

a wind-down. The Commission also 

considered the estimated cost of winddown noted in the RWD Plan in light of 

OCC’s rules regarding the maintenance 

of certain capital levels and qualifying 

liquid resources. The Commission 

believes that the RWD Plan, which 

indicates the cost at which OCC could 

effectuate an orderly wind-down, i.e., at 

a lower cost than the amount of its 

liquid resources is consistent with Rule 

17Ad–22(e)(15)(i).35

Therefore, the Commission believes 

that the proposed changes that would 

determine costs associated with an 

orderly wind-down and that would 

further ensure that OCC holds liquid net 

assets greater than these costs, are 

consistent with Rule 17Ad– 

22(e)(15)(i).36

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the Amended 

Proposed Rule Change is consistent 

with the requirements of the Exchange 

Act, and in particular, with the 

requirements of Section 17A of the 

Exchange Act 37 and the rules and 

regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,38

that the Proposed Rule Change (SR– 

OCC–2017–021), as modified by Partial 

Amendment No. 2, be, and it hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.39

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18673 Filed 8–28–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83925; File No. SR– 

CboeBYX–2018–017] 

Self-Regulatory Organizations; Cboe 

BYX Exchange, Inc.; Notice of Filing 

and Immediate Effectiveness of a 

Proposed Rule Change Related to Fees 

for Use on Cboe BYX Exchange, Inc. 

August 23, 2018. 

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

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on August 9, 

2018, Cboe BYX Exchange, Inc. (the 

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

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II and III 

below, which Items have been prepared 

by the Exchange. The Exchange has 

designated the proposed rule change as 

one establishing or changing a member 

due, fee, or other charge imposed by the 

Exchange under Section 19(b)(3)(A)(ii) 

of the Act 3 and Rule 19b–4(f)(2) 

thereunder,4 which renders the 

proposed rule change effective upon 

filing with the Commission. 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 filed a proposal to 

amend the Exchange’s fee schedule 

applicable to its equities trading 

platform to: (1) Increase the ADV 

requirements to qualify for Add/Remove 

Volume Tier 6 associated with fee codes 

W, BB, and N, and (2) increase the 

routing fee charged to orders routed to 

Investors Exchange LLC using the 

Destination Specific routing strategy 

under fee code IX, and eliminate an 

outdated reference to the TRIM and 

TRIM2 routing strategies in this fee 

code. 

The text of the proposed rule change 

is available at the Exchange’s website at 

www.markets.cboe.com, at the principal 

office of the Exchange, 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 parts of such 

statements. 

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The purpose of the proposed rule 

change is to amend the Exchange’s fee 

schedule applicable to its equities 

trading platform (‘‘BYX Equities’’) to: (1) 

Increase the ADV 5 requirements to 

qualify for Add/Remove Volume Tier 6 

associated with fee codes W,6 BB,7 and 

N,8 and (2) increase the routing fee 

charged to orders routed to Investors 

Exchange LLC (‘‘IEX’’) using the 

Destination Specific 9 routing strategy 

under fee code IX,10 and eliminate an 

outdated reference to the TRIM and 


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