Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 44109 

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

2 17 CFR 240.19b–4(n)(1)(i). 

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

4See Exchange Act Release No. 82514 (January 

17, 2018), 83 FR 3224 (January 23, 2018) (SR–OCC– 

2017–810) (hereinafter referred to as the ‘‘Notice of 

Filing’’). On December 18, 2017, OCC also filed a 

related proposed rule change (SR–OCC–2017–020) 

with the Commission pursuant to Section 19(b)(1) 

of the Exchange Act and Rule 19b–4 thereunder, 

seeking approval of changes to its rules necessary 

to implement the Advance Notice (‘‘Proposed Rule 

Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b– 

4, respectively. The Proposed Rule Change was 

published in the Federal Register on December 26, 

2017. Exchange Act Release No. 82352 (Dec. 19, 

2017), 82 FR 61072 (Dec. 26, 2017) (SR–OCC–2017– 

021). 

5See Memorandum from Office of Clearance and 

Settlement, Division of Trading and Markets, dated 

January 23, 2018, available at https://www.sec.gov/ 

rules/sro/occ-an/2018/34-83305.pdf. 

6See 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-2017-810/occ2017810-4062513- 

169149.pdf. 

7 In Amendment No. 1, OCC made three 

modifications to the Notice of Filing: (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 Amendment No. 2 

to OCC filing SR–OCC–2017–809 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8Partial Amendment No. 2 superseded and 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. Partial Amendment No. 3 then superseded and 

replaced Partial Amendment No. 1 in its entirety, 

due to technical defects in Partial Amendment No. 

2. 

9See Exchange Act Release No. 83762 (Aug. 1, 

2018), 83 FR 38750 (Aug. 7, 2018) (‘‘Notice of 

Amendment’’). 

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.’’ 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83928; File No. SR–OCC– 

2017–810] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of No Objection to Advance Notice, as 

Modified by Partial Amendment No. 3, 

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’’) advance 

notice SR–OCC–2017–810 (‘‘Advance 

Notice’’) pursuant to Section 806(e)(1) of 

Title VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 

entitled Payment, Clearing and 

Settlement Supervision Act of 2010 

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

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

Exchange Act of 1934 (‘‘Exchange 

Act’’) 3 to formalize and update its 

Recovery and Orderly Wind-Down Plan 

(‘‘RWD Plan’’). The Advance Notice was 

published for public comment in the 

Federal Register on January 23, 2018.4

On January 23, 2018, the Commission 

requested that OCC provide it with 

additional information regarding the 

Advance Notice.5 OCC responded to the 

request, and the Commission received 

the information on July 13, 2018.6

On July 11, 2018, OCC filed Partial 

Amendment No. 1 to the Advance 

Notice.7 On July 12, 2018, OCC filed 

Partial Amendment No. 2 and Partial 

Amendment No. 3 to the Advance 

Notice.8 Notice of the Amendments to 

the Advance Notice was published for 

public comment in the Federal Register 

on August 7, 2018,9 and the 

Commission has received no comments 

in response. 

This publication serves as notice that 

the Commission does not object to the 

changes set forth in the Advance Notice, 

as amended by Partial Amendment No. 

3 (‘‘Amended Advance Notice’’). 

II. Background 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 


sradovich on DSK3GMQ082PROD with NOTICES
44110 Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 

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 

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). 

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 

Exchange Act Release No. 83927 (Aug. 23, 2018). 

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 

Exchange Act Release No. 77112 (February 11, 

2016), 81 FR 8294 (February 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 

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 

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 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 44111 

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. 

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. 

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 

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. 


sradovich on DSK3GMQ082PROD with NOTICES
44112 Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 

21See 12 U.S.C. 5461(b). 

22 12 U.S.C. 5464(a)(2). 

23 12 U.S.C. 5464(b). 

24 12 U.S.C. 5464(c). 

25 17 CFR 240.17Ad–22. See Securities Exchange 

Act Release No. 68080 (October 22, 2012), 77 FR 

66220 (November 2, 2012) (S7–08–11). See also 

Securities Exchange Act Release No. 78961 

(September 28, 2016), 81 FR 70786 (October 13, 

2016) (S7–03–14) (‘‘Covered Clearing Agency 

Standards’’). The Commission established an 

effective date of December 12, 2016, and a 

compliance date of April 11, 2017, for the Covered 

Clearing Agency Standards. OCC is a ‘‘covered 

clearing agency’’ as defined in Rule 17Ad–22(a)(5). 

26 17 CFR 240.17Ad–22. 

27 12 U.S.C. 5464(b) and 17 CFR 240.17Ad–22. 

28 12 U.S.C. 5464(b). 

29 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v); 

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

30 12 U.S.C. 5464(b). 31 12 U.S.C. 5464(b). 

III. Discussion and Commission 

Findings 

Although the Clearing Supervision 

Act does not specify a standard of 

review for an advance notice, the stated 

purpose of the Clearing Supervision Act 

is instructive: 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 

(‘‘SIFMUs’’) and strengthening the 

liquidity of SIFMUs.21

Section 805(a)(2) of the Clearing 

Supervision Act 22 authorizes the 

Commission to prescribe regulations 

containing risk-management standards 

for the payment, clearing, and 

settlement activities of designated 

clearing entities engaged in designated 

activities for which the Commission is 

the supervisory agency. Section 805(b) 

of the Clearing Supervision Act 23

provides the following objectives and 

principles for the Commission’s riskmanagement standards prescribed under 

Section 805(a): 

• To promote robust risk 

management; 

• to promote safety and soundness; 

• to reduce systemic risks; and 

• to support the stability of the 

broader financial system. 

Section 805(c) provides, in addition, 

that the Commission’s risk-management 

standards may address such areas as 

risk-management and default policies 

and procedures, among others areas.24

The Commission has adopted riskmanagement standards under Section 

805(a)(2) of the Clearing Supervision 

Act and Section 17A of the Exchange 

Act (the ‘‘Clearing Agency Rules’’).25

The Clearing Agency Rules require, 

among other things, each covered 

clearing agency to establish, implement, 

maintain, and enforce written policies 

and procedures that are reasonably 

designed to meet certain minimum 

requirements for its operations and riskmanagement practices on an ongoing 

basis.26 As such, it is appropriate for the 

Commission to review advance notices 

against the objectives and principles of 

these risk management standards as 

described in Section 805(b) of the 

Clearing Supervision Act and the 

Clearing Agency Rules.27 As discussed 

below, the Commission believes the 

proposal in the Amended Advance 

Notice is consistent with the objectives 

and principles described in Section 

805(b) of the Clearing Supervision 

Act,28 and in the Clearing Agency Rules, 

in particular Rules 17Ad–22(e)(2)(i), 

(iii), and (v), 17Ad–22(e)(3)(ii), and 

17Ad–22(e)(15)(i) under the Exchange 

Act.29

A. Consistency With Section 805(b) of 

the Clearing Supervision Act 

The Commission believes that the 

proposal contained in OCC’s Amended 

Advance Notice is consistent with the 

stated objectives and principles of 

Section 805(b) of the Clearing 

Supervision Act. Specifically, as 

discussed below, the Commission 

believes that the changes proposed in 

the Amended Advance Notice are 

consistent with promoting robust risk 

management, promoting safety and 

soundness, reducing system risks, and 

supporting the stability of the broader 

financial system.30

First, the Commission believes that 

the proposed changes are consistent 

with reducing systemic risks and 

supporting the stability of the broader 

financial system. OCC is the sole 

registered clearing agency for the U.S. 

listed options markets and a SIFMU. By 

specifying the steps that OCC would 

take in either a recovery or an orderly 

wind-down, the Commission believes 

that the proposed changes would 

enhance OCC’s ability to address 

circumstances specific to an extreme 

stress event, thereby increasing the 

likelihood that it could execute a 

successful recovery or orderly winddown in such an event. As such, the 

Commission believes that the RWD Plan 

would help reduce systemic risk by 

decreasing the likelihood of a disorderly 

or unsuccessful recovery or wind-down, 

which could otherwise disrupt the 

markets for which OCC clears, thereby 

leading to the transmission of risk 

across market participants. For the same 

reason, the Commission also believes 

the RWD Plan would support the 

stability of the broader financial system. 

Second, the RWD Plan would, as 

described above, specify the Enhanced 

Risk Management Tools and Recovery 

Tools available to OCC in recovery, as 

well as the governance framework 

applicable to the use of such tools. It 

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 use to address, or preferably 

prevent, a recovery scenario, the RWD 

Plan would increase the likelihood that 

recovery would be orderly, efficient, 

and successful. By doing so, the 

Commission believes that the RWD Plan 

would enhance OCC’s ability to 

maintain the 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 both robust risk 

management and safety and soundness 

in the clearance and settlement in the 

listed-options and futures markets. 

Similarly, the Commission believes 

that the RWD Plan would enhance 

OCC’s ability to promote robust risk 

management and safety and soundness 

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 

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 these provisions would 

enhance OCC’s ability to promote robust 

risk management and safety and 

soundness in the clearance and 

settlement of the listed-options and 

futures markets by assuring that 

transactions are transferred to another 

entity or closed out in an orderly and 

transparent manner. 

Accordingly, and for the reasons 

stated, the Commission believes the 

changes proposed in the Amended 

Advance Notice are consistent with 

Section 805(b) of the Clearing 

Supervision Act.31

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, 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 44113 

32 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v). 

33 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v). 

34 17 CFR 240.17Ad–22(e)(3)(ii). 

35 Id. 

36 Id. 

37 Id. 

38 Id. 

39 Id. 

40 17 CFR 240.17Ad–22(e)(15)(i). 

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.32

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).33

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.34

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).35 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).36

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).37 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).38

Therefore, the Commission believes 

that the proposed changes to adopt 

plans for the orderly recovery and wind 

down of OCC are consistent with Rule 

17Ad–22(e)(3)(ii).39

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.40

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 

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 


sradovich on DSK3GMQ082PROD with NOTICES
44114 Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 

41 17 CFR 240.17Ad–22(e)(15)(i). 

42 17 CFR 240.17Ad–22(e)(15)(i). 

43 12 U.S.C. 5465(e)(1)(I). 

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

2 17 CFR 240.19b–4. 

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

4 17 CFR 240.19b–4(f)(6)(iii). 

5 IX is associated with order [sic] routed to IEX 

using TRIM or TRIM2 routing strategy. 

6TRIM and TRIM2 are both routing options under 

which an order checks the System for available 

shares and then is sent to destinations on the 

applicable System routing table. See Rule 

11.13(b)(3)(G). 

7The term ‘‘System routing table’’ refers to the 

proprietary process for determining the specific 

trading venues to which the System routes orders 

and the order in which it routes them. See Rule 

11.13(b)(3). Rule 11.13(b)(3) permits the Exchange 

to maintain a different System routing table for 

different routing options and to modify the System 

routing table at any time without notice. 

8 15 U.S.C. 78f(b). 

9 15 U.S.C. 78f(b)(5). 

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).41

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).42

IV. Conclusion 

It is therefore noticed, pursuant to 

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

Supervision Act,43 that the Commission 

does not object to Advance Notice (SR– 

OCC–2017–810), as modified by Partial 

Amendment No. 3, 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–2017–021, as modified by Partial 

Amendment No. 3, whichever is later. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18656 Filed 8–28–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83926; File No. SR– 

CboeBZX–2018–060] 

Self-Regulatory Organizations; Cboe 

BZX Exchange, Inc.; Notice of Filing 

and Immediate Effectiveness of a 

Proposed Rule Change Amending the 

Fee Schedule To Eliminate Fee Code IX 

on Cboe BZX 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 BZX Exchange, Inc. (the 

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

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Exchange has 

designated this proposal as a ‘‘noncontroversial’’ proposed rule change 

pursuant to Section 19(b)(3)(A) of the 

Act 3 and Rule 19b–4(f)(6)(iii) 

thereunder,4 which renders it 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 eliminate fee code IX, which 

applies to orders routed to Investors 

Exchange LLC using the Exchange’s 

TRIM or TRIM2 routing strategies. 

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 (‘‘BZX Equities’’) to 

eliminate fee code IX,5 which applies to 

orders routed to Investors Exchange LLC 

(‘‘IEX’’) using the Exchange’s TRIM or 

TRIM2 6 routing strategies. Currently, 

the fee schedule provides that orders 

routed to IEX using the TRIM or TRIM2 

routing strategies are charged a fee of 

$0.0010 per share under fee code IX. In 

May 2018, the Exchange removed IEX 

from the System routing table for its 

TRIM and TRIM2 routing strategies,7

which are designed to route to low cost 

away markets, due to increased costs 

associated with routing to IEX. Since 

IEX is no longer considered as a 

potential routing destination for those 

strategies, the Exchange proposes to 

eliminate fee code IX. Orders routed to 

IEX using other routing strategies will 

not be impacted by this proposed rule 

change and will continue to be charged 

the same rates as in place today. 

2. Statutory Basis 

The Exchange believes that its 

proposal is consistent with Section 6(b) 

of the Act 8 in general, and furthers the 

objectives of Section 6(b)(5) of the Act 9

in particular, in that it is designed to 

promote just and equitable principles of 

trade, to foster cooperation and 

coordination with persons engaged in 

facilitating transactions in securities, to 

remove impediments to and perfect the 

mechanism of a free and open market 

and a national market system and, in 

general, to protect investors and the 

public interest. 

The Exchange believes that the 

proposed change to eliminate fee code 

IX is consistent with the public interest 

and the protection [sic] investors as this 

is a non-substantive change being made 

because the Exchange no longer routes 

to IEX using the routing strategies 

specified in that fee code. The Exchange 

had previously routed orders to IEX 

using the TRIM and TRIM2 order 

routing strategies, which are designed to 

route to low cost venues, but recently 

stopped doing so due to increased 

routing costs associated with trading on 

IEX. As such, the Exchange believes that 

updating the fee schedule to reflect that 

these two routing strategies are not 

available for routing to IEX will increase 

transparency around the operation of 

the Exchange to the benefit of Members 

and investors. Because the proposed 

changes apply only to a fee code that is 

no longer in use on the Exchange, the 

proposed rule change will have no 

impact on the transaction fees actually 

assessed to Members. 

(B) Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will result in 

any burden on competition that is not 


sradovich on DSK3GMQ082PROD with NOTICES