[Federal Register Volume 83, Number 168 (Wednesday, August 29, 2018)]
[Notices]
[Pages 44083-44091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18655]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83927; File No. SR-OCC-2017-809]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice, as Modified by Amendment No. 
2, Concerning Enhanced and New Tools for Recovery Scenarios

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-2017-809 (``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 propose changes to OCC's Rules and By-Laws to 
enhance OCC's existing tools to address the risks of liquidity 
shortfalls and credit losses and to establish new tools by which OCC 
could re-establish a matched book and, if necessary, allocate uncovered 
losses following a default as well as provide for additional financial 
resources. The Advance Notice was published for public comment in the 
Federal Register

[[Page 44084]]

on January 23, 2018.\4\ On January 23, 2018, the Commission requested 
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\
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    \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.
    \4\ Exchange Act Release No. 82513 (Jan. 17, 2018), 83 FR 3244 
(Jan. 23, 2018) (SR-2017-809) (``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. 82531 (Dec. 
19, 2017), 82 FR 61107 (Dec. 26, 2017).
    \5\ See Memorandum from Office of Clearance and Settlement, 
Division of Trading and Markets, dated January 23, 2018, available 
at https://www.sec.gov/comments/sr-occ-2017-809/occ2017809-2948229-161855.pdf.
    \6\ See Memorandum from Office of Clearance and Settlement, 
Division of Trading and Markets, dated July 17, 2018, available at 
https://www.sec.gov/comments/sr-occ-2017-809/occ2017809-04062512-169148.pdf.
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    On July 11, 2018, OCC filed Amendment Nos. 1 and 2 to the Advance 
Notice to make certain changes to clarify the use of the recovery tools 
and to improve the overall transparency regarding the use of the 
recovery tools.\7\ Notice of the Amendments to the Advance Notice was 
published for public comment in the Federal Register on August 7, 
2018.\8\ Comments received on the proposal contained in the Advance 
Notice are discussed below.\9\
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    \7\ Amendment No. 2 was filed to supersede and replace Amendment 
No. 1 in its entirety due to technical defects in Amendment No. 1.
    \8\ See Exchange Act Release No. 83761 (Aug. 1, 2018), 83 FR 
38738 (Aug. 7, 2018) (``Notice of Amendment'').
    \9\ The letters are available at: https://www.sec.gov/comments/sr-occ-2017-022/occ2017020.htm.
    Since the proposal contained in the Advance Notice was also 
filed as a proposed rule change, all comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the proposed rule change or the Advance Notice.
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    This publication serves as notice that the Commission does not 
object to the changes set forth in the Advance Notice, as amended by 
Amendment No. 2 (``Amended Advance Notice'').

II. Background [bds1][bds0]
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    \10\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    The Amended Advance Notice concerns proposed changes to OCC's Rules 
and By-Laws to enhance OCC's existing tools to address the risks of 
liquidity shortfalls and credit losses and to establish new tools by 
which OCC could re-establish a matched book and, if necessary, allocate 
uncovered losses following the default of a Clearing Member as well as 
provide for additional financial resources. Each of the proposed tools 
is contemplated to be deployed by OCC in an extreme stress event that 
has placed OCC into a recovery or orderly wind-down scenario. The 
proposed changes include modifying OCC's powers of assessment, 
introducing a framework for requesting voluntary payments to the 
Clearing Fund, and establishing OCC's authority to extinguish open 
positons (i.e., conduct tear-ups) as well as authorizing OCC's Board to 
re-allocate losses from tear-ups.

A. Proposed Changes to OCC's Powers of Assessment

    OCC maintains a Clearing Fund comprised of required contributions 
from Clearing Members, and OCC has authority to use the Clearing Fund, 
by a proportionate charge or otherwise, to cover certain losses 
suffered by OCC.\11\ When an amount is paid out of a Clearing Member's 
required contribution to the Clearing Fund, the Clearing Member is 
generally required to promptly make good any deficiency in its required 
contribution to the Clearing Fund from such payment.\12\ Generally, 
this requirement to promptly make good on any deficiency arising from 
the default of a Clearing Member has been referred to as an 
``assessment'' by OCC against a Clearing Member; however, as further 
described below, OCC is making clarifying changes to a Clearing 
Member's obligation to contribute to the Clearing Fund, including 
defining and delineating between a Clearing Member's obligation to 
answer ``assessments'' charged by OCC under certain circumstances 
described further below and a Clearing Member's obligations where OCC 
seeks to effect a ``replenishment'' of the Clearing Fund.
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    \11\ See OCC By-Laws, Article VIII. For example, under Section 5 
of Article VIII of the OCC By-Laws, when a Clearing Member defaults, 
OCC will pay for the resulting losses or expenses by first applying 
other funds available to OCC in the accounts of the defaulting 
Clearing Member and then applying the defaulting Clearing Member's 
required contribution to the Clearing Fund. If the losses and 
expenses exceed those amounts, then OCC will charge the amount of 
the remaining deficiency on a proportionate basis against all non-
defaulting Clearing Members' required contributions to the Clearing 
Fund.
    \12\ See OCC By-Laws, Article VIII, Section 6.
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    Currently, a Clearing Member's obligation to make good its required 
contribution to the Clearing Fund is not subject to any pre-determined 
limit. However, a Clearing Member may limit the amount of its liability 
to contribute to the Clearing Fund by winding-down its clearing 
activities and terminating its membership. To do so, a Clearing Member 
must provide written notice to OCC that it is terminating its 
membership by no later than the fifth business day after application of 
the proportionate charge.\13\ This termination would limit the Clearing 
Member's obligation to meet a future assessment to an additional 100 
percent of the amount of its then-required Clearing Fund contribution. 
Thus, terminating clearing membership is the only means by which a 
Clearing Member can currently limit its liability for amounts due to 
the Clearing Fund. OCC proposed three changes to modify its existing 
authority to assess proportionate charges against Clearing Members' 
required contributions to the Clearing Fund: (1) A cooling-off period 
and cap on assessments; (2) termination of clearing membership during a 
cooling-off period; and (3) replenishment of resources following a 
cooling-off period.
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    \13\ In addition to providing the written notice, to effectively 
terminate membership, a Clearing Member must satisfy two other 
conditions. First, after submitting the written notice, the Clearing 
Member cannot submit for clearance any opening purchase transaction 
or opening written transaction or initiate a Stock Loan through any 
of the Clearing Member's accounts. Second, the Clearing Member has 
to close out or transfer all of its open positions with OCC, in each 
case as promptly as practicable after giving written notice. See OCC 
By-Laws, Article VIII, Section 6.
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1. Cooling-Off Period and Cap on Assessments
    The proposal would introduce a minimum fifteen calendar day 
``cooling-off'' period that automatically begins when OCC imposes a 
proportionate charge related to the default of a Clearing Member 
against non-defaulting Clearing Members' Clearing Fund contributions. 
During a cooling-off period, the aggregate liability for a Clearing 
Member would be capped at 200 percent of its then-required contribution 
to the Clearing Fund. The cooling-off period would be extended if one 
or more specific events related to the default of a Clearing Member (as 
set forth in OCC's By-laws) \14\ occur(s)

[[Page 44085]]

during that fifteen calendar day period and results in one or more 
proportionate charges against the Clearing Fund. Such an extension 
would run until the earlier of (i) the fifteenth calendar day from the 
date of the most recent proportionate charge resulting from that 
subsequent event, or (ii) the twentieth day from the date of the 
proportionate charge that initiated the cooling-off period.
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    \14\ Specifically, a cooling-off period would automatically 
begin after a proportionate charge arises in response to: (i) Any 
Clearing Member failure to discharge duly any obligation on or 
arising from any confirmed trade accepted by OCC, (ii) any Clearing 
Member (including any Appointed Clearing Member) failure to perform 
any obligations (including its obligations to the correspondent 
clearing corporation) under or arising from any exercised or 
assigned option contract or any other contract or obligation issued 
or guaranteed by OCC or in respect of which it is otherwise liable, 
(iii) any Clearing Member failure to perform any obligation to OCC 
in respect of the stock loan and borrow positions of such Clearing 
Member, or (iv) OCC suffered any loss or expense upon any 
liquidation of a Clearing Member's open positions. See OCC By-Laws, 
Article VIII, Section 5(a)(i)-(iv).
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    Once the cooling-off period ends, each remaining Clearing Member 
would be required to replenish the Clearing Fund in the amount 
necessary to meet its then-required contribution. Any remaining losses 
or expenses suffered by OCC as a result of any events that occurred 
during that cooling-off period could not be charged against the amounts 
Clearing Members have contributed to replenish the Clearing Fund upon 
the expiration of the cooling-off period. However, after the end of a 
cooling-off period, the occurrence of another specified event that 
results in a proportionate charge against the Clearing Fund would 
trigger a new cooling-off period.
2. Membership Termination During a Cooling-Off Period
    As noted above, to limit its liability to replenish the Clearing 
Fund, a Clearing Member currently must provide written notice of its 
intent to terminate its clearing membership by no later than the fifth 
business day after a proportionate charge. OCC's proposal would extend 
the time frame for a Clearing Member to provide such notice of 
termination, which would allow the terminating Clearing Member to avoid 
liability to replenish the Clearing Fund after the cooling-off period. 
Specifically, to terminate its status as a Clearing Member and not be 
liable for replenishment at the end of a cooling-off period, a Clearing 
Member would be required to: (i) Notify OCC in writing of its intent to 
terminate by no later than the last day of the cooling-off period, (ii) 
not initiate any opening purchase or opening writing transaction, and, 
if the Clearing Member is a Market Loan Clearing Member or a Hedge 
Clearing Member, not initiate any Stock Loan transaction through any of 
its accounts, and (iii) close-out or transfer all open positions by no 
later than the last day of the cooling-off period. If a Clearing Member 
fails to satisfy all of these conditions by the end of a cooling-off 
period, it would not have completed all of the requirements necessary 
to terminate its status as a Clearing Member, and therefore, it would 
remain subject to its obligation to replenish the Clearing Fund after 
the cooling-off period ends.
    Given the products cleared by OCC and the composition of its 
clearing membership, OCC determined that a minimum 15-calendar day 
cooling-off period, rolling up to a maximum of 20 calendar days, is 
likely to be a sufficient amount of time for OCC to manage the ongoing 
default(s) and take necessary steps in furtherance of stabilizing the 
clearing system. Further, based on its conversations with Clearing 
Members, OCC believes that the proposed cooling-off period is likely to 
be a sufficient amount of time for Clearing Members (and their 
customers) to orderly reduce or rebalance their positions, in an 
attempt to mitigate stress losses and exposure to potential initial 
margin increases during the stress event.\15\ OCC also believes the 
proposed cooling-off period, coupled with the other proposed changes to 
OCC's assessment powers, is likely to provide Clearing Members with an 
adequate measure of stability and predictability as to the potential 
use of Clearing Fund resources, which would, according to OCC, remove 
the existing incentive for Clearing Members to withdraw following a 
proportionate charge (i.e., to avoid facing potentially unlimited 
liability for replenishing the Clearing Fund).
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    \15\ See Notice of Amendment, 83 FR at 38746.
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3. Replenishment and Assessment
    The proposal would clarify the distinction between 
``replenishment'' of the Clearing Fund and a Clearing Member's 
obligation to answer ``assessments'' charged by OCC. In this context, 
the term ``replenish'' (and its variations) would refer to a Clearing 
Member's standing duty, following any proportionate charge against the 
Clearing Fund, to return its Clearing Fund contribution to the amount 
required from such Clearing Member for the month in question. The term 
``assessment'' (and its variations) would refer to the amount, during 
any cooling-off period, that a Clearing Member would be required to 
contribute to the Clearing Fund in excess of the amount of the Clearing 
Member's pre-funded required Clearing Fund contribution.

B. Proposed Authority To Request Voluntary Payments

    OCC proposed new Rule 1011 to provide a framework for receipt of 
voluntary payments in a circumstance where a Clearing Member has 
defaulted and OCC has determined that it may not have sufficient 
resources to satisfy its obligations and liabilities resulting from 
such default.\16\ OCC would initiate a call for voluntary payments by 
issuing a notice inviting all non-defaulting Clearing Members to make 
payments to the Clearing Fund in addition to any amounts they are 
otherwise required to contribute pursuant to Rule 1001 (``Voluntary 
Payment Notice''). The Voluntary Payment Notice would specify the terms 
applicable to any voluntary payment, including but not limited to, that 
any voluntary payment may not be withdrawn once made, that no Clearing 
Member shall be obligated to make a voluntary payment, and that OCC 
shall retain full discretion to accept or reject any voluntary payment.
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    \16\ OCC's determination would be made notwithstanding 
availability of remaining resources under Rules 707 (addressing the 
treatment of funds in a Clearing Member's X-M accounts); 1001 
(addressing the size of OCC's Clearing Fund and the amount of a 
Clearing Member's contribution); 1104-1107 (concerning the treatment 
of the portfolio of a defaulted Clearing Member); and 2210 and 2211 
(concerning the treatment of Stock Loan positions of a defaulted 
Clearing Member).
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    In the event that OCC eventually obtains additional financial 
resources from the defaulting Clearing Member, OCC would give priority 
to repayment of Clearing Members that made Voluntary Payments. 
Specifically, if OCC subsequently recovers from the defaulted Clearing 
Member or the estate of the defaulted Clearing Member, OCC would seek 
to first compensate all non-defaulting Clearing Members that made 
voluntary payments.\17\ If the amount recovered from the defaulted 
Clearing Member were less than the aggregate amount of voluntary 
payments, non-defaulting Clearing Members that made voluntary payments 
each would receive a percentage of the amount recovered that 
corresponds to that Clearing Member's percentage of the total amount of 
voluntary payments received.
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    \17\ As discussed further in Section II.C.1 below, OCC's 
proposed authority with respect to Voluntary Payments and Voluntary 
Payments would work together to establish a hierarchy of repayment 
in the event that OCC subsequently recovers from the defaulted 
Clearing Member. Under proposed rules 1011(b) and 1111(a)(ii), OCC 
would first seek to compensate those non-defaulting Clearing Members 
who had submitted Voluntary Payments and, thereafter, to the extent 
funds remained, OCC would then seek to compensation those non-
defaulting Clearing Members who had participated in the Voluntary 
Tear-Up.
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C. Proposed Authority To Conduct Voluntary Tear-Ups and Partial Tear-
Ups

    OCC proposed new Rule 1111 to establish a framework to extinguish 
positions of a suspended or defaulted Clearing Member on a voluntary 
basis (``Voluntary Tear-Up'') or on a mandatory basis (``Partial-Tear 
Up'') and, in certain extreme circumstances, to allocate any uncovered 
losses in the event that OCC does not have sufficient financial 
resources to conduct the tear-

[[Page 44086]]

up. A Voluntary Tear-Up, if provided, would precede a Partial-Tear Up, 
and any Partial Tear-Up would take into account any positions 
extinguished as part of a Voluntary Tear-Up. Further, Rule 1111(h) 
would provide that no action or omission by OCC pursuant to, and in 
accordance with, Rule 1111 shall constitute a default by OCC, provided 
that Rule 1111(h) would not apply in the event that OCC pays Clearing 
Members a pro rata amount of the applicable Tear-Up price because OCC 
does not have adequate resources to pay the full Tear-Up price.
    OCC's use of both Voluntary and Partial Tear-Up would be subject to 
certain prerequisites. First, any tear-up would occur after one or more 
failed auctions pursuant to Rule 1104 or 1106. Second, any tear-up 
would occur after OCC has determined that it may not have sufficient 
resources to satisfy its obligations and liabilities resulting from 
such default.\18\
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    \18\ As with Voluntary Payments, this determination would be 
made notwithstanding availability of remaining resources under Rules 
707, 1001, 1104-1107, 2210, and 2211. See note 16 supra.
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    OCC represented that it would initiate its tear-up process on a 
date sufficiently in advance of the exhaustion of its financial 
resources such that OCC would expect to have adequate remaining 
resources to cover the amount it must pay to extinguish the positions 
of Clearing Members and customers.\19\ The holders of torn-up positions 
would be assigned a price, and OCC would draw on its remaining 
financial resources to extinguish the torn-up positions at the assigned 
price. Although OCC does not intend, in the first instance, for its 
tear-up process to serve as a means of loss allocation, OCC recognizes 
that circumstances may arise such that, despite its best efforts, OCC 
may not have adequate remaining financial resources to extinguish torn-
up positions at the full assigned price, resulting in the allocation of 
uncovered losses by the tear-up process. As further described below, a 
Clearing Member allocated an uncovered loss would then have an 
unsecured claim against OCC for the value of the difference between the 
pro rata amount paid to the Clearing Member and the full amount the 
Clearing Member should have received.
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    \19\ Specifically, OCC stated that it anticipated that it would 
determine the date on which to initiate Partial Tear-Ups by 
monitoring its remaining financial resources against the potential 
exposure of the remaining unauctioned positions from the 
portfolio(s) of the defaulted Clearing Member(s).
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1. Voluntary Tear-Up
    As noted above, a Voluntary Tear-Up would provide an opportunity to 
holders of certain positions opposite a defaulting Clearing Member to 
voluntarily extinguish those positions. Although the Risk Committee of 
OCC's Board of Directors (``Risk Committee'') approval is not necessary 
to commence a Voluntary Tear-Up, the Risk Committee would be 
responsible for determining the scope of a Voluntary Tear-Up. Proposed 
Rule 1111(c) would provide discretion to the Risk Committee when 
determining the appropriate scope, but the discretion would be subject 
to, and limited by, certain conditions, i.e., that the determination 
should be: (i) Based on then-existing facts and circumstances; (ii) be 
in furtherance of the integrity of OCC and the stability of the 
financial system; and (iii) take into consideration the legitimate 
interests of Clearing Members and market participants.
    Once the Risk Committee has determined the scope, OCC would 
initiate the call for Voluntary Tear-Ups by issuing a notice 
(``Voluntary Tear-Up Notice'') to inform all non-defaulting Clearing 
Members of the opportunity to participate in a Voluntary Tear-Up.\20\ 
The Voluntary Tear-Up Notice would specify the terms applicable to any 
Voluntary Tear-Up, including, but not limited to, that no Clearing 
Member or customers of a Clearing Member shall be obligated to 
participate in a Voluntary Tear-Up, and that OCC shall retain full 
discretion to accept or reject any Voluntary Tear-Up.
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    \20\ Because OCC does not know the identities of Clearing 
Members' customers, OCC would depend on each Clearing Member to 
notify its customers with positions in scope of the Voluntary Tear-
Up of the opportunity to participate in such tear-up.
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    Clearing Members and their customers that participated in a 
Voluntary Tear-Up and incurred losses would have a claim to amounts 
subsequently recovered from a defaulted Clearing Member (or the estate 
of the defaulted Clearing Member). The claim would be junior to 
Clearing Members who made a voluntary payment to the Clearing Fund, and 
OCC would satisfy the claims on a pro-rata basis.
2. Partial Tear-Up
    Under proposed Rule 1111(b), OCC's Board would be responsible for 
the decision to conduct a mandatory Partial Tear-Up. The Risk Committee 
would then be responsible for determining the appropriate scope of the 
Partial Tear-Up, subject to the conditions in Rule 1111(c) discussed 
above.
    The proposed rule would also provide the Board with the discretion 
to conduct a mandatory Partial Tear-Up to extinguish the remaining open 
positions of any defaulted Clearing Member or customer of such 
defaulted Clearing Member(s) (``Remaining Open Positions'') and/or any 
related open positions necessary to mitigate further disruptions to the 
markets affected by the Remaining Open Positions (``Related Open 
Positions''). The open positions subject to tear-up opposite to the 
Remaining Open Positions and the Related Open Positions would be 
designated in accordance with the methodology in Rule 1111(e). 
Specifically, for Remaining Open Positions, the aggregate amount in the 
identical Cleared Contracts and Cleared Securities would be designated 
on a pro-rata basis to non-defaulting Clearing Members that have an 
open position in such Cleared Contract or Cleared Security. For 
Remaining Open Positions, all open positions in Cleared Contracts and 
Cleared Securities identified in the scope of the Partial Tear-Up would 
be extinguished.
    After the scope of the Partial Tear-Up is determined, OCC would 
initiate the Partial Tear-Up process by issuing a notice (``Partial 
Tear-Up Notice''). The Partial Tear-Up Notice would: (i) Identify the 
Remaining Open Positions and Related Open Positions designated for 
tear-up; (ii) identify the Tear-Up Positions; (iii) specify the 
termination price (``Partial Tear-Up Price'') for each position to be 
torn-up; and (iv) list the date and time, as determined by the Risk 
Committee, that the Partial Tear-Up will occur (``Partial Tear-Up 
Time'').
    Rule 1111(f) would provide that, to determine the Partial Tear-Up 
Price, OCC would use its discretion, acting in good faith and in a 
commercially reasonable manner, to adopt methods of valuation expected 
to produce reasonably accurate substitutes for the values that would 
have been obtained from the relevant market if it were operating 
normally, including but not limited to the use of pricing models that 
use the market price of the underlying interest or the market prices of 
its components. Rule 1111(f) further specifies that OCC may consider 
the same information set forth in subpart (c) of Section 27, Article VI 
of OCC's By-Laws.\21\ OCC stated that it is likely to

[[Page 44087]]

use the last established end-of-day settlement price, in accordance 
with its existing practices concerning pricing and valuation. However, 
given that it is not possible to know in advance the precise 
circumstances that would cause OCC to conduct a tear-up, Rule 1111(f) 
would allow OCC to exercise discretion, if necessary, in establishing 
the Partial Tear-Up Price by some means other than its existing 
practices concerning pricing and valuation. For example, OCC 
represented that it has observed certain rare circumstances in which a 
closing price for an underlying security of an option may be stale or 
unavailable. A stale or unavailable closing price could be the result 
of a halt on trading in the underlying security, a corporate action 
resulting in a cash-out or conversion of the underlying security (but 
that has not yet been finalized), or the result of an ADR whose 
underlying security is being impacted by certain provisions under 
foreign laws. OCC stated it would consider these circumstances in 
determining whether use of the discretion that would be afforded under 
proposed Rule 1111(f) might be warranted.\22\
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    \21\ Section 27, Article VI addresses the valuation of positions 
that may be subject to close-out netting in the event of OCC's 
insolvency or default. Specifically, it states that in determining a 
close-out amount, OCC may consider any information that it deems 
relevant, including, but not limited to, any of the following 
factors: (i) Prices for underlying interests in recent transactions, 
as reported by the market or markets for such interests; (ii) 
quotations from leading dealers in the underlying interest, setting 
forth the price (which may be a dealing price or an indicative 
price) that the quoting dealer would charge or pay for a specified 
quantity of the underlying interest; (iii) relevant historical and 
current market data for the relevant market, provided by reputable 
outside sources or generated internally; and (iv) values derived 
from theoretical pricing models using available prices for the 
underlying interest or a related interest and other relevant data.
    \22\ See Letter from Joseph P. Kamnik, Sr. Vice President and 
CRO, OCC, to Brent Fields, Secretary, Commission, at 5 (Jul. 9, 
2018) (``OCC Letter'').
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    Every Partial Tear-Up position would be automatically terminated at 
the Partial Tear-Up Time, without the need for any further step by any 
party to the position. Upon termination, either OCC or the relevant 
Clearing Member would be obligated to pay to the other party the 
applicable Partial Tear-Up Price. The corresponding open position would 
be deemed terminated at the Partial Tear-Up Price. In the event that, 
given the amount of remaining resources, OCC would not be able to pay 
the full Partial Tear-Up Price, OCC would pay each torn-up Clearing 
Member a pro-rata amount of the applicable Partial Tear-Up Price based 
on the amounts of such resources remaining. Those Clearing Members 
would then have an unsecured claim against OCC for the value of the 
difference between the pro rata amount and the Partial Tear-Up Price.
3. Re-Allocating Losses From Tear-Up
    The proposed changes would provide OCC with means to re-allocate 
losses, costs, and expenses associated with the tear-up process. First, 
the proposal would amend Article VIII of the By-Laws to provide OCC 
discretion to use remaining Clearing Fund contributions to re-allocate 
losses imposed on non-defaulting Clearing Members and customers from a 
tear-up. Second, in connection with a Partial Tear-Up, proposed Rule 
1111(g) would provide the Board with discretion to re-allocate losses, 
costs, and fees imposed upon non-defaulting Clearing Members and their 
customers among all non-defaulting Clearing Members to the extent that 
such losses, costs, and fees can be reasonably determined by OCC 
(``Special Charge''). The Special Charge would correspond to each non-
defaulting Clearing Member's proportionate share of the variable amount 
of the Clearing Fund at the time of the Partial Tear-Up. The Special 
Charge would be distinct and separate from a Clearing Member's 
obligation to satisfy Clearing Fund assessments during a cooling-off 
period and, therefore, not subject to the cap on assessments.

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.\23\
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    \23\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \24\ 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 \25\ provides the following objectives and 
principles for the Commission's risk-management standards prescribed 
under Section 805(a):
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    \24\ 12 U.S.C. 5464(a)(2).
    \25\ 12 U.S.C. 5464(b).
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    <bullet> To promote robust risk management;
    <bullet> to promote safety and soundness;
    <bullet> to reduce systemic risks; and
    <bullet> 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.\26\
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    \26\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\27\ 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 risk-management practices on an 
ongoing basis.\28\ 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. 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,\29\ and in the Clearing 
Agency Rules, in particular Rules 17Ad-22(e)(2)(i), (iii), and (v), 
(e)(4)(viii) and (ix), (e)(13), and (e)(23)(i) and (ii).\30\
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    \27\ 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).
    \28\ 17 CFR 240.17Ad-22.
    \29\ 12 U.S.C. 5464(b).
    \30\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v), (e)(4)(viii) 
and (ix), (e)(13), and (e)(23)(i) and (ii).
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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 in the area of credit risk, promoting 
safety and soundness, reducing system risks, and supporting the 
stability of the broader financial system.\31\
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    \31\ 12 U.S.C. 5464(b).
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    First, the proposed rule changes would provide OCC with additional 
tools to address risks it may confront in an extreme stress event that 
places OCC in a recovery scenario. The Commission

[[Page 44088]]

believes that the new and amended authority granted to OCC and 
described in the Amended Advance Notice should provide OCC with the 
ability to re-establish a matched book, allocate uncovered losses if 
necessary, and limit OCC's potential exposure to losses from an extreme 
loss event, all of which would be essential to OCC's ability to 
continue to provide its critical clearing services in the event that an 
extreme market event places OCC in a recovery scenario. In general, OCC 
maintains equal and opposite obligations on cleared positions. In an 
extreme loss event caused by a Clearing Member default, re-establishing 
this matched book as quickly as possible is essential because it would 
allow OCC to close out the defaulting Clearing Member's portfolio, 
define the potential scope of losses, and avoid additional losses to 
non-defaulting Clearing Members or OCC. In addition, allocating 
uncovered losses is important in an extreme loss event because it would 
allow OCC to provide further certainty to Clearing Members, their 
customers, and other stakeholders about how it addresses such losses 
and avoid a disorderly resolution to such an event. Thus, taken 
together, the Commission believes that, by providing OCC with these new 
and amended tools specific to the context of extreme loss events that 
may heighten the need for recovery, the proposed changes should improve 
OCC's ability to recover in the event that an extreme market event 
places OCC in a recovery scenario, and therefore are reasonably 
designed to enhance OCC's ability to address an extreme loss event and 
continue to operate in a safe and sound manner during such an event.
    In addition, the Commission believes that the proposed changes 
would provide a reasonable amount of clarity and specificity to 
Clearing Members, their customers, and other stakeholders about the 
potential tools that would be expected to be available to OCC if such 
an event occurred, and the consequences that might arise from OCC's 
application of such tools. Because of this increased clarity and 
specificity, OCC's Clearing Members, their customers, and other 
stakeholders should have more information regarding their potential 
exposure and liability to OCC in an extreme loss event. Accordingly, 
the Commission believes that the proposed changes should allow Clearing 
Members, their customers, and other stakeholders to better evaluate the 
risks and benefits of clearing transactions at OCC because the proposed 
changes result in those parties having more information and specificity 
regarding the actions that OCC could take in response to an extreme 
loss event. Further, to the extent that Clearing Members, their 
customers, and other stakeholders are able to use this increased 
clarity and specificity to better manage their potential exposure and 
liability in clearing transactions at OCC, such parties should be able 
to mitigate the likelihood that such tools could surprise or otherwise 
destabilize them and, by extension, the broader financial system. For 
these reasons, the Commission believes that the proposed changes are 
consistent with promoting robust risk management, promoting safety and 
soundness, and supporting the stability of the broader financial 
system.
    Second, 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. It is therefore 
important for OCC to implement measures that enhance its ability to 
address losses and avoid threatening the stability of the U.S. listed 
options markets and the broader financial system, including measures 
reflected in the proposed changes that are designed to facilitate OCC's 
ability to address risks and obligations arising in the specific 
context of extreme loss events that may heighten the need for recovery. 
Therefore, and for the reasons discussed above with respect to OCC's 
ability to re-establish a matched book, allocate uncovered losses if 
necessary, and limit OCC's potential exposure to losses from an extreme 
loss event, the Commission believes that, as a result of the new and 
amended authority granted to OCC to implement such measures, the 
proposed changes are reasonably designed to facilitate OCC's ability to 
fully allocate, and ultimately extinguish, any losses arising from an 
extreme market event, thereby enhancing OCC's ability to continue to 
provide its critical clearing services. Relatedly, the Commission also 
believes that the proposed changes should reduce the potential risk 
that OCC's handling of an extreme loss event results in additional 
financial stress or instability passing on to Clearing Members, their 
customers, other stakeholders and the broader financial system 
generally during such events. As such, the Commission believes the 
proposed change is consistent with reducing systemic risks and 
supporting the stability of the broader financial system.
    Third, OCC's proposed modified assessment powers would impose a cap 
on a Clearing Member's potential liability to replenish the Clearing 
Fund following a particular default event and extend the timeframe 
during which a Clearing Member must determine whether to terminate its 
membership and avoid further losses. In addition, the new authority to 
seek Voluntary Payments would provide an additional tool by which OCC 
may increase its financial resources. Taken together, the Commission 
believes that these tools are reasonably designed to provide OCC with 
sufficient financial resources to cover default losses and ensure that 
OCC can take timely actions to contain losses and continue meeting its 
obligations in the event of a Clearing Member default. Similarly, the 
Commission believes that these changes would provide Clearing Members 
and their customers with greater certainty and predictability regarding 
the amount of losses they must bear as a result of a Clearing Member 
default. For these reasons, the Commission believes that these tools 
should enhance OCC's ability to address the issues arising from a 
Clearing Member default, thereby promoting robust risk management and 
safety and soundness.
    Fourth, OCC's proposed authority to conduct tear-ups would provide 
OCC with a mechanism for restoring a matched book and, in the event 
that OCC did not have sufficient financial resources to pay the full 
Partial Tear-Up Price, allocate losses to the non-defaulting Clearing 
Members. The Commission recognizes that a tear-up would result in 
termination of positions of non-defaulting Clearing Members. However, 
because under the proposed rules 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 tear-up would only arise 
in an extreme stress scenario. Use of tear-up in such circumstances 
could potentially return OCC to a matched book quickly, thereby 
containing its losses and avoiding OCC's and its Clearing Members' 
exposure to additional losses, as discussed further above. OCC's 
proposal would also address the determination of the Partial Tear-Up 
Price. Specifically, OCC would determine a Partial Tear-Up Price by 
using its discretion, acting in good faith and a commercially 
reasonable manner, to adopt methods of valuation expected to produce 
reasonably accurate substitutes for the values that would have been 
obtained from the relevant market if it were operating normally, 
including but not limited to the use of pricing models that use the 
market price

[[Page 44089]]

of the underlying interest or the market prices of its components. The 
Commission believes that OCC's proposed authority to conduct tear-ups, 
and therefore its ability to return to a matched book quickly and, in 
an extreme event, allocate losses, could facilitate the timely 
containment of default losses and liquidity pressures, thereby helping 
to prevent OCC from failing in such an event, and is therefore 
consistent with promoting robust risk management and safety and 
soundness. Further, the Commission believes that, to the extent that 
OCC's ability to conduct tear-ups could limit contagion to the broader 
financial system, this ability is also consistent with supporting the 
stability of the broader financial system.
    One commenter states that the Partial Tear-Up Price should be 
determined objectively and not on a discretionary basis.\32\ In the OCC 
Letter, OCC states that, in the event that it has to determine a 
Partial Tear-Up Price, OCC anticipates that it is likely to use the 
last established end-of-day settlement price, in accordance with its 
existing practices concerning pricing and valuation, but notes that 
discretion may be necessary in the circumstances likely to be 
associated with an extreme loss event necessitating a tear-up where the 
end-of-day closing price may be stale or unavailable.\33\ Further, the 
Commission notes that, under OCC's proposed rule, OCC would not have 
unfettered discretion to determine the appropriate price. Rather, OCC's 
discretion would be limited by two conditions. Specifically, in the 
event that OCC uses its discretion to determine a Partial Tear-Up 
Price, it will be required under OCC's proposed rule to do so (i) in 
good faith and (ii) in a commercially reasonable manner.\34\ The 
Commission believes that this discretion, as limited by the two 
specified conditions, is appropriate given that it is not possible to 
know the precise circumstances likely to be associated with an extreme 
loss event necessitating a tear-up, and, therefore, the limited 
discretion provided for in the proposed rule may be appropriate in such 
circumstances. The Commission also notes that, in the event that OCC is 
using its authority to conduct a Partial Tear-Up, OCC would provide 
notification to the Commission and other regulators.\35\ Accordingly, 
the Commission does not believe that this aspect of the proposal is 
inconsistent with the Clearing Supervision Act.
---------------------------------------------------------------------------

    \32\ See Letter from Jacqueline H. Mesa, Sr. Vice President of 
Global Policy, Futures Industry Association, to Brent Fields, 
Secretary, Commission, at 2 available at https://www.sec.gov/comments/sr-occ-2017-022/occ2017020.htm (Jan. 16, 2018) (``FIA 
Letter'').
    \33\ See OCC Letter at 5. According to OCC, a stale or 
unavailable closing price could be the result of a halt on trading 
in the underlying security, a corporate action resulting in a cash-
out or conversion of the underlying security (but that has not yet 
been finalized), or the result of an ADR whose underlying security 
is being impacted by certain provisions under foreign laws. See id.
    \34\ See also id. at 5.
    \35\ See Securities Exchange Act Release No. 83928 (Aug. 23, 
2018 at note 19).
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    Finally, OCC's proposal would also introduce methods of re-
allocating losses after a tear-up. First, the revised By-Laws would 
allow OCC discretion to use remaining Clearing Fund contributions to 
re-allocate losses imposed on non-defaulting Clearing Members and their 
customers from a tear-up. Second, the revised Rules would provide the 
Board with the discretion to re-allocate losses among all non-
defaulting members via a Special Charge, to the extent that such losses 
can be reasonably determined. As such, the Commission believes that 
these tools, and the associated governance, are reasonably designed to 
give OCC the ability to re-allocate the losses in a fair and equitable 
manner after an extreme market event, thereby promoting safety and 
soundness and supporting the stability of the broader financial system.
    One commenter states that the power to impose the Special Charge in 
connection with a Partial Tear-Up potentially could impose costs onto 
non-defaulting Clearing Members that did not have an opposing position 
from a defaulting Clearing Member. According to the commenter, the 
Special Charge could, in effect, be another assessment against all 
Clearing Members, which could create unquantifiable and unmanageable 
risks to Clearing Members. Moreover, the commenter states that the 
discretion afforded the Board may result in the Special Charge being 
capriciously applied. For these reasons, the commenter believes that 
the costs associated with a Partial Tear-Up should not be transferrable 
to unaffected Clearing Members.\36\
---------------------------------------------------------------------------

    \36\ See FIA Letter at 2.
---------------------------------------------------------------------------

    Under the terms of the proposed rule, the Special Charge could only 
be used when the losses, costs, and fees imposed upon non-defaulting 
Clearing Members and their customers directly resulting from a Partial 
Tear-Up reasonably can be determined by OCC. Further, if it were used, 
the Special Charge would correspond to each non-defaulting Clearing 
Member's proportionate share of the Clearing Fund at the time of the 
Partial Tear-Up. Thus, the Commission does not believe that OCC would 
be permitted under the proposed rule to engage in unlimited assessments 
because the amount of the Special Charge must be subject to a 
reasonable determination, and the Special Charge would then correspond 
to the non-defaulting Clearing Member's proportionate share of the 
Clearing Fund. These aspects of the Special Charge should help ensure 
that OCC does not apply the tool capriciously and that the Board would 
use the Special Charge in these delineated circumstances, i.e., when 
the amount of the losses was reasonably determinable. For these 
reasons, the Commission does not believe that the Special Charge is 
inconsistent with the Clearing Supervision Act.
    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.\37\
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad0-22(e)(2)(i), (iii), and (v), Rule 17Ad-
22(e)(4)(viii) and (ix), Rule 17Ad-22(e)(13), and Rule 17Ad-
22(e)(23)(i) and (ii) Under the Exchange Act

1. Governance
    Rule 17Ad-22(e)(2) requires, in relevant part, that OCC establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent; support the public interest requirements of 
Section 17A of the Exchange Act applicable to clearing agencies, and 
the objectives of owners and participants; and specify clear and direct 
lines of responsibility.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------

    The proposal, taken together with existing OCC Rules, specifies the 
governance that would apply to use of each of the recovery tools. 
Specifically, with respect to the modified powers of assessment, the 
cooling-off period would commence automatically upon a number of events 
specified in the By-Laws. The use of Voluntary Payments and either 
Voluntary or Partial Tear-Up cannot occur unless OCC has determined 
that it may not have sufficient resources available to satisfy its 
obligations after a default. In addition, the proposal specifies the 
applicable decision-making body that would be responsible for 
determining whether to conduct a tear-up. Specifically, for a Voluntary 
Tear-Up, OCC would be able to make that determination, and for a 
Partial Tear-

[[Page 44090]]

Up, which is mandatory, Board action is required. The Risk Committee 
would be responsible for determining the scope of the tear-ups, and any 
such determinations must take into account certain considerations. Only 
the Board may elect to impose a Special Charge to reallocate losses, 
costs, and fees from a Partial Tear-Up.
    Thus, key decisions by OCC in connection with the use of its 
proposed recovery tools are subject to specific governance processes. 
These requirements include the involvement of the Risk Committee in 
determining the scope and pricing for any Partial Tear-up and 
specifically require Board approval with respect to instituting Partial 
Tear-Up and authorizing the Special Charge. Accordingly, the Commission 
believes that the governance process for using the recovery tools is 
clear and transparent and provides clear and direct lines of 
responsibility by addressing decision making in the use of recovery 
tools, thereby supporting the public interest requirements of Section 
17A of the Exchange Act applicable to clearing agencies, and the 
objectives of owners and participants, and therefore the Commission 
believes that the proposed rule change is consistent with Rule 17Ad-
22(e)(2)(i), (iii), and (v).\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------

2. Allocation of Credit Losses Exceeding Available Resources
    Rule 17Ad-22(e)(4)(viii) requires, in relevant part, that OCC 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to address allocation of credit losses 
OCC may face if its collateral and other resources are insufficient to 
fully cover its credit exposures.\40\ OCC's proposal includes three new 
recovery tools addressing the allocation of credit losses in the event 
that OCC determined that, notwithstanding the availability of any 
remaining resources under the Other Resource Rules, OCC may not have 
sufficient resources to satisfy its obligations and liabilities 
following a default. First, Rule 1009 would provide a framework for OCC 
to receive Voluntary Payments in addition to their required 
contribution to the Clearing Fund to address a shortfall. Second, Rule 
1111 would provide a framework for Clearing Members and their customers 
to participate in a Voluntary Tear-Up. Third, Rule 1111 would provide 
the Board with the discretion to conduct a mandatory Partial Tear-Up. 
This tool could be used, if necessary in the event that OCC determines 
that its resources are inadequate to pay the applicable Partial Tear-Up 
Price, to allocate losses by allowing OCC to pay each relevant Clearing 
Member a pro rata amount of the applicable Partial Tear-Up Price based 
on the amount of such resources remaining. In addition, the modified 
powers of assessment would continue to allow OCC to use the Clearing 
Fund to address credit losses in the event of a member default.
---------------------------------------------------------------------------

    \40\ 17 CFR 240.17Ad-22(e)(4)(viii).
---------------------------------------------------------------------------

    Thus, the Commission believes that these additional recovery tools 
are reasonably designed to provide OCC with means to address allocation 
of credit losses that it may face if its collateral and other resources 
are insufficient to fully cover its credit exposures. Further, the 
Commission believes that these tools should address fully any credit 
losses that OCC may face as a result of any individual or combined 
default among its Clearing Members. Therefore, the Commission believes 
that these aspects of the proposed changes are consistent with Rule 
17Ad-22(e)(4)(viii).\41\
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(e)(4)(viii).
---------------------------------------------------------------------------

3. Replenishment of Financial Resources Following a Default
    Rule 17Ad-22(e)(4)(ix) requires, in relevant part, that OCC 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to describe OCC's process to replenish 
any financial resources it may use following a default or other event 
in which use of resources is contemplated.\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------

    The proposed changes to OCC's assessment powers would include the 
addition of a minimum fifteen-day cooling-off period that would be 
automatically triggered by a proportionate charge to the Clearing Fund 
arising from a Clearing Member default. At the end of the cooling-off 
period, a remaining Clearing Member (i.e., a Clearing Member that did 
not choose to terminate its membership during the cooling-off period) 
would be obligated to replenish the Clearing Fund.
    The Commission recognizes that by placing a cap on its assessment 
power during the cooling-off period, these revisions would effectively 
limit the amount of financial resources available to OCC from its 
Clearing Fund during that period. However, the Commission believes that 
these proposals would provide greater certainty and predictability 
regarding Clearing Members' maximum liability to the Clearing Fund, 
which could potentially limit loss contagion in the broader financial 
system. Moreover, in light of the proposed cap on OCC's assessment 
powers during the cooling-off period, OCC has authority under Rule 603 
to call for additional initial margin from Clearing Members to ensure 
that OCC maintains sufficient financial resources to meet its 
requirements under Rule 17Ad-22(e)(4)(iii). Finally, at the end of a 
cooling-off period, a Clearing Member would be required to replenish 
the Clearing Fund in the amount necessary to meet its then-required 
contribution.
    In light of the foregoing discussion, the Commission believes that 
the provisions related to OCC's assessment powers, taken together with 
the other components of OCC's default management procedures and 
recovery rules, which are reasonably designed to allow OCC to replenish 
its financial resources following a default or other event in which use 
of such resources is contemplated, are consistent with Rule 17Ad-
22(e)(4)(ix).\43\
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    \43\ 17 CFR 240.17Ad-22(e)(4)(ix).
---------------------------------------------------------------------------

    One commenter states that OCC should provide an explanation of its 
determination to set the cap on the powers of assessment at 200 percent 
during a cooling-off period.\44\ In the OCC Letter, OCC provided an 
explanation of the internal analysis that it conducted to reach the 200 
percent determination.\45\ Specifically, OCC stated that it considered 
its ability to have sufficient financial resources inclusive of its 
proposed assessment powers to withstand extreme market conditions on a 
``Cover-2'' basis under various scenarios, and that OCC determined 
that, under such scenarios, it would be able to meet its clearing 
obligations so long as it was able to use (1) the financial resources 
on hand in the Clearing Fund, and (2) the full funding of two 
assessments (i.e., 200 percent) from non-defaulting Clearing 
Members.\46\ Moreover, OCC stated that it reviewed the caps that other 
CCPs impose upon their own assessment powers and determined that the 
200 percent cap is generally aligned with other assessment caps.\47\ 
Based on review of the analysis provided by OCC and the caps of other 
CCPs,\48\ the

[[Page 44091]]

Commission believes that the 200 percent cap in the proposed changes is 
consistent with Rule 17Ad-22(e)(4)(ix).
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    \44\ See FIA Letter at 1-2.
    \45\ See OCC Letter at 2-3.
    \46\ See id.
    \47\ See id. at 3.
    \48\ See, e.g., Self-Regulatory Organizations; ICE Clear Credit 
LLC; Notice of Filing Amendment No. 1 and Order Granting Accelerated 
Approval of Proposed Rule Change to Amend the ICE Clear Credit 
Clearing Rules, as Modified by Amendment No. 1, Relating to Default 
Management, Clearing House Recovery and Wind-Down, Exchange Act 
Release No. 79750 (Jan. 6, 2017), 82 FR 3831 (Jan. 12, 2017) (SR-
ICC-2016-013) (approving a proposed rule change including, among 
other things, a 300 percent cap on non-defaulting participants' 
liability during a cooling-off period).
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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 Tear-Ups.
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(e)(13).
---------------------------------------------------------------------------

    As discussed above, the Commission recognizes that a tear-up would 
result in termination of positions of non-defaulting 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 tear-up 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\
---------------------------------------------------------------------------

    \50\ Id.
---------------------------------------------------------------------------

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\
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    \51\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
    \52\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
---------------------------------------------------------------------------

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

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18655 Filed 8-28-18; 8:45 am]
 BILLING CODE 8011-01-P