Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 44083 

46 Id. 

47 17 CFR 240.17Ad–22(e)(23)(i) and (ii). 

48 Id. 

49 In approving this Amended Proposed Rule 

Change, the Commission has considered the 

proposed rule’s impact on efficiency, competition, 

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

50 15 U.S.C. 78s(b)(2). 

51 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 83594 

(July 5, 2018), 83 FR 32158. 

4 15 U.S.C. 78s(b)(2). 

5 Id. 

6 17 CFR 200.30–3(a)(31). 

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. 

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).46

5. 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.47 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).48

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the Amended 

Proposed Rule Change is consistent 

with the requirements of the Exchange 

Act, and in particular, with the 

requirements of Section 17A of the 

Exchange Act 49 and the rules and 

regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,50

that the Proposed Rule Change (SR– 

OCC–2017–020), as modified by 

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

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.51

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18672 Filed 8–28–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83919; File No. SR– 

CboeBZX–2018–044] 

Self-Regulatory Organizations; Cboe 

BZX Exchange, Inc.; Notice of 

Designation of a Longer Period for 

Commission Action on a Proposed 

Rule Change Regarding BZX Rule 

14.11(c) (Index Fund Shares) 

August 23, 2018. 

On June 21, 2018, Cboe BZX 

Exchange, Inc. (‘‘BZX’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

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

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

allow the quantitative requirements of 

BZX Rule 14.11(c)(3), (4), and (5) to be 

satisfied by either the underlying index 

or the fund’s portfolio. The proposed 

rule change was published for comment 

in the Federal Register on July 11, 

2018.3 The Commission has received no 

comment letters on the proposed rule 

change. 

Section 19(b)(2) of the Act 4 provides 

that, within 45 days of the publication 

of notice of the filing of a proposed rule 

change, or within such longer period up 

to 90 days as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or as to which the 

self-regulatory organization consents, 

the Commission shall either approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether the 

proposed rule change should be 

disapproved. The 45th day after 

publication of the notice for this 

proposed rule change is August 25, 

2018. The Commission is extending this 

45-day time period. 

The Commission finds that it is 

appropriate to designate a longer period 

within which to take action on the 

proposed rule change so that it has 

sufficient time to consider the proposed 

rule change. Accordingly, the 

Commission, pursuant to Section 

19(b)(2) of the Act,5 designates October 

9, 2018, as the date by which the 

Commission shall either approve or 

disapprove or institute proceedings to 

determine whether to disapprove the 

proposed rule change (File Number SR– 

CboeBZX–2018–044). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.6

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18674 Filed 8–28–18; 8:45 am] 

BILLING CODE 8011–01–P 

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 


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44084 Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 / Notices 

4Exchange 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). 

5See 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. 

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-2017-809/occ2017809-04062512- 

169148.pdf. 

7Amendment No. 2 was filed to supersede and 

replace Amendment No. 1 in its entirety due to 

technical defects in Amendment No. 1. 

8See Exchange Act Release No. 83761 (Aug. 1, 

2018), 83 FR 38738 (Aug. 7, 2018) (‘‘Notice of 

Amendment’’). 

9The 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. 

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. 

11See 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. 

12See OCC By-Laws, Article VIII, Section 6. 

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. 

14Specifically, 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 ByLaws, Article VIII, Section 5(a)(i)–(iv). 

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

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

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 10

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. 

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. 

1. Cooling-Off Period and Cap on 

Assessments 

The proposal would introduce a 

minimum fifteen calendar day ‘‘coolingoff’’ 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) 


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15See Notice of Amendment, 83 FR at 38746. 

16OCC’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). 

17As 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 nondefaulting Clearing Members who had participated 

in the Voluntary Tear-Up. 

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. 

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 coolingoff 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 coolingoff 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). 

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 coolingoff 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. 

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 nondefaulting 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, nondefaulting 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. 

C. Proposed Authority To Conduct 

Voluntary Tear-Ups and Partial TearUps 

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 tearVerDate Sep<11>2014 17:04 Aug 28, 2018 Jkt 244001 PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 E:\FR\FM\29AUN1.SGM 29AUN1

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18As 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. 

19Specifically, 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). 

20Because 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. 

21Section 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 

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

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. 

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. 

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 TearUp, 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 ByLaws.21 OCC stated that it is likely to 


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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. 

22See Letter from Joseph P. Kamnik, Sr. Vice 

President and CRO, OCC, to Brent Fields, Secretary, 

Commission, at 5 (Jul. 9, 2018) (‘‘OCC Letter’’). 

23See 12 U.S.C. 5461(b). 

24 12 U.S.C. 5464(a)(2). 

25 12 U.S.C. 5464(b). 

26 12 U.S.C. 5464(c). 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). 

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

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

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 TearUp 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 TearUp 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 ByLaws to provide OCC discretion to use 

remaining Clearing Fund contributions 

to re-allocate losses imposed on nondefaulting 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 nondefaulting 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 nondefaulting 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

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 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.26

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’’).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 riskmanagement 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

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

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 


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believes that the new and amended 

authority granted to OCC and described 

in the Amended Advance Notice should 

provide OCC with the ability to reestablish 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 nondefaulting 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 


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32See 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’’). 

33See 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. 

34See also id. at 5. 

35See Securities Exchange Act Release No. 83928 

(Aug. 23, 2018 at note 19). 

36See FIA Letter at 2. 

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

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

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-ofday 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. 

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

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 nondefaulting 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

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

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 ByLaws. 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 TearVerDate Sep<11>2014 17:04 Aug 28, 2018 Jkt 244001 PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 E:\FR\FM\29AUN1.SGM 29AUN1

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

40 17 CFR 240.17Ad–22(e)(4)(viii). 

41 17 CFR 240.17Ad–22(e)(4)(viii). 

42 17 CFR 240.17Ad–22(e)(4)(ix). 

43 17 CFR 240.17Ad–22(e)(4)(ix). 

44See FIA Letter at 1–2. 

45See OCC Letter at 2–3. 

46See id. 

47See id. at 3. 

48See, 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 

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

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. 

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

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

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

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 


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

proposed rule change including, among other 

things, a 300 percent cap on non-defaulting 

participants’ liability during a cooling-off period). 

49 17 CFR 240.17Ad–22(e)(13). 

50 Id. 

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

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

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

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

2 17 CFR 240.19b–4. 

3See Notice infra note 4, 82 FR 61072. 

4Securities Exchange Act Release No. 82352 (Dec. 

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

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

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

2017–810) (‘‘Advance Notice’’) with the 

Commission pursuant to Section 806(e)(1) of Title 

VIII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, entitled the Payment, 

Clearing, and Settlement Supervision Act of 2010 

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

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

respectively. The Advance Notice was published in 

the Federal Register on January 23, 2018. Securities 

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

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

The Financial Stability Oversight Council 

designated OCC a systemically important financial 

market utility on July 18, 2012. See Financial 

Stability Oversight Council 2012 Annual Report, 

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

initiatives/fsoc/Documents/2012%20Annual

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

comply with the Payment, Clearing and Settlement 

Supervision Act and file advance notices with the 

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

5Securities Exchange Act Release No. 82586 (Jan. 

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

OCC–2017–021). 

6Securities Exchange Act Release No. 82927 

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

No. SR–OCC–2017–021). 

7 In Partial Amendment No. 1, OCC made three 

modifications to the Notice: (1) Removal of sections 

of the RWD Plan concerning OCC’s proposed 

authority to require cash settlement of certain 

physically delivered options and single stock 

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

Support Functions; and (3) making three changes to 

the RWD Plan to conform to a change 

contemporaneously proposed in Partial 

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

concerning enhanced and new tools for recovery 

scenarios. 

8Partial Amendment No. 2 superseded and 

replaced Partial Amendment No. 1 in its entirety, 

due to technical defects in Partial Amendment No. 

1. 

9See Securities Exchange Act Release No. 83732 

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

of Amendment’’). 

Commission believes that the 200 

percent cap in the proposed changes is 

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

5. Authority To Take Timely Action To 

Contain Losses and Liquidity Demands 

and Continue To Meet Obligations 

Rule 17Ad–22(e)(13) requires, in 

relevant part, that OCC establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to ensure that it has 

the authority and operational capacity 

to take timely action to contain losses 

and liquidity demands and continue to 

meet its obligations.49 As described 

above, OCC’s proposal would provide 

OCC with modified assessment powers 

and new tools of Voluntary Payments, 

Voluntary Tear-Ups, and Partial TearUps. 

As discussed above, the Commission 

recognizes that a tear-up would result in 

termination of positions of nondefaulting Clearing Members. However, 

because OCC would only be able to use 

its tear-up authority after it has 

conducted an auction pursuant to its 

Rules and when OCC has determined 

that it may not have sufficient financial 

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

scenario. Further, use of tear-up in such 

circumstances could potentially return 

OCC to a matched book quickly, thereby 

containing its losses. 

The Commission believes that these 

tools are designed to provide greater 

certainty to Clearing Members seeking 

to estimate the potential risks and losses 

arising from their use of OCC, while 

enabling OCC to promptly return to a 

matched book. The Commission 

believes that returning to a matched 

book pursuant to these provisions in the 

context of OCC’s default management 

and recovery facilitates OCC’s 

operational capacity to timely contain 

losses and liquidity demands while 

continuing to meet its obligations. Thus, 

the Commission believes that the 

proposed changes are consistent with 

Rule 17Ad–22(e)(13).50

6. Public Disclosure of Key Aspects of 

Default Rules 

Rules 17Ad–22(e)(23)(i) and (ii) 

require, in relevant part, that OCC 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to provide for the 

public disclosure of all relevant rules 

and material procedures, including key 

aspects of default rules and procedures, 

as well as sufficient information to 

enable participants to identify and 

evaluate the risks, fees and other 

material costs they incur by 

participating in OCC.51 The 

Commission believes that the proposed 

changes address key aspects of OCC’s 

default rules and procedures, thereby 

providing Clearing Members with a 

better understanding of the potential 

risks and costs they might face in an 

extreme event where OCC may use its 

proposed recovery tools, including the 

potential use of the Special Charge. 

Accordingly, the Commission believes 

that OCC has disclosed these key 

aspects of its default rules and 

procedures, consistent with Rule 17Ad– 

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

IV. Conclusion 

It is therefore noticed, pursuant to 

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

Supervision Act,53 that the Commission 

does not object to Advance Notice (SR– 

OCC–2017–809), as modified by 

Amendment No. 2, and that OCC is 

authorized to implement the proposed 

change as of the date of this notice or 

the date of an order by the Commission 

approving proposed rule change SR– 

OCC–2017–020, as modified by 

Amendment No. 2, whichever is later. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

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

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

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

2017–021] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Approving Proposed Rule Change, as 

Modified by Partial Amendment No. 2, 

Concerning Updates to and 

Formalization of OCC’s Recovery and 

Orderly Wind-Down Plan 

August 23, 2018. 

I. Introduction 

On December 8, 2017, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change SR–OCC–2017– 

021 (‘‘Proposed Rule Change’’) pursuant 

to Section 19(b) of the Securities 

Exchange Act of 1934 (‘‘Exchange 

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

propose to formalize and update its 

Recovery and Orderly Wind-Down Plan 

(‘‘RWD Plan’’).3 The Proposed Rule 

Change was published for comment in 

the Federal Register on December 26, 

2017.4 On January 25, 2018, the 

Commission designated a longer period 

of time for Commission action on the 

Proposed Rule Change.5 On March 22, 

2018, the Commission published an 

order to institute proceedings to 

determine whether to approve or 

disapprove the Proposed Rule Change.6

On July 11, 2018, OCC filed Partial 

Amendment No. 1 to the Proposed Rule 

Change.7 On July 13, 2018, OCC filed 

Partial Amendment No. 2 to the 

Proposed Rule Change.8 Notice of 

Partial Amendments No. 1 and 2 to the 

Proposed Rule Change was published 

for public comment in the Federal 

Register on August 2, 2018,9 and the 

Commission has received no comments 


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