[Federal Register Volume 89, Number 17 (Thursday, January 25, 2024)]
[Notices]
[Pages 5069-5075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01385]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99392; File No. SR-OCC-2024-002]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning Amendments to The 
Options Clearing Corporation's Rules, By-Laws, and Certain Clearing 
Member Documents

January 19, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 10, 2024, The Options Clearing 
Corporation (``OCC'' or ``Corporation'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared primarily by OCC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would amend the OCC Rules, By-Laws, 
certain Clearing Member documents \3\ in connection with the recent 
amendments adopted by the Commission to Rule 15c6-1(a) \4\ under the 
Exchange Act. The amendments to Rule 15c6-1(a) \5\ shorten the standard 
settlement cycle for most broker-dealer securities transactions from 
two business days after the trade date to one business day after the 
trade date.
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    \3\ The Clearing Member documents consist of contracts and 
forms, that in conjunction with OCC's By-Laws and Rules, establish 
and govern the relationship between OCC and each Clearing Member. 
See Exchange Act Release No. 73577 (Nov. 12, 2014), 79 FR 68733 
(Nov. 18, 2014) (File No. SR-OCC-2014-20).
    \4\ 17 CFR 240.15c6-1(a).
    \5\ Id.
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    The proposed changes are included in Exhibits 5A through 5F to File 
No. SR-OCC-2024-002. Material proposed to be added as currently in 
effect is underlined and material proposed to be deleted is marked in 
strikethrough text. All capitalized terms not defined herein have the 
same meaning as set forth in the OCC By-Laws and Rules.\6\
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    \6\ OCC's By-Laws and Rules can be found on OCC's public 
website, available https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
    The proposed rule change consists of modifications to OCC Rules, 
By-Laws, and certain Clearing Member documents in connection with the 
recently adopted amendments to Commission Rule 15c6-1(a) to shorten the 
standard settlement cycle for most broker-dealer securities 
transactions from two business days after the trade date (``T+2'') to 
one business day after the trade date (``T+1'').\7\ Specifically, OCC 
proposes to (i) revise provisions connected to late exercise that are 
impacted by a shortened settlement cycle, (ii) change timeframes 
related to the standard settlement cycle to reflect T+1, and (iii) make 
certain other conforming and clarifying changes. The compliance date 
regarding the amendments to Rule 15c6-1(a) is May 28, 2024.\8\
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    \7\ Exchange Act Release No. 96930 (Feb. 15, 2023), 88 FR 13872 
(Mar. 6, 2023) (``T+1 Adopting Release'').
    \8\ Id.
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Background
    Rule 15c6-1 establishes a standard settlement cycle for most 
purchases or sales of securities by broker-dealers. The Commission 
adopted Rule 15c6-1(a) in 1993 to establish T+3 as the standard trade 
settlement cycle (instead of five business days after the trade date), 
and it became effective in June 1995.\9\ In

[[Page 5070]]

March 1995, the Commission approved changes to OCC's Rules that were 
proposed to ensure consistency with the new T+3 standard settlement 
cycle.\10\ In 2017, the Commission amended Rule 15c6-1(a) to shorten 
the standard settlement cycle from T+3 to T+2.\11\ In coordination with 
the Commission's designated September 2017 compliance date, OCC adopted 
changes to its Rules and By-Laws to ensure consistency with the new T+2 
standard settlement cycle.\12\
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    \9\ Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891 
(Oct. 13, 1993) (final rule adopting Rule 15c6-1); Exchange Act 
Release No. 34952 (Nov. 9, 1994), 59 FR 59137 (changing the 
effective date of the final rule from June 1, 1995 to June 7, 1995).
    \10\ Exchange Act Release No. 35552 (Mar. 30, 1995), 60 FR 17600 
(Apr. 6, 1995) (SR-OCC-94-11).
    \11\ Exchange Act Release No. 80295 (Mar. 22, 2017), 82 FR 15564 
(Mar. 29, 2017).
    \12\ Exchange Act Release No. 81008 (June 23, 2017), 82 FR 29598 
(June 29, 2017) (SR-OCC-2017-015) (filed for immediate effectiveness 
on June 9, 2017).
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    Since the change to T+2, the Commission and the financial services 
industry have continued to explore the idea of shortening the 
settlement cycle even further. In February 2021, the Depository Trust 
and Clearing Corporation (``DTCC'') published a White Paper discussing 
the benefits of accelerated settlement beyond T+2.\13\ Following the 
publication, the securities industry formed an Industry Steering 
Committee (``ISC'') and an Industry Working Group (``IWG'') to develop 
industry consensus to transition to an accelerated settlement 
cycle.\14\ The ISC engaged Deloitte & Touche LLP (``Deloitte'') to 
support the effort, including facilitating analysis on the benefits and 
barriers to transitioning to T+1 and coordinating with the industry on 
the transition.\15\ In December 2021, DTCC, SIFMA, and ICI, together 
with Deloitte, published a report containing the ISC's recommendations 
for migrating to a T+1 standard settlement cycle.\16\
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    \13\ See DTCC, ``Advancing Together: Leading the Industry to 
Accelerated Settlement'' (Feb. 2021), available at https://www.dtcc.com/-/media/Files/PDFs/White%20Paper/DTCC-Accelerated-Settle-WP-2021.pdf.
    \14\ Exchange Act Release No. 94196 (Feb. 9, 2022), 87 FR 10436 
(Feb. 24, 2022) (``T+1 Proposing Release'').
    \15\ Id.
    \16\ See Deloitte, DTCC, Investment Company Institute (``ICI''), 
and Securities Industry and Financial Markets Association 
(``SIFMA''), ``Accelerating the U.S. Securities Settlement Cycle to 
T+1'' (Dec. 1, 2021), available at https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf.
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    On February 9, 2022, the Commission proposed amendments to Rule 
15c6-1(a) to shorten the standard settlement cycle to T+1 on the basis 
that the shorter settlement cycle would reduce the credit, market and 
liquidity risks in securities transactions faced by market participants 
and U.S. investors.\17\ On February 15, 2023, the Commission adopted 
these amendments to Rule 15c6-1(a).\18\ In light of this action by the 
Commission, OCC proposes to implement the changes described herein in 
connection with the T+1 settlement cycle on the Commission's designated 
T+1 compliance date.
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    \17\ T+1 Proposing Release, supra note 14; see also Commission 
Press Release 2022-21: ``SEC Issues Proposal to Reduce Risks in 
Clearance and Settlement'' (Feb. 9, 2022).
    \18\ T+1 Adopting Release, supra note 7.
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Proposed Changes
    OCC proposes certain amendments in light of the anticipated 
industry move to a T+1 settlement cycle. OCC has determined that 
shortening the settlement cycle to T+1 would require revisions to OCC 
Rules, By-Laws, and Clearing Member documents, which are currently 
aligned with a T+2 settlement cycle. Specifically, OCC proposes to (i) 
revise provisions connected to late exercise that are impacted by a 
shortened settlement cycle, (ii) change timeframes related to the 
standard settlement cycle to reflect T+1, and (iii) make certain other 
conforming and clarifying changes.
(i) Provisions Connected to Late Exercise
    OCC proposes to amend provisions in Chapter VIII of the Rules that 
are affected by a shortened settlement cycle. Rules 801 and 805 require 
Clearing Members to submit exercise notices within the timeframes 
prescribed by OCC.\19\ These Rules currently set out an exception 
process to accommodate notices submitted after these timeframes. OCC's 
late exercise process provides final deadlines by which late exercise 
notices must be received by OCC and subjects Clearing Members to 
potential disciplinary action (as the filing of such notice may be 
deemed a violation) and liability for a late filing fee, among other 
things.\20\ More specifically, subject to certain conditions, Rule 801, 
which addresses the exercise of options other than at expiration, 
allows a Clearing Member to file an exercise notice after the 
prescribed deadline solely for the purpose of correcting a bona fide 
error on the part of the Clearing Member or a customer and imposes 
liability for a late filing fee of $250,000 per line item listed on the 
notice. Similarly, OCC Rule 805, which addresses exercises on 
expiration, imposes liability for a late filing fee of $250,000 per 
line item on a Clearing Member that submits an exercise notice after 
the prescribed deadline.
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    \19\ The current deadline for submitting exercise notices other 
than at expiration is 6:00 p.m. CT. The current deadline for 
submitting exercise notices at expiration is 8:00 p.m. CT on monthly 
standard Friday expirations, 7:00 p.m. CT on weekly Friday 
expirations, and 6:30 p.m. CT on Monday and Wednesday expirations.
    \20\ Under Rule 801, the deadline for submitting late exercise 
notices is 6:00 a.m. CT. Under Rule 805, the deadline for submitting 
late exercise notices is the expiration time of the option, which is 
currently 10:59 p.m. CT (as set forth in Article 1, Section 1(E)(23) 
of the By-Laws).
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    OCC proposes to cease facilitating the late exercise process after 
the move to T+1. OCC reviewed its internal operational processes to 
assess the implications of the shortened settlement cycle on late 
exercises. Currently, when a late exercise is processed, OCC sends the 
delivery information to the National Securities Clearing Corporation 
(``NSCC'') for T+1 settlement.\21\ Reducing the standard settlement 
time to T+1 would reduce the time available to OCC and NSCC to transmit 
information and perform operational and risk management steps 
associated with their arrangement. Specifically, moving to T+1 would 
require settlement activity from a late exercise to be sent to NSCC for 
same-day settlement, which is not supported by the Accord. Late 
exercise activity would thus not be guaranteed by NSCC, resulting in 
various implications, as the link between OCC and NSCC allows common 
clearing members, and their customers, to realize financial and 
operational efficiencies through the combined settlement of obligations 
from their OCC and NSCC cleared positions. OCC proposes to no longer 
accommodate late exercises due to operational challenges for same-day 
settlement and limitations under the Accord. Even if OCC were to find 
another operational mechanism outside of NSCC to process the settlement 
of a late exercise submission in a T+1 environment, any such processing 
would negate the settlement certainty for all market participants that 
the Commission seeks to achieve in its T+1 proposal.
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    \21\ OCC maintains a link with NSCC to facilitate the settlement 
of physically settled stock options and stock futures. More 
specifically, OCC and NSCC are parties to a Stock Options and 
Futures Settlement Agreement that specifies the time at which 
responsibility for the settlement of such obligations passes from 
OCC to NSCC (the ``Accord''). See Exchange Act Release No. 81266 
(July 31, 2017), 82 FR 36484 (Aug. 4, 2017) (File No. SR-OCC-2017-
013).
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    OCC does not believe that such changes represent a significant 
departure from its current practices or the practices of other self-
regulatory organizations. As described above, OCC's Rules allow OCC to 
prescribe timeframes during which Clearing

[[Page 5071]]

Members may submit exercise notices. Following the proposed changes, 
OCC would continue to maintain deadlines for receiving exercise 
notices. The Financial Industry Regulatory Authority (``FINRA'') and 
the options exchanges have similarly established a cut-off time for 
receiving exercise notices.\22\ Moreover, the late exercise process at 
OCC is intended to be used in extenuating circumstances and is not 
routinely performed. The filing of a late exercise notice may be deemed 
a violation subject to disciplinary action under Rules 801 and 805. 
Most recently, in 2020, OCC raised the late filing fee from $75,000 to 
$250,000 per line item to further disincentivize late exercises.\23\ 
For these reasons, OCC would cease accepting late exercise notices and 
proposes to amend the following provisions in connection with such 
change.
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    \22\ See e.g., FINRA Rule 2360(b)(23)(A)(iii); Nasdaq Options 
6B, Section 1(c); NYSE Arca Rule 6.24-O(c).
    \23\ See Exchange Act Release No. 88310 (Mar. 2, 2020), 85 FR 
13198 (Mar. 6, 2020) (File No. SR-OCC-2020-001) (noting that the 
late exercise fee is intended to encourage Clearing Members to be 
diligent in processing exercise notices and to improve back office 
procedures).
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    OCC proposes to revise Rule 801, which addresses the exercise of 
options other than at expiration. OCC propose to remove language in 
paragraph (a) that requires a Clearing Member to prepare and preserve a 
memorandum describing the error that gave rise to a late filing. OCC 
also proposes to remove paragraph (d) that grants certain individuals 
the discretion to permit a Clearing Member to file a late exercise 
notice to correct a bona fide error, subject to certain conditions, 
including liability for a late filing fee, a final deadline for 
submission, and potential disciplinary action.\24\ OCC accordingly 
proposes to remove a reference to paragraph (d) in Rule 801, 
Interpretation and Policy .02.
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    \24\ For the avoidance of doubt, Clearing Members may still 
correct errors following the proposed changes but must make any 
corrections prior to daily processing deadlines. OCC discussed the 
cessation of late exercises following T+1 with the Operations 
Roundtable, which solicits feedback from interested stakeholders 
such as Clearing Members. No substantive opposing views were raised 
in these discussions. See confidential Exhibit 3A to File no. SR-
OCC-2024-002 for supporting data and analysis, including materials 
from Operations Roundtable meetings and information on past 
instances of late exercises.
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    OCC propose similar changes to Rule 805, which addresses exercises 
on expiration. OCC proposes to remove the language in paragraph (c) and 
related language in paragraph (e) that allows Clearing Members to file 
late exercise notices subject to a final deadline for submission. OCC 
would replace the text in paragraph (c) with the term ``Reserved.'' OCC 
proposes to remove paragraphs (g), (h), and (i) that set out various 
terms and conditions governing the submission of late exercise notices, 
including liability for a late filing fee and potential disciplinary 
action for the Clearing Member. OCC would eliminate and update 
references to the provisions in Rule 805 (including the Interpretation 
and Policy) and make conforming changes throughout the Rules, including 
in Rules 1305, 1401, and 2702.
(ii) Timeframes Related to the Standard Settlement Cycle
    OCC proposes changes to timeframes in its Rules, By-Laws, and 
Clearing Member documents that are related to the current T+2 standard 
settlement cycle. The following provisions would need to be updated to 
facilitate the move to T+1 and are discussed in more detail below:
    <bullet> OCC Rule 901 (Settlement Through Correspondent Clearing 
Corporations); \25\
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    \25\ Article I, Section 1.C.(32) of OCC's By-Laws defines the 
term ``correspondent clearing corporation'' to mean National 
Securities Clearing Corporation (``NSCC'') or any successor thereto 
which, ``by agreement with [OCC], provides facilities for 
settlements in respect of exercised option contracts or BOUNDs or in 
respect of delivery obligations arising from physically-settled 
stock futures.'' The Accord is the current agreement that governs 
NSCC settlement of OCC related activity.
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    <bullet> OCC Rule 903 (Obligation to Deliver);
    <bullet> OCC Rule 1302 (Delivery of Underlying Securities);
    <bullet> OCC Rule 1302B (Delivery of Underlying Treasury 
Securities);
    <bullet> OCC Rule 1503 (Exercise Settlement Date for Event Options 
and Range Options);
    <bullet> OCC Rule 2201 (Instructions to the Corporation);
    <bullet> OCC Rule 2208 (Settlement Date);
    <bullet> Article XXI of OCC's By-Laws (Stock Loan/Hedge Program);
    <bullet> OCC Rule 2209A (Termination of Market Loans); and
    <bullet> OCC Rule 2502 (Settlement Date for BOUNDs).
    OCC proposes to amend certain of its Rules that govern the 
settlement of physically-settled options and futures through NSCC. Rule 
901 requires that certain obligations be settled through the facilities 
of NSCC. Consistent with the new standard settlement cycle, OCC 
proposes to amend paragraph (c) of Rule 901 to remove a parenthetical 
indicating that ``regular way'' settlement under NSCC's rules and 
procedures does not occur on T+1. Further, paragraph (d) permits OCC to 
revoke a specification in any delivery advice that settlement be made 
through the facilities of NSCC at any time prior to the obligation 
time. In such event, Rule 901(d) allows specified OCC senior officers 
to extend or postpone the time for delivery to no more than two 
business days after the date of such revocation. To be consistent with 
the T+1 settlement cycle, OCC proposes to change the amount of time 
that OCC has to extend or postpone the time of delivery to one business 
day.
    OCC proposes related changes to conform language with the T+1 
settlement cycle in Rule 901(f) and (g) and in certain associated 
Clearing Member documents. Rule 901(f) permits a Clearing Member (the 
``Appointing Clearing Member'') that is not an NSCC member to appoint 
another Clearing Member that is an NSCC member (the ``Appointed 
Clearing Member'') to act on its behalf with respect to the settlement 
of exercised or matured cleared securities in its accounts through 
NSCC. OCC maintains a related Clearing Member document (the 
``Appointment of Clearing Member Form'' or an ``appointment form'') 
that permits the Appointed Clearing Member to act on behalf of the 
Appointing Clearing Member for this purpose. Rule 901(g) permits a 
Canadian Clearing Member, on behalf of which CDS Clearing and 
Depository Services Inc. (``CDS'') \26\ maintains a subaccount at NSCC, 
to appoint CDS to act on its behalf with respect to the settlement of 
exercised or matured cleared securities in its accounts through NSCC. 
OCC also maintains a related Clearing Member document (the 
``Appointment of CDS--Stock Settlement Form'' or an ``appointment 
form'') that permits CDS to act on behalf of the Canadian Clearing 
Member for this purpose. Such appointments currently become effective 
as of the second business day following the day on which OCC receives 
written notice, or such later date as may be specified. Under the 
proposed rule change, OCC would replace the ``second'' business day 
with the ``first'' business day in Rule 901(f) and (g) and in the 
appointment forms.
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    \26\ CDS is Canada's national securities depository, which, 
among other things, facilitates the settlement of cross-border 
transactions with the U.S. and has relationships with NSCC and The 
Depository Trust Company (``DTC'').
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    Rule 903 governs a Clearing Member's obligation to deliver when 
either a delivery advice or OCC directs that settlement be made on a 
broker-to-broker basis. Under Rule 903, the delivery date for 
physically-settled options is the second business day following the day 
on which the exercise notice was, or is deemed to have been, properly 
tendered to OCC, and the

[[Page 5072]]

delivery date for physically settled security futures is generally the 
second business day following the maturity date. OCC proposes to 
replace references to the ``second'' business day with the ``first'' 
business day.
    In Chapter XIII regarding futures, futures options and commodity 
options, OCC proposes to revise Rule 1302 concerning the delivery of 
underlying securities and Rule 1302B concerning the delivery of 
underlying Treasury securities. With certain exceptions, Rule 1302 
currently provides that the delivery date for a physically-settled 
stock future is the second business day following the maturity date of 
the applicable series. Rule 1302B(a) currently provides that the 
delivery date for each physically-settled Treasury future in respect of 
which a delivery intent has been submitted (or deemed submitted) is the 
second business day following such submission (or deemed submission). 
OCC also maintains a related Clearing Member document (the 
``Designation of Clearing Member'' or a ``designation form'') that 
permits, among other things, a Clearing Member to designate another 
Clearing Member for the purposes of effecting settlement of physically-
settled treasury futures through the Fixed Income Clearing Corporation 
(``FICC'').\27\ OCC proposes to replace references to the ``second'' 
business day in Rules 1302 and 1302B and in the designation form with 
the ``first'' business day. OCC also proposes corresponding changes to 
update references from the ``second'' business day to the ``first'' 
business day with respect to applicable deadlines specified in 
paragraphs (d), (e), and (j) of Rule 1302B.
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    \27\ FICC provides central counterparty services to firms that 
participate in the U.S. Government and mortgage-backed securities 
markets.
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    OCC proposes similar changes to make language consistent with the 
T+1 settlement cycle in Rule 1503. With certain exceptions, Rule 1503 
currently provides that the exercise settlement date for a credit 
default option and credit default basket option is the second business 
day following the date on which the option is deemed to have been 
exercised. Under the proposed rule change, OCC would replace the 
``second'' business day with the ``first'' business day.
    OCC also proposes to amend provisions of its Rules and By-Laws 
concerning its two Stock Loan Programs. OCC operates two programs in 
which it acts as a central counterparty for stock loan transactions: 
the Stock Loan/Hedge Program and Market Loan Program.\28\ The Stock 
Loan/Hedge Program allows Clearing Members to use borrowed and loaned 
securities to reduce OCC margin requirements. The Market Loan Program 
is a program whereby OCC processes and maintains stock loan positions 
that have originated through a Loan Market.\29\
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    \28\ Information on the Stock Loan/Hedge Program and Market Loan 
Program can be found on OCC's public website, available at https://www.theocc.com/clearance-and-settlement/stock-loan-programs.
    \29\ Article I, Section 1.L.(5) of OCC's By-Laws defines ``Loan 
Market'' as an electronic platform included in OCC's Market Loan 
Program that supports securities lending and borrowing transactions 
by matching lenders and borrowers based on loan terms that each 
party is willing to accept.
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    In respect of the Stock Loan/Hedge Program, Rule 2201(c) currently 
permits a Canadian Clearing Member on behalf of which CDS maintains a 
subaccount at DTC to appoint CDS to act on its behalf with respect to 
effecting delivery orders for stock loan and stock borrow transactions 
in its accounts through DTC. OCC also maintains a related Clearing 
Member document (the ``Appointment of CDS--Stock Loan Form'' or an 
``appointment form'') that permits CDS to act on behalf of the Canadian 
Clearing Member for this purpose. Such appointment currently becomes 
effective as of the second business day following the day on which OCC 
receives written notice, or such later date as may be specified. Under 
the proposed rule change, OCC would replace the ``second'' business day 
with the ``first'' business day in Rule 2201(c) and in the appointment 
form.
    In addition, with respect to the Stock Loan/Hedge Program, Rule 
2208(a) currently provides that the settlement date for the termination 
of a stock loan will be the earlier of: (1) the date on which the 
borrowing Clearing Member initiates the termination or (2) the date 
that is two stock loan business days after the date on which the 
lending Clearing Member initiates the termination. OCC proposes to 
amend Rule 2208(a) to change ``two stock loan business days'' to ``one 
stock loan business day.''
    OCC may terminate outstanding stock loans under certain conditions 
pursuant to Article XXI, Section 2(c) of OCC's By-Laws with respect to 
the Stock Loan/Hedge Program. If any stock loans are so terminated, OCC 
is required to provide written notice to the affected Clearing Members 
specifying the date on which such termination is to become effective, 
which will be at least two stock loan business days after the date of 
such notice. OCC proposes to make the effective date consistent with 
the new T+1 settlement cycle by changing the minimum number of days 
between notice and termination from two to one.
    Regarding the Market Loan Program, a market loan (i.e., a loan of 
eligible stock effected through a Loan Market) is terminated by the 
relevant Clearing Member providing a return or recall notice to the 
Loan Market with respect to a specified quantity of loaned stock under 
Rule 2209A. Rule 2209A(a)(3) discusses the scenario where a recall 
transaction fails to settle by the settlement time on the second stock 
loan business day following the day that the transaction was first 
submitted. OCC proposes to replace ``second'' stock loan business day 
with ``first'' stock loan business day. Under Rule 2209A(d), OCC may 
terminate outstanding market loans under certain conditions. If any 
market loans are so terminated, OCC is required to provide written 
notice to the affected Clearing Members specifying the date on which 
such termination is to become effective, which will be at least two 
stock loan business days after the date of such notice. OCC proposes to 
make the effective date consistent with the new T+1 settlement cycle by 
changing the minimum number of days between notice and termination from 
two to one.
    OCC proposes to amend Rule 2502 concerning the settlement date for 
BOUNDs. Namely, OCC proposes to update the settlement date for a BOUND 
contract from the second business day following the expiration date to 
the first business day.
(iii) Conforming and Clarifying Changes
    OCC proposes changes to Chapter VI of its Rules related to deposits 
in lieu of margin. In lieu of depositing margin, OCC permits a Clearing 
Member or an approved custodian to deposit eligible collateral in 
respect of certain option contracts included in a short position in 
accordance with OCC Rule 610. More specifically, OCC permits certain 
types of deposits in lieu of margin, including member specific 
deposits, third-party specific deposits, and escrow deposits, which are 
further described in Rules 610A, 610B and 610C, respectively.\30\
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    \30\ Member specific deposits are equity securities deposited by 
clearing members at DTC at the direction of their customers; third-
party specific deposits are equity securities deposited by custodian 
banks at DTC at the direction of their customers; and escrow 
deposits can consist of cash deposits held at a custodian bank for 
the benefit of OCC, in addition to equities, and U.S. Government 
securities pledged to OCC through DTC by escrow deposit banks at the 
direction of their customers.
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    With certain exceptions, OCC Rule 610C(o) provides that any escrow

[[Page 5073]]

deposit in respect of a short position in stock put options will be 
released by OCC on its own initiative at a specified time on the fourth 
business day following the expiration date.\31\ OCC proposes to amend 
this outdated provision to state that such deposits will be released by 
OCC at a specified time following the expiration date. Reference to the 
specific business day would be removed from the Rules and, instead, 
would be centralized in and made available through the Operations 
Manual, along with other timeframes and deadlines specified by OCC.\32\ 
The Operations Manual would state that this release of collateral would 
occur on the next business day following the expiration date. 
Shortening the period for the automatic release of collateral to the 
next business day following the expiration date would be in line with 
the changes described above to shorten the current settlement cycle to 
T+1. OCC believes that such change would align with the goals of the 
T+1 Adopting Release to reduce central counterparty exposure to credit, 
market, and liquidity risk arising from its obligations to its 
participants, as there is no need for OCC to hold the collateral for an 
extended period of time.\33\
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    \31\ The exceptions in OCC Rule 610C(o) include that (1) the 
Clearing Member's obligations in respect of such short position have 
not been satisfied or (2) the deposit is subject to a ``hold'' 
instruction (i.e., an instruction requesting that OCC not release 
such deposit).
    \32\ See Confidential Exhibit 3B to File no. SR-OCC-2024-002 
containing the changes to the Operations Manual with material to be 
added in underlined text and material to be deleted in strikethrough 
text.
    \33\ See T+1 Adopting Release, supra note 7.
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    OCC proposes conforming changes throughout Chapter VI. OCC proposes 
to amend Rule 610B(d)(2) regarding third-party specific deposits \34\ 
and Rule 610C(p) regarding escrow deposits in respect of a short 
position in index options \35\ to uniformly state that such deposits 
will be released by OCC at a specified time following the expiration 
date, which would be consistent with the language described above in 
amended Rule 610C(o). OCC also proposes language in new paragraph (2) 
of Rule 610A(c) to address the automatic release of any member specific 
deposits by OCC, which would largely align with the language in amended 
Rule 610B(d)(2).\36\ This addition is intended to be clarifying in 
nature, as OCC currently releases member specific deposits in the same 
general manner as set out in Rule 610B(d)(2) for third-party specific 
deposits. Consistent with the change described above, automatic release 
would occur on the next business day following the expiration date for 
member specific, third-party specific and escrow deposits and would be 
set out in the Operations Manual. These changes are intended to ensure 
consistent language and practices to promote clarity for market 
participants. These changes are made in conjunction with the revisions 
to Rule 610C(o) and align with the goals of the T+1 Adopting Release to 
reduce central counterparty exposure to credit, market, and liquidity 
risk arising from its obligations to its participants, as there is no 
need for OCC to hold the collateral for an extended period of time.\37\
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    \34\ Rule 610B(d)(2) provides that any third-party specific 
deposit will be released by OCC on its own initiative at a specified 
time on the business day following the exercise settlement date 
unless (1) the settlement obligations in respect of such short 
position have not been met, that NSCC has determined to suspend, 
decline or cease to act for the Clearing Member in respect of whose 
account such deposit was made, or, that NSCC has determined to 
prohibit or limit such Clearing Member's access to services; (2) OCC 
has directed that the exercise be settled otherwise than through 
NSCC; or (3) the deposit is subject to a ``hold'' instruction.
    \35\ Rule 610C(p) provides that such escrow deposit will be 
released by OCC on its own initiative at a specified time on the 
first business day following the expiration date unless (1) the 
Clearing Member carrying the short position is not in full 
compliance with its obligations to OCC or (2) the deposit is subject 
to a ``hold'' instruction.
    \36\ The proposed text in Rule 610A(c)(2) would mirror the 
amended text in Rule 610B(d)(2) with minor changes to remove or 
replace provisions associated with third-party specific deposits 
with member specific deposits.
    \37\ See T+1 Adopting Release, supra note 7.
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    OCC further proposes revisions to Chapter XIV in relation to 
Treasury securities options. As U.S. Treasury securities commonly 
settle on a T+1 basis, OCC proposes to update the exercise settlement 
date for Treasury securities options from the second business day 
following the expiration date to the first business day in Rule 
1402(a). Additionally, Clearing Members are required to notify OCC 
within a prescribed timeframe if a trade required to be completed 
pursuant to Rule 1403 has not been successfully matched at FICC.\38\ 
Under Rule 1404, if OCC receives timely notice of a failure to match a 
trade, the affected Clearing Members are required to attempt to resolve 
the failure such that settlement could occur through FICC by the 
specified deadline on the second business day following the expiration 
date. If the failure is not resolved by such deadline, the Clearing 
Members are required to notify OCC within a specified time on the 
second business day following the expiration date. OCC also proposes to 
update these references from the ``second'' business day to the 
``first'' business day in Rule 1404. Similar to the changes described 
above, these changes would promote consistency between OCC's Rules and 
the settlement cycle for the relevant asset class.
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    \38\ Under Rule 1403, OCC requires every Treasury Securities 
Clearing Member to be a participant in the Government Securities 
Division (``GSD'') of FICC or designate a GSD participant as its 
representative to submit trade information into FICC's real-time 
trade matching system.
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Implementation Timeframe
    As discussed above, OCC would implement the proposed rule change in 
coordination with the Commission's compliance date for the amendments 
to Rule 15c6-1(a) and the transition to T+1. OCC would provide notice 
to Clearing Members of the implementation through an Information 
Memorandum posted to its public website at least two (2) weeks prior to 
implementation.
(2) Statutory Basis
    For the following reasons, OCC believes that the proposed rule 
change is consistent with Section 17A(b)(3)(F) of the Act \39\ and Rule 
17Ad-22(e)(1) \40\ thereunder. Section 17A(b)(3)(F) of the Act \41\ 
requires, among other things, that the rules of a clearing agency be 
designed to promote the prompt and accurate clearance and settlement of 
securities transactions, to assure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency or for 
which it is responsible, and, in general, to protect investors and the 
public interest. OCC believes the proposed rule change is consistent 
with these requirements because it would coordinate the terms of 
certain provisions in OCC's Rules, By-Laws, and Clearing Member 
documents with the Commission's amendments to Rule 15c6-1(a) to support 
a T+1 standard settlement cycle. First, OCC proposes to remove 
provisions connected to late exercise that are impacted by a shortened 
settlement cycle. As discussed above, OCC would no longer accommodate 
late exercise notices due to operational challenges for same-day 
settlement and limitations under the Accord. In OCC's view, this change 
does not represent a significant departure from OCC's current practices 
or the practices of other self-regulatory organizations. OCC would 
continue to maintain timeframes during which Clearing Members may 
submit exercise notices following the amendments. The proposed change 
is intended to preserve the successful and timely completion of 
exercise and assignment processes,

[[Page 5074]]

which are important to the prompt and accurate settlement of securities 
transactions, following the transition to a T+1 settlement cycle.
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    \39\ 15 U.S.C. 78q-1(b)(3)(F).
    \40\ 17 CFR 240.17Ad-22(e)(1).
    \41\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC believes that the proposed changes to amend timeframes related 
to the standard settlement cycle are also consistent with Section 
17A(b)(3)(F) of the Act.\42\ Where a current OCC Rule, By-Law, or 
Clearing Member document is based upon or otherwise references the T+2 
standard securities settlement cycle, the provision would be changed to 
support T+1. Harmonizing OCC's Rules, By-Laws, and Clearing Member 
documents with the new T+1 standard settlement cycle would remove 
impediments to and support the prompt and accurate clearance and 
settlement of securities transactions by, for example, ensuring that 
provisions in these documents that are related to T+1 are consistent 
with the rules concerning the standard settlement cycle that are 
maintained by the exchanges for which OCC clears and settles 
transactions and the rules of clearing agencies that provide clearance 
and settlement services for securities transactions that underlie 
physically-settled stock option and stock future contracts cleared by 
OCC. OCC believes that conforming its Rules, By-Laws, and Clearing 
Member documents to the new T+1 standard settlement cycle would also 
protect investors and the public interest by ensuring that OCC provides 
clearance and settlement services in a manner that supports the 
Commission's requirements for the T+1 standard settlement cycle.
---------------------------------------------------------------------------

    \42\ Id.
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    Additionally, OCC believes that the proposed conforming and 
clarifying changes to its Rules are consistent with Section 
17A(b)(3)(F) of the Act.\43\ Automatic release would consistently occur 
on the next business day following the expiration date for member 
specific, third-party specific and escrow deposits and associated 
language would be set out in the Operations Manual, along with other 
timeframes and deadlines specified by OCC. As described above, the 
proposed changes would ensure consistent language and practices by OCC, 
including with respect to the settlement cycle for the relevant asset 
class and the automatic release of deposits, thereby promoting clarity 
and avoiding potential confusion for market participants, which would 
help support OCC's prompt and accurate clearance and settlement of 
securities transactions. For these reasons, the proposed changes are 
reasonably designed to promote the prompt and accurate clearance and 
settlement of securities transactions, to assure the safeguarding of 
securities and funds in OCC's custody or control, and, in general, to 
protect investors and the public interest in accordance with Section 
17A(b)(3)(F) of the Act.\44\
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    \43\ Id.
    \44\ Id.
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    OCC believes the proposed changes are also consistent with the 
requirements in Rule 17Ad-22(e)(1) under the Act.\45\ Rule 17Ad-
22(e)(1) requires that each covered clearing agency establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for a well-founded, clear, transparent, 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\46\ The changes are designed to modify OCC's 
Rules, By-Laws, and Clearing Member documents that would otherwise 
become outdated upon the change to the T+1 standard settlement cycle, 
or present other operational difficulties or concerns. The proposed 
changes would allow OCC to maintain provisions and practices that are 
both clear and consistent with the standard settlement cycle that is 
specified in Rule 15c6-1(a), which would help ensure that OCC's Rules, 
By-Laws, and Clearing Member documents remain well-founded, clear, 
transparent, and enforceable. Additional changes are proposed to OCC's 
Rules that would amend an outdated provision and ensure consistency 
with the settlement cycle for the relevant asset class and regarding 
the automatic release of deposits, which would ensure that OCC's Rules 
are well-founded, clear, transparent, and enforceable. Therefore, OCC 
believes that the proposed changes promote compliance and consistency 
with the requirements in Rule 17Ad-22(e)(1) to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for a well-founded, clear, transparent and 
enforceable legal basis.
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    \45\ 17 CFR 240.17Ad-22(e)(1).
    \46\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \47\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. As discussed above, OCC proposes amendments to its Rules, 
By-Laws, and Clearing Member documents to (i) revise provisions 
connected to late exercise that are impacted by a shortened settlement 
cycle, (ii) change timeframes related to the standard settlement cycle 
to reflect T+1, and (iii) make certain other conforming and clarifying 
changes. OCC does not believe that the proposed rule change would 
impose any burden or have any impact on competition. The proposed rule 
change would implement revisions that ensure consistency with 
amendments recently adopted by the Commission in Rule 15c6-1(a) to 
change the standard securities settlement cycle to T+1 and additional 
changes that promote clarity or uniformity amongst OCC's Rules, By-
Laws, and Clearing Member documents, as described above. All Clearing 
Members would be equally subject to the changes, and the proposed 
changes would not provide any Clearing Member with a competitive 
advantage over any other Clearing Member. This proposed rule change 
would also not inhibit access to OCC's services or disadvantage or 
favor any particular user in relationship to another. As a result, OCC 
believes the proposed rule change would not impact or impose a burden 
on competition.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

[[Page 5075]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#8cfef9e0e9a1efe3e1e1e9e2f8ffccffe9efa2ebe3fa"><span class="__cf_email__" data-cfemail="681a1d040d450b0705050d061c1b281b0d0b460f071e">[email protected]</span></a>. Please include 
file number SR-OCC-2024-002 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to file number SR-OCC-2024-002. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of OCC and on OCC's 
website at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection.
    All submissions should refer to file number SR-OCC-2024-002 and 
should be submitted on or before February 15, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01385 Filed 1-24-24; 8:45 am]
BILLING CODE 8011-01-P


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