[Federal Register Volume 89, Number 20 (Tuesday, January 30, 2024)]
[Notices]
[Pages 5953-5970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01748]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99427; File No. SR-OCC-2023-801]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Amendment No. 2 to Advance Notice Relating to The 
Options Clearing Corporation's Concerning Modifications to the Amended 
and Restated Stock Options and Futures Settlement Agreement Between The 
Options Clearing Corporation and the National Securities Clearing 
Corporation

January 24, 2024.
    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\ of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\3\ notice is hereby given that on 
January 23, 2024, the Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') this 
amendment (``Amendment No. 2'') to an advance notice 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 advance notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This Amendment No. 2 to the advance notice SR-OCC-2023-801 is 
submitted by OCC to: (1) modify the Amended and Restated Stock Options 
and Futures Settlement Agreement dated August 5, 2017 between OCC and 
National Securities Clearing Corporation (``NSCC,'' and together with 
OCC, the ``Clearing Agencies'') (``Existing Accord'') \4\ to permit OCC 
to elect to make a cash payment to NSCC following the default of a 
common clearing participant that would cause NSCC's central 
counterparty trade guaranty to attach to certain obligations of that 
participant and to make certain related revisions to OCC By-Laws, OCC 
Rules,\5\ OCC's Comprehensive Stress Testing & Clearing Fund 
Methodology, and Liquidity Risk Management Description and OCC's 
Liquidity Risk Management Framework (``Phase 1'') and (2) to improve 
information sharing between the Clearing Agencies to facilitate the 
upcoming transition to a T+1 standard securities settlement cycle and 
allow OCC, after the compliance date under amended Exchange Act Rule 
15c6-1(a), to provide certain assurances to NSCC prior to the default 
of a common clearing participant that would enable NSCC to begin 
processing E&A/Delivery Transactions (defined below) before the central 
counterparty trade guaranty attaches to certain obligations of that 
participant (``Phase 2'').\6\ This Amendment No. 2 would amend and 
replace the Initial Filing and Amendment No. 1 in their entirety.
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    \4\ The Existing Accord was previously approved by the 
Commission. See Securities Exchange Act Release Nos. 81266, 81260 
(July 31, 2017) (File Nos. SR-NSCC-2017-007; SR-OCC-2017-013), 82 FR 
36484 (Aug. 4, 2017).
    \5\ OCC By-Laws are available at https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf and OCC 
Rules are available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf.
    \6\ OCC initially filed an advance notice concerning the 
proposed Phase 1 changes on August 10, 2023. See Securities Exchange 
Act Release No. 98214 (Aug. 24, 2023), 88 FR 59988 (Aug. 30, 2023) 
(File No. SR-OCC-2023-801) (``Initial Filing''). OCC subsequently 
submitted a partial amendment (``Amendment No. 1'') to clarify the 
proposed implementation plan for the Initial Filing available at 
https://www.theocc.com/getmedia/fb30a875-2438-4b2d-bb79-3ff364b6796b/SR-OCC-2023-801-Partial-Amendment-No-1.pdf. NSCC also 
has filed a proposed rule change with the Commission in connection 
with this proposal. See Securities Exchange Act Release No. 98213 
(Aug. 24, 2023), 88 FR 59968 (Aug. 30, 2023) (File No. SR-NSCC-2023-
007); Securities Exchange Act Release No. 98930 (Nov. 14, 2023), 88 
FR 80790 (Nov. 20, 2023) (Partial Amendment No. 1 to File No. SR-
NSCC-2023-007).
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    The proposed changes are included in Exhibits 5A and 5B and 
confidential Exhibits 5C, 5D, and 5E of Amendment No. 2 to File No. SR-
OCC-2023-801. Material proposed to be added is underlined and material 
proposed to be deleted is marked in strikethrough text.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the advance notice and 
discussed any comments it received on the advance notice. 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) and (B) 
below, of the most significant aspects of these statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants or Others

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

(B) Advance Notice Filed Pursuant to Section 806(e) of the Payment, 
Clearing, and Settlement Supervision Act

Description of Proposed Change
Background
    OCC is filing this advance notice to (1) modify the Existing Accord 
between OCC and NSCC to permit OCC to elect to make a cash payment to 
NSCC following the default of a common clearing participant that would 
cause NSCC's central counterparty trade guaranty to attach to certain 
obligations of that participant and to make certain related revisions 
to OCC By-Laws, OCC Rules, OCC's Comprehensive Stress

[[Page 5954]]

Testing & Clearing Fund Methodology, and Liquidity Risk Management 
Description and OCC's Liquidity Risk Management Framework for Phase 1 
and (2) improve information sharing between the Clearing Agencies to 
facilitate the upcoming transition to a T+1 standard securities 
settlement cycle and allow OCC, after the compliance date under amended 
Exchange Act Rule 15c6-1(a), to provide certain assurances to NSCC 
prior to the default of a common clearing participant that would enable 
NSCC to begin processing E&A/Delivery Transactions before the central 
counterparty trade guaranty attaches to certain obligations of that 
participant for Phase 2.
i. Executive Summary
    NSCC is a clearing agency that provides clearing, settlement, risk 
management, and central counterparty services for trades involving 
equity securities. OCC is the sole clearing agency for standardized 
equity options listed on national securities exchanges registered with 
the Commission, including options that contemplate the physical 
delivery of equities cleared by NSCC in exchange for cash (``physically 
settled'' options).\7\ OCC also clears certain futures contracts that, 
at maturity, require the delivery of equity securities cleared by NSCC 
in exchange for cash. As a result, the exercise/assignment of certain 
options or maturation of certain futures cleared by OCC effectively 
results in stock settlement obligations. NSCC and OCC maintain a legal 
agreement, generally referred to by the parties as the ``Accord'' 
agreement, that governs the processing of such physically settled 
options and futures cleared by OCC that result in settlement 
obligations in underlying equity securities to be cleared by NSCC 
(i.e., the Existing Accord). The Existing Accord establishes terms 
under which NSCC accepts for clearing certain securities transactions 
that result from the exercise and assignment of relevant options 
contracts and the maturity of futures contracts that are cleared and 
settled by OCC.\8\ It also establishes the time when OCC's settlement 
guaranty in respect of those transactions ends and NSCC's settlement 
guaranty begins.
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    \7\ The term ``physically-settled'' as used throughout the OCC 
Rules refers to cleared contracts that settle into their underlying 
interest (i.e., options or futures contracts that are not cash-
settled). When a contract settles into its underlying interest, 
shares of stock are sent, i.e., delivered, to contract holders who 
have the right to receive the shares from contract holders who are 
obligated to deliver the shares at the time of exercise/assignment 
in the case of an option and maturity in the case of a future.
    \8\ Under the Existing Accord, such options and futures are 
defined as ``E&A/Delivery Transactions,'' which refers to ``Exercise 
& Assignment Delivery Transactions.''
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    The Existing Accord allows for a scenario in which NSCC could 
choose not to guarantee the settlement of such securities arising out 
of E&A/Delivery Transactions. Specifically, NSCC is not obligated to 
guarantee settlement until its member has met its collateral 
requirements at NSCC. If NSCC chooses not to guarantee settlement, OCC 
would engage in an alternate method of settlement outside of NSCC. This 
scenario presents two primary problems. First, the cash required for 
OCC and its Clearing Members in certain market conditions to facilitate 
settlement outside of NSCC could be significantly more than the amount 
required if NSCC were to guarantee the relevant transactions. This is 
because settlement of the transactions in the underlying equity 
securities outside of NSCC would mean that they would no longer receive 
the benefit of netting through the facilities of NSCC. In such a 
scenario, the additional collateral required from Clearing Members to 
support OCC's continuing settlement guarantee would also have to be 
sufficiently liquid to properly manage the risks associated with those 
transactions being due on the second business day following the option 
exercise or the relevant futures contract maturity date.
    Based on an analysis of scenarios using historical data where it 
was assumed that OCC could not settle transactions through the 
facilities of NSCC, the worst-case outcome resulted in extreme 
liquidity demands of over $300 billion for OCC to effect settlement via 
an alternative method, e.g., by way of gross broker-to-broker 
settlement, as discussed in more detail below. OCC Clearing Members, by 
way of their contributions to the OCC Clearing Fund, would bear the 
brunt of this demand. Furthermore, there is no guarantee that OCC 
Clearing Members could fund the entire amount of any similar real-life 
scenarios. By contrast, projected Guaranty Substitution Payments, 
defined below, identified during the study ranged from approximately 
$419 million to over $6 billion, also as discussed in more detail 
below.
    The second primary problem relates to the significant operational 
complexities if settlement occurs outside of NSCC. More specifically, 
netting through NSCC reduces the volume and value of settlement 
obligations. For example, in 2022 it is estimated that netting through 
NSCC's continuous net settlement (``CNS'') accounting system \9\ 
reduced the value of CNS settlement obligations by approximately 98% or 
$510 trillion from $519 trillion to $9 trillion. If settlement occurred 
outside of NSCC, on a broker-to-broker basis between OCC Clearing 
Members, for example, shares would not be netted and Clearing Members 
would have to coordinate directly with each other to settle the 
relevant transactions. The operational complexities and uncertainty 
associated with alternate means of settlement would impact every market 
participant involved in a settlement of OCC-related transactions.
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    \9\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation) of the NSCC Rules. See NSCC's Rules, available at https://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
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    To address these problems, the Clearing Agencies are proposing 
certain changes as part of Phase 1 to amend and restate the Existing 
Accord and make related changes to their respective rules that would 
allow OCC to elect to make a cash payment (the ``Guaranty Substitution 
Payment'' or ``GSP'') to NSCC following the default of a Common Member 
\10\ that would cause NSCC to guarantee settlement of that Common 
Member's transactions and, therefore, cause those transactions to be 
settled through processing by NSCC. In connection with this proposal, 
OCC also would enhance its daily liquidity stress testing processes and 
procedures to account for the possibility of OCC making such a payment 
to NSCC in the event of a Common Member default. By making these 
enhancements to its stress testing, OCC could include the liquid 
resources necessary to make the payment in its resource planning. The 
Clearing Agencies believe that by NSCC accepting such a payment from 
OCC, the operational efficiencies and reduced costs related to the 
settlement of transactions through NSCC would limit market disruption 
following a Common Member default because settlement through NSCC 
following such a default would be less operationally complex and would 
be expected to require less liquidity and other collateral from market 
participants than the processes available to OCC for closing out 
positions. Additionally, proposed enhancements by OCC to its liquidity 
stress testing would add assurances that

[[Page 5955]]

OCC could make such a payment in the event of a Common Member default. 
The Clearing Agencies believe that their respective clearing members 
and all other participants in the markets for which OCC provides 
clearance and settlement would benefit from OCC's ability to choose to 
make a cash payment to effect settlement through the facilities of 
NSCC. This change would provide more certainty around certain default 
scenarios and would blunt the financial and operational burdens market 
participants could experience in the case of most clearing member 
defaults.\11\
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    \10\ A firm that is both an OCC Clearing Member and an NSCC 
Member or is an OCC Clearing Member that has designated an NSCC 
Member to act on its behalf is referred to herein as a ``Common 
Member.'' The term ``Clearing Member'' as used herein has the 
meaning provided in OCC's By-Laws. See OCC's By-Laws, supra, note 5. 
The term ``Member'' as used herein has the meaning provided in 
NSCC's Rules. See NSCC's Rules, supra note 9.
    \11\ OCC provided its analysis of the financial impact of 
alternate means of settlement as confidential Exhibit 3A to this 
filing.
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    Finally, the Clearing Agencies are also proposing certain changes 
as part of Phase 2 that, if approved, would not be implemented until 
after the Commission shortens the standardized settlement cycle under 
Exchange Act Rule 15c6-1(a) from two days after the traded date 
(``T+2'') to one day after the trade date (``T+1''), which currently is 
set for May 28, 2024. The Phase 2 changes would address the operational 
realities concerning the Accord that will result from the Commission's 
adoption and implementation of a new standard settlement cycle of T+1 
pursuant to Rule 15c6-1(a) under the Act. The Phase 2 changes generally 
are designed to allow OCC to provide certain assurances with respect to 
OCC's ability to make a GSP in the event of a Common Member default to 
NSCC that would permit NSCC to begin processing Common Members' E&A/
Delivery Transactions in a shortened settlement cycle prior to Guaranty 
Substitution occurring by introducing new or amended terms and setting 
out the processes associated therewith.
ii. Background
    OCC acts as a central counterparty clearing agency for U.S.-listed 
options and futures on a number of underlying financial assets 
including common stocks, currencies and stock indices. In connection 
with these services, OCC provides the OCC Guaranty pursuant to its By-
Laws and Rules. NSCC acts as a central counterparty clearing agency for 
certain equity securities, corporate and municipal debt, exchange 
traded funds and unit investment trusts that are eligible for its 
services. Eligible trading activity may be processed through NSCC's CNS 
system \12\ or through its Balance Order Accounting system,\13\ where 
all eligible compared and recorded transactions for a particular 
settlement date are netted by issue into one net long (buy), net short 
(sell) or flat position. As a result, for each day with activity, each 
Member has a single deliver or receive obligation for each issue in 
which it has activity at NSCC. In connection with these services, NSCC 
also provides the NSCC Guaranty pursuant to Addendum K of the NSCC 
Rules.
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    \12\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting 
Operation) of the NSCC Rules, supra note 9.
    \13\ See Rule 8 (Balance Order and Foreign Security Systems) and 
Procedure V (Balance Order Accounting Operation) of the NSCC Rules, 
supra note 9.
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    OCC's Rules provide that delivery of, and payment for, securities 
underlying certain exercised stock options and matured single stock 
futures that are physically settled are generally effected through the 
facilities of NSCC and are not settled through OCC's facilities.\14\ 
OCC and NSCC executed the Existing Accord to facilitate, via NSCC's 
systems, the physical settlement of securities arising out of options 
and futures cleared by OCC. OCC Clearing Members that clear and settle 
physically settled options and futures transactions through OCC also 
are required under OCC's Rules \15\ to be Members of NSCC or to have 
appointed or nominated a Member of NSCC to act on its behalf. As noted 
above, these firms are referred to as ``Common Members'' in the 
Existing Accord.
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    \14\ See Chapter IX of OCC's Rules (Delivery of Underlying 
Securities and Payment), supra note 5.
    \15\ See OCC Rule 901, supra note 5.
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iii. Summary of the Existing Accord
    The Existing Accord governs the transfer between OCC and NSCC of 
responsibility for settlement obligations that involve a delivery and 
receipt of stock in the settlement of physically settled options and 
futures that are cleared and settled by OCC and for which the 
underlying securities are eligible for clearing through the facilities 
of NSCC (``E&A/Delivery Transactions''). It also establishes the time 
when OCC's settlement guarantee (the ``OCC Guaranty'') ends and NSCC's 
settlement guarantee (the ``NSCC Guaranty'') \16\ begins with respect 
to E&A/Delivery Transactions. However, in the case of a Common Member 
default \17\ NSCC can reject these settlement obligations, in which 
case the settlement guaranty would not transfer from OCC to NSCC and 
OCC would not have a right to settle the transactions through the 
facilities of NSCC. Instead, OCC would have to engage in alternative 
methods of settlement that have the potential to create significant 
liquidity and collateral requirements for both OCC and its non-
defaulting Clearing Members.\18\ More specifically, this could involve 
broker-to-broker settlement between OCC Clearing Members.\19\ This 
settlement method is operationally complex because it requires 
bilateral coordination directly between numerous Clearing Members 
rather than relying on NSCC to facilitate multilateral netting to 
settle the relevant settlement obligations. As described above, it also 
potentially could result in significant liquidity and collateral 
requirements for both OCC and its non-defaulting Clearing Members 
because the transactions would not be netted through the facilities of 
NSCC. Alternatively, where NSCC accepts the E&A/Delivery Transactions 
from OCC, the OCC Guaranty ends and the NSCC Guaranty takes effect. The 
transactions are then netted through NSCC's systems, which allows 
settlement obligations for the same settlement date to be netted into a 
single deliver or receive obligation. This netting reduces the costs 
associated with securities transfers by reducing the number of 
securities movements required for settlement and further reduces 
operational and market risk. The benefits of such netting by NSCC may 
be significant with respect to the large volumes of E&A/Delivery 
Transactions processed during monthly options expiry periods.
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    \16\ See Addendum K and Procedure III of the NSCC Rules, supra 
note 9.
    \17\ A Common Member that has been suspended by OCC or for which 
NSCC has ceased to act is referred to as a ``Mutually Suspended 
Member.''
    \18\ For example, OCC evaluated certain Clearing Member default 
scenarios in which OCC assumed that NSCC would not accept the 
settlement obligations under the Existing Accord, including the 
default of a large Clearing Member coinciding with a monthly options 
expiration. OCC has estimated that in such a Clearing Member default 
scenario, the aggregate liquidity burden on OCC in connection with 
obligations having to be settled on a gross broker-to-broker basis 
could reach a significantly high level. For example, in January 
2022, the largest gross broker-to-broker settlement amount in the 
case of a larger Clearing Member default would have resulted in 
liquidity needs of approximately $384,635,833,942. OCC provided the 
data and analysis as confidential Exhibit 3A to this filing.
    \19\ In broker-to-broker settlement, Clearing Member parties are 
responsible for coordinating settlement--delivery and payment--among 
themselves on a transaction-by-transaction basis. Once transactions 
settle, the parties also have an obligation to affirmatively notify 
OCC so that OCC can close out the transactions. If either one of or 
both of the parties do not notify OCC, the transaction would remain 
open on OCC's books indefinitely until the time both parties have 
provided notice of settlement to OCC.
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    Pursuant to the Existing Accord, on each trading day NSCC delivers 
to OCC a file that identifies the securities, including stocks, 
exchange-traded funds and exchange-traded notes, that are

[[Page 5956]]

eligible (1) to settle through NSCC and (2) to be delivered in 
settlement of (i) exercises and assignments of stock options cleared 
and settled by OCC or (ii) delivery obligations from maturing stock 
futures cleared and settled by OCC. OCC, in turn, delivers to NSCC a 
file identifying securities to be delivered, or received, for physical 
settlement in connection with OCC transactions.\20\
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    \20\ Each day that both OCC and NSCC are open for accepting 
trades for clearing is referred to as an ``Activity Date'' in the 
Existing Accord. Securities eligible for settlement at NSCC are 
referred to collectively as ``Eligible Securities'' in the Existing 
Accord. Eligible securities are settled at NSCC through NSCC's CNS 
Accounting Operation or NSCC's Balance Order Accounting Operation.
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    After NSCC receives the list of eligible transactions from OCC, and 
NSCC has received all required deposits to the NSCC Clearing Fund from 
all Common Members taking into consideration amounts required to 
physically settle the OCC transactions, the OCC Guaranty would end and 
the NSCC Guaranty would begin with respect to physical settlement of 
the eligible OCC-related transactions.\21\ At this point, NSCC is 
solely responsible for settling the transactions.\22\
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    \21\ The term ``NSCC Clearing Fund'' as used herein has the same 
meaning as the term ``Clearing Fund'' as provided in the NSCC Rules. 
Procedure XV of the NSCC Rules provides that all NSCC Clearing Fund 
requirements and other deposits must be made within one hour of 
demand, unless NSCC determines otherwise, supra note 9.
    \22\ This is referred to in the Existing Accord as the 
``Guaranty Substitution Time,'' and the process of the substitution 
of the NSCC Guaranty for the OCC Guaranty with respect to E&A/
Delivery Transactions is referred to as ``Guaranty Substitution.''
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    Each day, NSCC is required to promptly notify OCC at the time the 
NSCC Guaranty takes effect. If NSCC rejects OCC's transactions due to 
an improper submission \23\ or if NSCC ``ceases to act'' for a Common 
Member,\24\ NSCC's Guaranty would not take effect for the affected 
transactions pursuant to the NSCC Rules.
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    \23\ Guaranty Substitution by NSCC (discussed further below) 
does not occur with respect to an E&A/Delivery Transaction that is 
not submitted to NSCC in the proper format or that involves a 
security that is not identified as an Eligible Security on the then-
current NSCC Eligibility Master File.
    \24\ Under NSCC's Rules, a default would generally be referred 
to as a ``cease to act'' and could encompass a number of 
circumstances, such as an NSCC Member's failure to make a Required 
Fund Deposit in a timely fashion. See NSCC Rule 46 (Restrictions on 
Access to Services), supra note 9. An NSCC Member for which it has 
ceased to act is referred to in the Existing Accord as a 
``Defaulting NSCC Member.'' Transactions associated with a 
Defaulting NSCC Member are referred to as ``Defaulted NSCC Member 
Transactions'' in the Existing Accord.
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    NSCC is required to promptly notify OCC if it ceases to act for a 
Common Member. Upon receiving such a notice, OCC would not continue to 
submit to NSCC any further unsettled transactions that involve such 
Common Member, unless authorized representatives of both OCC and NSCC 
otherwise consent. OCC would, however, deliver to NSCC a reversal file 
containing a list of all transactions that OCC already submitted to 
NSCC and that involve such Common Member. The NSCC Guaranty ordinarily 
would not take effect with respect to transactions for a Common Member 
for which NSCC has ceased to act, unless both Clearing Agencies agree 
otherwise. As such, NSCC does not have any existing contractual 
obligation to guarantee such Common Member's transactions. To the 
extent the NSCC Guaranty does not take effect, OCC's Guaranty would 
continue to apply, and, as described above, OCC would remain 
responsible for effecting the settlement of such Common Member's 
transactions pursuant to OCC's By-Laws and Rules.
    As noted above, the Existing Accord does provide that the Clearing 
Agencies may agree to permit additional transactions for a Common 
Member default (``Defaulted NSCC Member Transactions'') to be processed 
by NSCC while subject to the NSCC Guaranty. This optional feature, 
however, creates uncertainty for the Clearing Agencies and market 
participants about how Defaulted NSCC Member Transactions may be 
processed following a Common Member default and also does not provide 
NSCC with the ability to collect collateral from OCC that it may need 
to close out these additional transactions. While the optional feature 
would remain in the agreement as part of this proposal, the proposed 
changes to the Existing Accord, as described below, could significantly 
reduce the likelihood that it would be utilized.
Proposed Phase 1 Changes
i. Proposed Changes to the Existing Accord
    The proposed changes to the Existing Accord would permit OCC to 
make a cash payment, referred to as the ``Guaranty Substitution 
Payment'' or ``GSP,'' to NSCC. This cash payment could occur on either 
or both of the day that the Common Member becomes a Mutually Suspended 
Member and on the next business day. Upon NSCC's receipt of the 
Guaranty Substitution Payment from OCC, the NSCC Guaranty would take 
effect for the Common Member's transactions, and they would be accepted 
by NSCC for clearance and settlement.\25\ OCC could use all Clearing 
Member contributions to the OCC Clearing Fund \26\ and certain Margin 
Assets \27\ of a defaulted Clearing Member to pay the GSP, as described 
in more detail below.
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    \25\ Acceptance of such transactions by NSCC would be subject to 
NSCC's standard validation criteria for incoming trades. See NSCC 
Rule 7, supra note 9.
    \26\ The term ``OCC Clearing Fund'' as used herein has the same 
meaning as the term ``Clearing Fund'' in OCC's By-Laws, supra note 
5.
    \27\ The term ``Margin Assets'' as used herein has the same 
meaning as provided in OCC's By-Laws, supra note 5.
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    NSCC would calculate the Guaranty Substitution Payment as the sum 
of the Mutually Suspended Member's unpaid required deposit to the NSCC 
Clearing Fund (``Required Fund Deposit'') \28\ and the unpaid 
Supplemental Liquidity Deposit \29\ obligation that is attributable to 
E&A/Delivery Transactions. The proposed changes to the Existing Accord 
define how NSCC would calculate the Guaranty Substitution Payment.
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    \28\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules, see supra note 9.
    \29\ Under the NSCC Rules, NSCC collects additional cash 
deposits from those Members who would generate the largest 
settlement debits in stressed market conditions, referred to as 
``Supplemental Liquidity Deposits'' or ``SLD.'' See Rule 4A of the 
NSCC Rules, supra note 9.
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    More specifically, NSCC would first determine how much of the 
member's unpaid Clearing Fund requirement would be included in the GSP. 
NSCC would look at the day-over-day change in gross market value of the 
Mutually Suspended Member's positions as well as day-over-day change in 
the member's NSCC Clearing Fund requirements. Based on such changes, 
NSCC would identify how much of the change in the Clearing Fund 
requirement was attributable to E&A/Delivery Transactions coming from 
OCC. If 100 percent of the day-over-day change in the NSCC Clearing 
Fund requirement is attributable to activity coming from OCC, then the 
GSP would include 100 percent of the member's NSCC Clearing Fund 
requirement. If less than 100 percent of the change is attributable to 
activity coming from OCC, then the GSP would include that percent of 
the member's unpaid NSCC Clearing Fund requirement attributable to 
activity coming from OCC. NSCC would then determine the portion of the 
member's unpaid SLD obligation that is attributable to E&A/Delivery 
Transactions. As noted above, the GSP would be the sum of these two 
amounts. A member's NSCC Clearing Fund requirement and SLD obligation 
at NSCC are designed to address the credit and liquidity risks that a 
member poses to NSCC. The GSP calculation is

[[Page 5957]]

intended to assess how much of a member's obligations arise out of 
activity coming from OCC so that the amount paid by OCC is commensurate 
with the risk to NSCC of guarantying such activity.
    To permit OCC to anticipate the potential resources it would need 
to pay the GSP for a Mutually Suspended Member, each business day, NSCC 
would provide OCC with (1) Required Fund Deposit and Supplemental 
Liquidity Deposit obligations, as calculated pursuant to the NSCC 
Rules, and (2) the gross market value of the E&A/Delivery Transactions 
and the gross market value of total Net Unsettled Positions (as such 
term is defined in the NSCC Rules). On options expiry days that fall on 
a Friday, NSCC would also provide OCC with information regarding 
liquidity needs and resources, and any intraday SLD requirements of 
Common Members. Such information would be delivered pursuant to the 
ongoing information sharing obligations under the Existing Accord (as 
proposed to be amended) and the Service Level Agreement (``SLA'') to 
which both NSCC and OCC are a party pursuant to Section 2 of the 
Existing Accord.\30\ The SLA addresses specifics regarding the time, 
form, and manner of various required notifications and actions 
described in the Accord and also includes information applicable under 
the Accord.
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    \30\ OCC provided a draft of the revised SLA to the Commission 
as confidential Exhibit 3C to this filing.
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    NSCC and OCC believe the proposed calculation of the Required Fund 
Deposit portion of the GSP is appropriate because it is designed to 
provide a reasonable proxy for the impact of the Mutually Suspended 
Member's E&A/Delivery Transactions on its Required Fund Deposit. While 
impact study data did show that the proposed calculation could result 
in a GSP that overestimates or underestimates the Required Fund Deposit 
attributable to the Mutually Suspended Member's E&A/Delivery 
Transactions,\31\ current technology constraints prohibit NSCC from 
performing a precise calculation of the GSP on a daily basis for every 
Common Member.\32\
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    \31\ The impact study was conducted at the Commission's request 
to cover a three-day period and reviewed the ten Common Members with 
the largest Required Fund Deposits attributable to the Mutually 
Suspended Member's E&A/Delivery Transactions. Over the 30 instances 
in the study, approximately 15 instances resulted in an 
underestimate of the Required Fund Deposit by an average of 
approximately $112,900,926, four instances where the proxy 
calculation was the same as the Required Fund Deposit, and eleven 
instances of an overestimate of the Required Fund Deposit by an 
average of approximately $59,654,583. See confidential Exhibit 3D to 
this filing for additional detail related to the referenced study.
    \32\ OCC and NSCC agreed that performing the necessary 
technology build during Phase 1 would delay the implementation of 
Phase 1 of this proposal. NSCC will incorporate those technology 
updates in connection with Phase 2 of this proposal.
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    Implementing the ability for OCC to make the GSP and cause the E&A/
Delivery Transactions to be cleared and settled through NSCC would 
promote the ability of OCC and NSCC to be efficient and effective in 
meeting the requirements of the markets they serve. This is because 
data demonstrates that the expected size of the GSP would be smaller 
than the amount of cash that would otherwise be needed by OCC and its 
Clearing Members to facilitate settlement outside of NSCC. More 
specifically, based on a historical study of alternate means of 
settlement available to OCC from September 2021 through September 2022, 
in the event that NSCC did not accept E&A/Delivery Transactions, the 
worst-case scenario peak liquidity need OCC identified was 
$384,635,833,942 for settlement to occur on a gross broker-to-broker 
basis. OCC estimates that the corresponding GSP in this scenario would 
have been $863,619,056. OCC also analyzed several other large liquidity 
demand amounts that were identified during the study if OCC effected 
settlement on a gross broker-to-broker basis.\33\ These liquidity 
demand amounts and the largest liquidity demand amount OCC observed of 
$384,635,833,942 substantially exceed the amount of liquid resources 
currently available to OCC.\34\ By contrast, projected GSPs identified 
during the study ranged from $419,297,734 to $6,281,228,428. For each 
of these projected GSP amounts, OCC observed that the Margin Assets and 
OCC Clearing Fund contributions that would have been required of 
Clearing Members in these scenarios would have been sufficient to 
satisfy the amount of the projected GSPs.
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    \33\ See confidential Exhibit 3A to this filing for additional 
detail related to the referenced study.
    \34\ As of September 30, 2023, OCC held approximately $12.37 
billion in qualifying liquid resources. See OCC Quantitative 
Disclosure, July-September 2023, available at https://www.theocc.com/risk-management/pfmi-disclosures.
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    To help address the current technology constraint that prohibits 
NSCC from performing a precise calculation of the GSP on a daily basis 
for every Common Member, proposed Section 6(b)(i) of the Existing 
Accord and related Section 7(d) of the SLA would provide that with 
respect to a Mutually Suspended Member, either NSCC or OCC may require 
that the Required Fund Deposit portion of the GSP be re-calculated by 
calculating the Required Fund Deposit for the Mutually Suspended Member 
both before and after the delivery of the E&A/Delivery Transactions and 
utilize the precise amount that is attributable to that activity in the 
final GSP. If such a recalculation is required, the result would 
replace the Required Fund Deposit component of the GSP that was 
initially calculated. The SLD component of the GSP would be unchanged 
by such recalculation.
    As the above demonstrates, the GSP is intended to address the 
significant collateral and liquidity requirements that could be 
required of OCC Clearing Members in the event of a Common Member 
default.
    Allowing OCC to make a GSP payment also is intended to allow for 
settlement processing to take place through the facilities of NSCC to 
retain operational efficiencies associated with the settlement process. 
Alternative settlement means such as broker-to-broker settlement add 
operational burdens, because transactions would need to be settled 
individually on one-off bases. In contrast, NSCC's netting reduces the 
volume and value of settlement obligations that would need to be closed 
out in the market.\35\ Because the clearance and settlement of 
obligations through NSCC's facilities following a Common Member 
default, including netting of E&A/Delivery Transactions with a Common 
Member's positions at NSCC, would avoid these potentially significant 
operational burdens for OCC and its Clearing Members, OCC and NSCC 
believe that the proposed changes would limit market disruption 
relating to a Common Member default. NSCC netting significantly reduces 
the total number of obligations that require the exchange of money for 
settlement. Allowing more activity to be processed through NSCC's 
netting systems would minimize risk associated with the close out of 
those transactions following the default of a Common Member.
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    \35\ CNS reduces the value of obligations that require financial 
settlement by approximately 98%, where, for example $519 trillion in 
trades could be netted down to approximately $9 trillion in net 
settlements.
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    Amending the Existing Accord to define the terms and conditions 
under which Guaranty Substitution may occur, at OCC's election, with 
respect to Defaulted NSCC Member Transactions after a Common Member 
becomes a Mutually Suspended Member would also provide more certainty 
to both the Clearing Agencies and market

[[Page 5958]]

participants generally about how a Mutually Suspended Member's 
Defaulted NSCC Member Transactions may be processed.
    NSCC and OCC have agreed it is appropriate to limit the 
availability of the proposed provision to the day of the Common Member 
default and the next business day because, based on historical 
simulations of cease to act events involving Common Members, most 
activity of a Mutually Suspended Member is closed out on those 
days.\36\ Furthermore, the benefits of netting through NSCC's systems 
would be reduced for any activity submitted to NSCC after that time.
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    \36\ OCC provided data regarding such events in confidential 
Exhibit 3B to this filing. The information contained therein 
includes the assumptions and timelines leading up to the declaration 
of a default for a Common Member and the anticipated timing of OCC's 
payment of the GSP.
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    To implement the proposed Phase 1 changes to the Existing Accord, 
OCC and NSCC propose to make the following changes.
Section 1--Definitions
    First, new definitions would be added, and existing definitions 
would be amended in Section 1, which is the Definitions section.
    The new defined terms would be as follows.
    <bullet> The term ``Close Out Transaction'' would be defined to 
mean ``the liquidation, termination or acceleration of one or more 
exercised or matured Stock Options \37\ or Stock Futures \38\ 
contracts, securities contracts, commodity contracts, forward 
contracts, repurchase agreements, swap agreements, master netting 
agreements or similar agreements of a Mutually Suspended Member 
pursuant to OCC Rules 901, 1006 and 1101 through 1111 (including but 
not limited to Rules 1104 and 1107) and/or NSCC Rule 18.'' This 
proposed definition would make it clear that the payment of the 
Guaranty Substitution Payment and NSCC's subsequent acceptance of 
Defaulted NSCC Member Transactions for clearance and settlement are 
intended to fall within the ``safe harbors'' provided in the Bankruptcy 
Code,\39\ the Securities Investor Protection Act,\40\ and other similar 
laws.
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    \37\ The term ``Stock Options'' is defined in the Existing 
Accord within the definition of ``Eligible Securities,'' and refers 
to options issued by OCC.
    \38\ The term ``Stock Futures'' is defined in the Existing 
Accord within the definition of ``Eligible Securities,'' and refers 
to stock futures contracts cleared by OCC.
    \39\ 11 U.S.C. 101 et seq., including sections 362(b)(6), (7), 
(17), (25) and (27) (exceptions to the automatic stay), sections 
546(e)-(g) and (j) (limitations on avoiding powers), and sections 
555-556 and 559-562 (contractual right to liquidate, terminate or 
accelerate certain contracts).
    \40\ 15 U.S.C. 78aaa-lll, including section 78eee(b)(2)(C) 
(exceptions to the stay).
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    <bullet> The term ``Guaranty Substitution Payment'' would be 
defined to mean ``an amount calculated by NSCC in accordance with the 
calculations set forth in Appendix A [to the Existing Accord (as 
proposed to be amended)], to include two components: (i) a portion of 
the Mutually Suspended Member's Required Fund Deposit deficit to NSCC 
at the time of the cease to act; and (ii) a portion of the Mutually 
Suspended Member's unpaid Supplemental Liquidity Deposit obligation at 
the time of the cease to act.''
    <bullet> The term ``Mutually Suspended Member'' would mean ``any 
OCC Participating Member \41\ that has been suspended by OCC that is 
also an NSCC Participating Member \42\ for which NSCC has ceased to 
act.''
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    \41\ The term ``OCC Participating Member'' is defined in the 
Existing Accord to mean ``(i) a Common Member; (ii) an OCC Clearing 
Member that is an `Appointing Clearing Member' (as defined in 
Article I of OCC's By-Laws) and has appointed an Appointed Clearing 
Member that is an NSCC Member to effect settlement of E&A/Delivery 
Transactions through NSCC on the Appointing Clearing Member's 
behalf; (iii) an OCC Clearing Member that is an Appointed Clearing 
Member; or (iv) a Canadian Clearing Member.'' No changes are 
proposed to this definition.
    \42\ The term ``NSCC Participating Member'' is defined in the 
Existing Accord to mean ``(i) a Common Member; (ii) an NSCC Member 
that is an `Appointed Clearing Member' (as defined in Article I of 
OCC's By-Laws); or (iii) [Canadian Depository for Securities Limited 
or ``CDS'']. For the avoidance of doubt, the Clearing Agencies agree 
that CDS is an NSCC Member for purposes of this Agreement.'' No 
changes are proposed to this definition.
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    <bullet> The term ``Required Fund Deposit'' would have the meaning 
``provided in Rule 4 of NSCC's Rules and Procedures (or any replacement 
or substitute rule), the version of which, with respect to any 
transaction or obligation incurred that is the subject of this 
Agreement, is in effect at the time of such transaction or incurrence 
of obligation.''
    <bullet> The term ``Supplemental Liquidity Deposit'' would have the 
meaning ``provided in Rule 4A of NSCC's Rules and Procedures (or any 
replacement or substitute rule), the version of which, with respect to 
any transaction or obligation incurred that is the subject of this 
Agreement, is in effect at the time of such transaction or incurrence 
of obligation.''
    The defined terms that would be amended in Section 1 of the 
Existing Accord are as follows.
    <bullet> The definition for the term ``E&A/Delivery Transaction'' 
generally contemplates a transaction that involves a delivery and 
receipt of stock in the settlement of physically settled options and 
futures that are cleared and settled by OCC and for which the 
underlying securities are eligible for clearing through the facilities 
of NSCC. The definition would be amended to make clear that it would 
apply in respect of a ``Close Out Transaction'' of a ``Mutually 
Suspended Member'' as those terms are proposed to be defined (described 
above).
    <bullet> The definition for the term ``Eligible Securities'' 
generally contemplates the securities that are eligible to be used for 
physical settlement under the Existing Accord. The term would be 
modified to clarify that this may include, for example, equities, 
exchange-traded funds and exchange-traded notes that are underlying 
securities for options issued by OCC.
Section 6--Default by an NSCC Participating Member or OCC Participating 
Member
    Section 6 of the Existing Accord provides that NSCC is required to 
provide certain notice to OCC in circumstances in which NSCC has ceased 
to act for a Common Member. Currently, Section 6(a)(ii) of the Existing 
Accord also requires NSCC to notify OCC if a Common Member has failed 
to satisfy its Clearing Fund obligations to NSCC, but for which NSCC 
has not yet ceased to act. In practice, this provision would trigger a 
number of obligations (described below) when a Common Member fails to 
satisfy its NSCC Clearing Fund obligations for any reason, including 
those due to an operational delay. Therefore, OCC and NSCC are 
proposing to remove the notification requirement under Section 6(a)(ii) 
from the Existing Accord. Under Section 7(d) of the Existing Accord, 
NSCC and OCC are required to provide each other with general 
surveillance information regarding Common Members, which includes 
information regarding any Common Member that is considered by the other 
party to be in distress. Therefore, if a Common Member has failed to 
satisfy its NSCC Clearing Fund obligations and NSCC believes this 
failure is due to, for example, financial distress and not, for 
example, due to a known operational delay, and NSCC has not yet ceased 
to act for that Common Member, such notification to OCC would still 
occur but would be done pursuant to Section 7(d) of the Existing Accord 
(as proposed to be amended), and not Section 6(a)(ii). Notifications 
under Section 6 of the Existing Accord (as proposed to be amended) 
would be limited to instances when NSCC has actually ceased to act

[[Page 5959]]

for a Common Member pursuant to the NSCC Rules.\43\
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    \43\ See Rule 46 (Restrictions on Access to Services) of the 
NSCC Rules, supra note 9.
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    Following notice by NSCC that it has ceased to act for a Common 
Member, OCC is obligated in turn to deliver to NSCC a list of all E&A/
Delivery Transactions (excluding certain transactions for which 
Guaranty Substitution does not occur) involving the Common Member.\44\ 
This provision would be amended to clarify that it applies in respect 
of such E&A/Delivery Transactions for the Common Member for which the 
NSCC Guaranty has not yet attached--meaning that Guaranty Substitution 
has not yet occurred.
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    \44\ The section of the Existing Accord that addresses 
circumstances in which NSCC ceases to act and/or an NSCC Member 
defaults is currently part of Section 6(a). It would be re-
designated as Section 6(b) for organizational purposes.
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    As described above in the summary of the Existing Accord, where 
NSCC has ceased to act for a Common Member, the Existing Accord refers 
to the Common Member as the Defaulting NSCC Member and also refers to 
the relevant E&A/Delivery Transactions in connection with that 
Defaulting NSCC Member for which a Guaranty Substitution has not yet 
occurred as Defaulted NSCC Member Transactions.
    If the Defaulting NSCC Member is also suspended by OCC, it would be 
covered by the proposed definition that is described above for a 
Mutually Suspended Member. For such a Mutually Suspended Member, the 
proposed changes in Section 6(b) would provide that NSCC, by a time 
agreed upon by the parties, would provide OCC with the amount of the 
Guaranty Substitution Payment as calculated by NSCC and related 
documentation regarding the calculation. The Guaranty Substitution 
Payment would be calculated pursuant to NSCC's Rules as that portion of 
the unmet Required Fund Deposit \45\ and Supplemental Liquidity Deposit 
\46\ obligations of the Mutually Suspended Member attributable to the 
Defaulted NSCC Member Transactions. By a time agreed upon by the 
parties,\47\ OCC would then be required to either notify NSCC of its 
intent to make the full amount of the Guaranty Substitution Payment to 
NSCC or notify NSCC that it will not make the Guaranty Substitution 
Payment. If OCC makes the full amount of the Guaranty Substitution 
Payment, NSCC's guaranty would take effect at the time of NSCC's 
receipt of that payment and the OCC Guaranty would end.
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    \45\ The Required Fund Deposit is calculated pursuant to Rule 4 
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other 
Matters) of the NSCC Rules, see supra note 9.
    \46\ The Supplemental Liquidity Deposit is calculated pursuant 
to Rule 4A (Supplemental Liquidity Deposits) of the NSCC Rules, see 
supra note 9.
    \47\ The time by which OCC would be required to notify NSCC of 
its intent would be defined in the Service Level Agreement. As of 
the time of this filing, the parties intend to set that time as one 
hour after OCC's receipt of the calculated Guaranty Substitution 
Payment from NSCC.
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    The proposed changes would further provide that if OCC does not 
suspend the Common Member (such that the Common Member would therefore 
not meet the proposed definition of a Mutually Suspended Member) or if 
OCC elects to not make the full amount of the Guaranty Substitution 
Payment to NSCC, then all of the Defaulted NSCC Member Transactions 
would be exited from NSCC's CNS Accounting Operation and/or NSCC's 
Balance Order Accounting Operation, as applicable, and Guaranty 
Substitution would not occur in respect thereof. Therefore, NSCC would 
continue to have no obligation to guarantee or settle the Defaulted 
NSCC Member Transactions, and the OCC Guaranty would continue to apply 
to them pursuant to OCC's By-Laws and Rules.\48\
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    \48\ Under the current and proposed terms of the Existing 
Accord, NSCC would be permitted to voluntarily guaranty and settle 
the Defaulted NSCC Member Transactions.
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    Proposed changes to the Existing Accord would also address the 
application of any Guaranty Substitution Payment by NSCC. Specifically, 
new Section 6(d) would provide that any Guaranty Substitution Payment 
made by OCC may be used by NSCC to satisfy any liability or obligation 
of the Mutually Suspended Clearing Member to NSCC on account of 
transactions involving the Mutually Suspended Clearing Member for which 
the NSCC Guaranty applies and to the extent that any amount of assets 
otherwise held by NSCC for the account of the Mutually Suspended Member 
(including any Required Fund Deposit or Supplemental Liquidity Deposit) 
are insufficient to satisfy its obligations related to transactions for 
which the NSCC Guaranty applies. Proposed changes to Section 6(d) would 
further provide for the return to OCC of any unused portion of the GSP. 
With regard to the portion of the Guaranty Substitution Payment that 
corresponds to a member's Supplemental Liquidity Deposit obligation, 
NSCC must return any unused amount to OCC within fourteen (14) days 
following the conclusion of NSCC's settlement, close-out and/or 
liquidation. With regard to the portion of the Guaranty Substitution 
Payment that corresponds to a Required Fund Deposit, NSCC must return 
any unused amount to OCC under terms agreed to by the parties.\49\
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    \49\ Such amounts would be returned to OCC as appropriate and in 
accordance with a Netting Contract and Limited Cross-Guaranty, by 
and among The Depository Trust Company, Fixed Income Clearing 
Corporation, NSCC and OCC, dated as of January 1, 2003, as amended.
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Other Proposed Changes as Part of Phase 1
    Certain other technical changes are also proposed to the Existing 
Accord to conform it to the proposed changes described above. For 
example, the preamble and the ``whereas'' clauses in the Preliminary 
Statement would be amended to clarify that the agreement is an amended 
and restated agreement and to summarize that the agreement would be 
modified to contemplate the Guaranty Substitution Payment structure. 
Section 1(c), which addresses the terms in the Existing Accord that are 
defined by reference to NSCC's Rules and Procedures and OCC's By-Laws 
and Rules would be modified to state that such terms would have the 
meaning then in effect at the time of any transaction or obligation 
that is covered by the agreement rather than stating that such terms 
have the meaning given to them as of the effective date of the 
agreement. This change is proposed to help ensure that the meaning of 
such terms in the agreement will not become inconsistent with the 
meaning in the NSCC Rules and/or OCC By-Laws and Rules, as they may be 
modified through proposed rule changes with the Commission.
    Technical changes would be made to Sections 3(d) and (e) of the 
Existing Accord to provide that those provisions would not apply in the 
event new Section 6(b) described above, is triggered. Section 3(d) 
generally provides that OCC will no longer submit E&A/Delivery 
Transactions to NSCC involving a suspended OCC Participating 
Member.\50\ Similarly, Section 3(e) generally provides that OCC will no 
longer submit E&A/Delivery Transactions to NSCC involving an NSCC 
Participating Member \51\ for which NSCC has ceased to act. A proposed 
change would also be made to Section 5 of the Existing Accord to modify 
a reference to Section 5 of Article VI of OCC's By-Laws to instead 
provide that the updated cross-reference should be to Chapter IV of 
OCC's Rules.
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    \50\ See supra note 41 defining OCC Participating Member.
    \51\ See supra note 42 defining NSCC Participating Member.
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    Section 5 would also be amended to clarify that Guaranty 
Substitution

[[Page 5960]]

occurs when NSCC has received both the Required Fund Deposit and 
Supplemental Liquidity Deposit, as calculated by NSCC in its sole 
discretion, from Common Members. The addition of the collection of the 
Supplemental Liquidity Deposit to the definition of the Guaranty 
Substitution Time in this Section 5 would reflect OCC and NSCC's 
agreement that both amounts are components of the Guaranty Substitution 
Payment (as described above) and would make this definition consistent 
with that agreement.
    In Section 7 of the Existing Accord, proposed changes would be made 
to provide that NSCC would provide to OCC information regarding a 
Common Member's Required Fund Deposit and Supplemental Liquidity 
Deposit obligations, to include the Supplemental Liquidity Deposit 
obligation in this notice requirement, and additionally that NSCC would 
provide OCC with information regarding the potential Guaranty 
Substitution Payment for the Common Member. On an options expiration 
date that is a Friday, NSCC would, by close of business on that day, 
also provide to OCC information regarding the intra-day liquidity 
requirement, intra-day liquidity resources and intra-day calls for a 
Common Member that is subject to a Supplemental Liquidity Deposit at 
NSCC.
    Finally, Section 14 of the Existing Accord would be modernized to 
provide that notices between the parties would be provided by email 
rather than by hand, overnight delivery service or first-class mail.
ii. Proposed Changes to OCC By-Laws and Rules as Part of Phase 1
General Description
    OCC is also proposing certain changes to its By-Laws and Rules that 
are designed to complement the proposed changes described above 
regarding the Existing Accord. These proposed changes to the By-Laws 
and Rules are described below, and they generally cover the following 
four areas. First, the proposed changes would define Guaranty 
Substitution Payment. Second, the proposed changes would describe the 
circumstances under which OCC could make a Guaranty Substitution 
Payment to NSCC. Third, the proposed changes would specify what 
financial resources could be used by OCC to make the Guaranty 
Substitution Payment.\52\ Fourth, the proposed changes to OCC's 
Comprehensive Stress Testing and Clearing Fund Methodology, and 
Liquidity Risk Management Description would outline enhanced stress 
testing incorporating the GSP and OCC's ability to call for additional 
resources from Clearing Members. OCC also is proposing changes to OCC's 
Liquidity Risk Management Framework to account for OCC's ability to 
make the GSP.
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    \52\ OCC would be permitted to borrow from the Clearing Fund and 
margin of a suspended Clearing Member, over which OCC has a general 
lien, where that Clearing Member is a Mutually Suspended Member. The 
change would merely expand the circumstances under which OCC's 
current By-Laws and Rules permit OCC to borrow Clearing Fund and 
margin. The change would not affect the treatment of such borrowing 
under OCC's default waterfall that determines how OCC allocates 
losses against available financial resources. The Mutually Suspended 
Member's margin and Clearing Fund collateral would remain first in 
line to absorb losses.
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Article I--Definitions
    OCC proposes to add ``Guaranty Substitution Payment'' as a new 
defined term under Article I of OCC's By-Laws, which is the Definitions 
section. The term ``Guaranty Substitution Payment'' would be defined to 
mean: ``a payment that may be made by [OCC] to [NSCC] under the terms 
of an agreement between them, as described in Rule 901, so that [NSCC] 
will not reject settlement obligations for CCC-eligible \53\ securities 
that are directed by [OCC] for settlement through the facilities of 
[NSCC] on account of a Clearing Member that has been suspended, as 
described in Rule 1102, and for which [NSCC] has ceased to act.''
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    \53\ The term ``CCC-Eligible'' as used herein has the meaning 
provided in OCC's By-Laws, supra note 5.
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Chapter IX--Delivery of Underlying Securities and Payment
    Certain changes are also proposed to Chapter IX of OCC's Rules. OCC 
proposes to add parenthetical language to the Introduction section of 
Chapter IX of OCC's Rules. It would specify that a Guaranty 
Substitution Payment could be made by OCC to NSCC in connection with 
OCC's general policy that to the extent a security to be delivered and 
received is CCC-eligible, OCC will direct the delivery and payment 
obligations to be settled through the facilities of NSCC where the 
obligations are physically-settled and arise out of the exercise of 
stock option contracts or the maturity of stock futures contracts.
    Next, OCC proposes to delete certain provisions from Rule 901(b) 
regarding when a Guaranty Substitution occurs. Specifically, Rule 
901(b) currently provides that unless otherwise agreed between OCC and 
NSCC, a Guaranty Substitution with respect to settlement obligations 
for CCC-eligible securities that settle ``regular way'' under NSCC's 
Rules and Procedures will occur if: (i) the applicable settlement 
obligations are reported to and are not rejected by NSCC; (ii) NSCC has 
not notified OCC that it has ceased to act for the relevant Clearing 
Member or Appointed Clearing Member; and (iii) the NSCC Clearing Fund 
requirements of the relevant Clearing Member or Appointed Clearing 
Member owing to NSCC, as determined in accordance with NSCC's Rules and 
Procedures, are received by NSCC. These considerations regarding when a 
Guaranty Substitution occurs are addressed under the terms of the 
Existing Accord, and they would continue to be relevant considerations 
regarding when a Guaranty Substitution occurs under the changes that 
OCC and NSCC are proposing to the Existing Accord. However, because 
additional considerations would be added to the Guaranty Substitution 
process in connection with the proposed ability for OCC in certain 
circumstances to make a Guaranty Substitution Payment to NSCC and also 
to eliminate the potential for a description of the Guaranty 
Substitution process in OCC's Rules to become inconsistent with the 
process that OCC and NSCC have agreed to in the Existing Accord, as it 
would be amended, OCC is proposing to delete the discussion of these 
considerations in Rule 901(b) in favor of instead simply cross 
referencing the terms of the agreement.\54\
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    \54\ For purposes of the proposed rule change process under 
Exchange Act Section 19(b), the agreement is treated as a rule of a 
clearing agency under Exchange Act Section 3(a)(27) and therefore 
any proposed changes to it by OCC are subject to the related rule 
change process and public notice and comment. OCC therefore believes 
that addressing the terms in the agreement and cross-referencing the 
agreement in OCC Rule 901 would not deprive the Commission or the 
public of notice regarding any future proposed changes.
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    In addition, OCC proposes to add a new paragraph to the end of Rule 
901(b) to provide that pursuant to the proposed changes to the Existing 
Accord, OCC would be permitted to make a Guaranty Substitution Payment 
to NSCC. The proposed changes would also describe the circumstances in 
which OCC may make a Guaranty Substitution Payment in connection with 
settlement obligations of a suspended Clearing Member, and that the 
amount of the Guaranty Substitution Payment under the terms of the 
Existing Accord, as amended, would be the amount required by NSCC to 
satisfy its deficit(s) regarding such Clearing Member's ``Required Fund 
Deposit'' and ``Supplemental Liquidity Deposit'' as those terms are 
defined in NSCC's Rules

[[Page 5961]]

and Procedures.\55\ The changes would provide that any amount of a 
Guaranty Substitution Payment that NSCC does not use pursuant to its 
Rules and Procedures would subsequently be returned to OCC under such 
terms and within such times as are agreed by OCC and NSCC. OCC believes 
that it is useful to include this description of the proposed process 
for the Guaranty Substitution Payment and the circumstances in which it 
may be made so that a user of OCC's publicly available By-Laws and 
Rules would have sufficient information to understand the existence of 
the Guaranty Substitution Payment mechanism, the general circumstances 
in which it may be made and the role that a Guaranty Substitution 
Payment would play in causing NSCC to accept obligations for CCC-
eligible securities for clearance and settlement.
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    \55\ See NSCC Rules 4 (defining ``Required Fund Deposit'') and 
4A (defining ``Supplemental Liquidity Deposit''), supra note 9.
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Chapters X and XI--Clearing Fund Contributions and Suspension of a 
Clearing Member
    As generally described above, the proposed changes would also 
provide that OCC would be permitted to borrow from the OCC Clearing 
Fund, and also against certain Margin Assets, of a Clearing Member that 
has been suspended by OCC where that Clearing Member is a Mutually 
Suspended Member. To implement these changes, OCC is proposing the 
following amendments to OCC Rule 1006 and Rule 1104.
    OCC Rule 1006 addresses the purpose and permitted uses of the OCC 
Clearing Fund. OCC proposes to make amendments to paragraphs (a) and 
(f) to permit OCC to utilize assets in the Clearing Fund as a liquidity 
resource in connection with making a Guaranty Substitution Payment. 
Currently, OCC Rule 1006(a) states the conditions for use of the OCC 
Clearing Fund. These provide that the OCC Clearing Fund may be used for 
borrowings pursuant to OCC Rule 1006(f) or to make good losses or 
expenses suffered by OCC including: (i) as a result of the failure of 
any Clearing Member to discharge duly any obligation on or arising from 
any confirmed trade accepted by OCC, (ii) as a result of the failure of 
any Clearing Member (including any Appointed Clearing Member) or of CDS 
(Canada's national securities depository) to perform its obligations 
under any contract or obligation issued, undertaken, or guaranteed by 
OCC or in respect of which OCC is otherwise liable, (iii) as a result 
of the failure of any Clearing Member to perform any of its obligations 
to OCC in respect of the stock loan and borrow positions of such 
Clearing Member, (iv) in connection with any liquidation of a Clearing 
Member's open positions, (v) in connection with protective transactions 
effected for the account of OCC pursuant to Chapter XI of OCC's Rules 
(delivery of underlying securities and payment), (vi) as a result of 
the failure of any Clearing Member to make any other required payment 
or render any other required performance or (vii) as a result of the 
failure of any bank, securities or commodities clearing organization, 
or investment counterparty, to perform its obligations to OCC for 
certain specified reasons.\56\
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    \56\ The terms ``Clearing Member'' and ``Appointed Clearing 
Member'' as used herein have the meanings provided in OCC's By-Laws, 
supra note 5.
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    OCC proposes to renumber clauses (iii) through (vii) in paragraph 
(a) as (iv) through (viii), and to insert as new clause (iii) a 
provision that the OCC Clearing Fund may be used ``regarding any 
Guaranty Substitution Payment that [OCC] may make to [NSCC] under an 
agreement between them, as described in [OCC] Rule 901, so that [NSCC] 
will not reject settlement obligations for CCC-eligible securities 
involving a Clearing Member for which [NSCC] has ceased to act and that 
[OCC] directs to [NSCC] for settlement through its facilities.'' \57\ 
OCC also proposes to add parenthetical language to paragraphs (f)(1)(A) 
and (f)(2)(A)(ii) to further clarify that contributions to the OCC 
Clearing Fund may be borrowed by OCC for use in connection with making 
a Guaranty Substitution Payment to NSCC. Any borrowing from the OCC 
Clearing Fund by OCC to make a Guaranty Substitution Payment to NSCC 
would be subject to the existing terms of OCC Rule 1006(f)(3) that 
provide that irrespective of how any such borrowings from the OCC 
Clearing Fund are applied by OCC, the borrowing for a period not to 
exceed thirty (30) days will not be deemed to result in charges against 
the OCC Clearing Fund under OCC's default waterfall for allocating 
actual losses. For purposes of determining whether a loss resulting 
from a Guaranty Substitution Payment has occurred, OCC Rule 1006(f)(3) 
would be amended to provide that the Guaranty Substitution Payment is 
deemed to be repaid by OCC at such time as under the Accord that it is 
NSCC's obligation to return any portion of the Guaranty Substitution 
Payment that NSCC does not use pursuant to its rules. If, subsequent to 
the borrowing, OCC determines that the borrowing represents an actual 
loss or all or any part of the borrowing remains outstanding after 
thirty (30) days (or on the first Business Day thereafter if the 
thirtieth calendar day is not a Business Day) then the amount of OCC 
Clearing Fund assets used in the outstanding borrowing would be an 
actual loss that OCC would be required to immediately allocate under 
its By-Laws and Rules.\58\ As noted above, losses resulting from the 
borrowing of Clearing Fund or Margin Assets as a liquidity resource to 
facilitate OCC making a Guaranty Substitution Payment would be 
allocated in the same sequence as any other losses charged to the 
default waterfall.
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    \57\ In connection with these amendments, the reference in Rule 
1006(b) to ``clauses (i) through (vi) of paragraph (a)'' would be 
changed to ``clauses (i) through (vii) of paragraph (a).''
    \58\ If the defaulting OCC Clearing Member's Margin Assets and 
OCC Clearing Fund contribution were insufficient to cover the 
associated losses, OCC would next look to certain OCC financial 
resources that are available for that purpose (e.g., OCC's corporate 
contribution and Clearing Fund contributions of non-defaulting OCC 
Clearing Members).
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    Consistent with these changes to permit OCC to use the OCC Clearing 
Fund as a borrowing resource to make a Guaranty Substitution Payment to 
NSCC, OCC is also proposing similar changes to OCC Rule 1104 that would 
permit OCC to borrow certain Margin Assets of a Clearing Member that 
has been suspended by OCC where that Clearing Member is a Mutually 
Suspended Member and OCC has a general lien \59\ over the Margin 
Assets.
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    \59\ Article I, Section 1.G.(1) of OCC's By-Laws states that the 
``term `general lien' means a security interest of [OCC] in all or 
specified assets in a Clearing Member account as security for all of 
the Clearing Member's obligations to [OCC] regardless of the source 
or nature of such obligations.'' See OCC By-Laws, supra note 5.
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    Specifically, OCC proposes to add a new paragraph (g) to OCC Rule 
1104 that would provide that OCC may use specified Margin Assets of a 
suspended Clearing Member as a borrowing in order to use such borrowed 
Margin Assets to make a Guaranty Substitution Payment to NSCC. OCC 
would be permitted to use Margin Assets from the following accounts of 
a suspended Common Member: firm lien account and firm non-lien account; 
separate Market-Maker's account; combined Market-Maker's account; and 
JBO Participants' account.\60\ OCC is not proposing at this time to 
have authority to borrow Margin Assets from other types of accounts 
over

[[Page 5962]]

which OCC has a restricted lien \61\ and for which the Margin Assets 
are security for the particular restricted lien accounts because of 
additional complexity that OCC believes would be associated with 
tracking NSCC's use of Margin Assets associated with those accounts and 
also due to certain regulatory requirements under Commission Rule 15c3-
3 that apply to broker-dealer Clearing Members and prohibit the use of 
customer property of the broker-dealer to support non-customer 
activities.\62\
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    \60\ The Clearing Member accounts referenced herein are 
described in subparagraphs (a), (b), (c) and (h) of Article VI, 
Section 3 of OCC's By-Laws. See OCC's By-Laws, supra note 5.
    \61\ Article I, Section 1.R.(8) of OCC's By-Laws states that the 
``term `restricted lien' means a security interest of [OCC] in 
specified assets (including any proceeds thereof) in an account of a 
Clearing Member with [OCC] as security for the Clearing Member's 
obligations to [OCC] arising from such account or, to the extent so 
provided in the By-Laws or Rules, a specified group of accounts that 
includes such account including, without limitation, obligations in 
respect of all confirmed trades effected through such account or 
group of accounts, and exercise notices assigned to such account or 
group of accounts.'' See OCC's By-Laws, supra note 5.
    \62\ For example, under the broker-dealer customer reserve 
account formula to SEC Rule 15c3-3 the broker-dealer takes a debit 
in the formula under Item 13 for margin that is ``required and on 
deposit with OCC for all option contracts written or purchased in 
customer accounts.'' This means that such margin in turn can be used 
by the broker-dealer Clearing Member as Margin Assets to support the 
securities customers' account at OCC.
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    As with the terms that currently apply to any borrowing from the 
OCC Clearing Fund pursuant to OCC Rule 1006(f), new paragraph (g) in 
OCC Rule 1104 would further provide that Margin Assets borrowed by OCC 
to make a Guaranty Substitution Payment to NSCC would not be deemed to 
be charges against the margin assets for the relevant account(s) for up 
to thirty (30) days; however, if all or a part of such borrowing were 
to be determined by OCC, in its discretion, to represent an actual 
loss, or if all or a part of the borrowing were to remain outstanding 
after such thirty (30)-day period, OCC would consider the amount of 
margin assets used to support OCC's obligations under the outstanding 
borrowing or transaction as an actual loss and immediately allocate the 
loss in accordance with OCC's By-Laws and Rules.
    OCC anticipates that in a scenario in which it would be permitted 
make a Guaranty Substitution Payment to NSCC under the proposed changes 
to the Existing Accord and OCC's By-Laws and Rules, OCC would generally 
expect to borrow from the Clearing Fund as a primary liquidity 
resource. OCC could also borrow Margin Assets of the suspended Clearing 
Member that is a Common Member under the proposed terms described 
above. OCC is not proposing changes that would require a specific 
borrowing sequence because OCC believes that it is more appropriate to 
preserve flexibility to borrow from the available OCC Clearing Fund or 
Margin Assets as OCC determines appropriate under the circumstances.
    In addition, OCC proposes to specify in OCC Rule 1107(a)(1) that 
exercised option contracts and matured, physically-settled stock 
futures to which the suspended Clearing Member is a party may be 
settled in accordance with the terms of any agreement between OCC and 
NSCC governing the settlement of exercised option contracts and 
matured, physically-settled stock futures of a suspended Clearing 
Member. In such an event, settlement will be governed by and subject to 
the agreement between OCC and NSCC and the rules of NSCC.
    The purpose of the proposed changes to create the Guaranty 
Substitution Payment mechanism is to provide OCC and NSCC with an 
additional default management tool to help manage liquidity and 
settlement risks that OCC believes would be presented to each covered 
clearing agency in connection with a Mutually Suspended Member. OCC 
believes that having the ability to make a Guaranty Substitution 
Payment to NSCC in regard to any unmet Required Fund Deposit or 
Supplemental Liquidity Deposit obligations of a Mutually Suspended 
Member would promote prompt and accurate clearance and settlement in 
the national system for the settlement of securities transactions by 
causing NSCC to guarantee certain securities settlement obligations 
that result from exercised options and matured futures contracts that 
are cleared and settled by OCC. In the following ways, OCC believes 
that this would be beneficial to and protective of OCC, NSCC, their 
participants, and the markets they serve.
    First, OCC's ability to make the Guaranty Substitution Payment 
would ensure that the relevant securities settlement obligations would 
be accepted by NSCC for clearance and settlement and therefore the size 
of the related settlement obligations could be decreased from netting 
through NSCC's CNS Accounting Operation and/or NSCC's Balance Order 
Accounting Operation. Second, this outcome would avoid a scenario in 
which OCC's Guaranty would continue to apply and the settlement 
obligations would be settled on a broker-to-broker basis between OCC 
Clearing Members pursuant to the applicable provisions in Chapter IX of 
OCC's Rules. As noted above, OCC believes that such a broker-to-broker 
settlement scenario could result in substantial collateral and 
liquidity requirements for OCC Clearing Members. OCC believes that 
these potential collateral and liquidity consequences would be due to 
the lost benefit of netting of the settlement obligations through 
NSCC's facilities and also due to the short time (i.e., the T+2 
standard settlement cycle) between a rejection by NSCC of the 
settlement obligations for clearing and the associated settlement date 
on which settlement would be otherwise required to be made bilaterally 
by OCC Clearing Members. This scenario also raises the potential for 
procyclical liquidity demands on OCC Clearing Members and participants 
during stressed market conditions. Third, OCC will plan to size its 
liquidity resource requirements to reasonable expectations with a high 
probability of making a Guaranty Substitution Payment in order to 
facilitate the settlement of a Mutually Suspended Member's obligations 
through NSCC. Accounting for net liquidity demands from a Mutually 
Suspended Member's settlement obligations at the central counterparty-
level enhances liquidity in the financial system and promotes the 
efficient use of capital by reducing the demand for liquidity 
associated with gross settlement of obligations and enabling the 
application of resources at both clearing agencies to satisfy the 
Member's obligation. Fourth, OCC believes that the potential for the 
size of the settlement obligations to be comparatively larger than the 
Guaranty Substitution Payment coupled with the short time remaining to 
settlement could also increase the risk of default by the affected OCC 
Clearing Members at a time when a Common Member has already been 
suspended. Therefore, OCC believes that the proposed changes to 
implement the ability for OCC to make a Guaranty Substitution Payment 
to NSCC would allow OCC to avoid these risks by causing NSCC to accept 
the relevant obligations arising from exercised options and matured 
futures cleared and settled by OCC, as it ordinarily would, and 
guarantee their settlement, upon OCC making a Guaranty Substitution 
Payment to NSCC in accordance with the revised Accord.

[[Page 5963]]

iii. Proposed Changes to Comprehensive Stress Testing & Clearing Fund 
Methodology, and Liquidity Risk Management Description and Liquidity 
Risk Management Framework as Part of Phase 1
Comprehensive Stress Testing & Clearing Fund Methodology, and Liquidity 
Risk Management Description
    OCC proposes to revise the OCC Comprehensive Stress Testing & 
Clearing Fund Methodology, and Liquidity Risk Management Description to 
include the GSP in its liquidity risk management practices. Overall, 
the proposed changes would reflect that the GSP functions as an 
additional liquidity demand type at the Clearing Member Organization 
(``CMO'') Group level.\63\
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    \63\ A Clearing Member Group is composed of a set of affiliated 
OCC Clearing Members.
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    OCC would include additional specifics to address the potential 
increased demand that the inclusion of the GSP may cause in its 
liquidity risk management practices in the Liquidity Risk Management 
section of the Comprehensive Stress Testing & Clearing Fund 
Methodology, and Liquidity Risk Management Description. Specifically, 
OCC proposes to amend the Liquidity Demand for Positions Rejected by 
NSCC subsection, which describes the Existing Accord, including the 
scenario in which NSCC could choose not to guaranty certain securities 
settlement obligations arising out of transactions cleared by OCC. This 
subsection would be retitled as the Liquidity Demand Associated with 
NSCC Performance of Physical Settlement Activities subsection to more 
clearly describe its content and incorporate the GSP, as further 
detailed below. Consistent with the changes to the Existing Accord 
described above, OCC proposes to clarify that the Accord allows NSCC to 
reject such obligations if OCC elects to not make a GSP.
    OCC proposes a new subsection, titled the Liquidity Demand GSP, to 
describe the GSP, which NSCC would calculate as defined in the proposed 
amendments to the Existing Accord. OCC would describe a GSP as a firm 
specific liquidity demand (i.e., the amount of cash OCC needs to pay 
NSCC on behalf of the defaulting Common Member). OCC would describe the 
components of the GSP under the Accord. OCC would explain how it 
accounts for the liquidity demand associated with a potential GSP. 
Specifically, OCC would apply an amount to account for a potential GSP 
obligation for every day on which option expirations occur. This amount 
would be based on peak GSP amounts from the prior 12 months in a given 
expiration category for the specific CMO Group for each forecasted 
liquidity demand calculation. OCC will use a one-year lookback time 
period to determine the appropriate GSP amount to apply. The one-year 
lookback allows for the best like-to-like application of a historical 
GSP as there is a cyclical nature to option standard expirations with 
quarterly (i.e., March, June, September, and December) and January 
generally being more impactful than non-quarterly expirations. The one-
year lookback also allows behavior changes of a Clearing Member to be 
recognized within an annual cycle. OCC proposes to utilize a historical 
GSP based on current system capabilities and data that will be supplied 
by NSCC.
    OCC would use the total amount of Clearing Fund and SLD deficits at 
NSCC in its calculation to account for its obligation. However, in the 
event of a default, OCC would be responsible for a proportionate share 
of both NSCC Clearing Fund deficits (which are analogous to OCC margin 
deficits) and SLDs that are attributable to OCC E&A activity 
transmitted to NSCC for settlement, whereas NSCC will be responsible 
for the portion of the Clearing Fund and SLD deficits associated with 
activity that NSCC clears that is not transmitted by OCC.
    The amount of notional activity sent by OCC to NSCC informs the 
likelihood of a GSP. Namely, the potential amount of NSCC Clearing Fund 
and SLD deficits that are allocable to OCC increases as the amount of 
activity OCC sends to NSCC increases. Since not all types of 
expirations are the same with respect to the notional amount of 
activity sent by OCC to NSCC, OCC proposes to use five separate 
categories of expirations with potentially different GSP amounts to 
apply. Each day on which expirations occur would fall into one of five 
categories as follows:
    <bullet> Standard Monthly Expiration: typically the third Friday of 
each month from the previous twelve months;
    <bullet> Non-Standard Monthly Expiration Fridays (``End of Week 
Expirations''): the last business day of every week, typically a 
Friday, excluding the third Friday of each month from the previous 
twelve months;
    <bullet> End of Month Expirations: the last trading day of every 
month from the previous twelve months;
    <bullet> Expirations falling on Bank Holidays where Markets Are 
Open (``Bank Holiday Expirations''): days where banks are closed but 
the markets are open from the previous twelve months; \64\
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    \64\ The Bank Holiday category recognizes that for Veterans Day 
and Columbus Day, the equity and equity derivative markets are open 
for trading, but the banking system is closed for the day. Since the 
banking system is closed while the aforementioned markets are open, 
settlement at NSCC encompasses two days of equity trading and equity 
derivative E&A activity. As OCC is using NSCC deficit numbers 
without regard for allocation, there is a possibility of a 
significant outlying GSP requirement due to the settlement of two 
days of activity simultaneously. Prudence dictates retaining the 
capability to risk manage a day with such disparate characteristics 
differently. Additional supporting data in support of the creation 
of the Bank Holiday Expiration category is included as confidential 
Exhibit 3E to this filing.
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    <bullet> Remaining Expiration Days (``Daily Expirations''): All 
other days with an expiration from the previous twelve months that do 
not fall into any of the categories above (typically most Mondays 
through Thursdays) from the previous twelve months.
    OCC believes these five categories are appropriate after an 
analysis of notional activity sent to NSCC by OCC.\65\ More 
specifically, the standard Friday monthly expiration far exceeds the 
needs associated with any other category.\66\ The remaining categories 
are intended to capture like time periods that will appropriately 
account for the GSP.
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    \65\ OCC provided its analysis of notional activity sent to NSCC 
by OCC in support of the creation of the five categories as 
confidential Exhibit 3E to this filing. This Exhibit 3E sets forth 
data related to OCC's liquidity stress testing, including Available 
Liquidity Resources, Minimum Cash Requirement thresholds, and/or 
liquidity breaches, for Sufficiency and Adequacy scenarios with and 
without the inclusion of the GSP.
    \66\ For example, the average notional transfer for Remaining 
Expiration Days is approximately 10% the size of Standard 
Expiration.
---------------------------------------------------------------------------

    OCC would apply the peak GSP amounts from the prior twelve months 
in a given expiration category for the specific CMO Group for each 
forecasted liquidity demand calculation by adding the GSP amounts to 
the CMO Group's other forecasted liquidity demands for the relevant 
expiration day.\67\ If a Clearing Member defaults, OCC may have to pay 
a GSP to NSCC on two successive days to facilitate the close-out of the 
defaulted Clearing Member's positions. To account for this possibility 
in its liquidity risk management process, OCC contemplates the payment 
of a GSP on expirations that result in settlements on the first and 
second days of the default management process. As described above, this 
GSP amount may

[[Page 5964]]

serve to only increase liquidity demands.\68\
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    \67\ As an example, if the applicable GSP is $100 and the 
(current) stressed liquidity demand is $150 for a Clearing Member 
Group, the result after the application of the GSP for that Clearing 
Member Group would be a combined liquidity requirement of $250 
versus $150 currently.
    \68\ OCC provided its analysis of the impact of the GSP, 
including with respect to calls for collateral and liquidity demands 
as confidential Exhibit 3E to this filing.
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    Furthermore, as stated in the new Liquidity Demand GSP subsection, 
OCC would apply a floor to certain expirations. At a minimum, the GSPs 
applied to the End of Week, End of Month, and Bank Holiday Expirations 
will be no lower than the peak of the Daily Expirations category. If a 
GSP pertaining to the End of Week, End of Month, and Bank Holiday 
Expiration category is higher than the peak of the Daily Expirations 
category, then OCC will apply that higher GSP. Standard Monthly 
Expirations will be floored by End of Week, End of Month, and Daily 
Expirations. If a GSP pertaining to any of these categories is higher 
than the Standard Monthly Expiration category, then OCC will apply that 
higher GSP. OCC would set out formulas representing the floors for the 
Standard Monthly, End of Week, End of Month, and Bank Holiday 
Expirations. Finally, OCC also proposes a minor change to clarify that 
it would attempt to effect alternative settlement if OCC elected not to 
make a GSP.\69\
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    \69\ This clarification would maintain OCC's current process for 
settling transactions not processed through NSCC and does not 
represent the adoption of a new process or settlement method.
---------------------------------------------------------------------------

Liquidity Risk Management Framework
    OCC proposes changes to the Liquidity Risk Management Framework to 
incorporate the GSP. In the Liquidity Risk Identification section, OCC 
would specify that, in the situation where a member defaults 
immediately preceding, or during the expiration, of physically-settled 
E&A activity, OCC may elect to make a GSP to NSCC to compel NSCC to 
accept and process the E&A activity. If OCC elects to not make a GSP, 
OCC would complete settlement of the defaulted Clearing Member's E&A 
transactions through its current process. Relatedly, OCC would include 
a minor clarification to a footnote in this section to note that NSCC 
is not acting on behalf of a defaulting Clearing Member ``in this 
situation.''
Proposed Phase 2 Changes
    On February 15, 2023, the Commission adopted amendments to Rule 
15c6-1(a) under the Act \70\ to shorten the standard settlement cycle 
for most broker-dealer transactions in securities from T+2 to T+1. In 
doing so, the Commission stated that a shorter settlement cycle ``can 
promote investor protection, reduce risk, and increase operational and 
capital efficiency.'' \71\ Moreover, the Commission stated that 
delaying the move to a shorter settlement cycle would ``allow undue 
risk to continue to exist in the U.S. clearance and settlement system'' 
\72\ and that it ``believes that the May 28, 2024, compliance date will 
help ensure that market participants have sufficient time to implement 
the changes necessary to reduce risk, such as risks associated with the 
potential for increases in settlement fails.'' \73\ The Phase 2 changes 
proposed herein serve those risk reduction objectives related to 
securities settlements by endeavoring to limit market disruption 
following a Common Member default. The proposed changes would allow OCC 
to provide certain assurances with respect to its ability to make a GSP 
in the event of a Common Member default to NSCC in a shortened 
settlement cycle, which would permit NSCC to begin processing E&A/
Delivery Transactions prior to Guaranty Substitution occurring. This, 
in turn, would promote settlement through NSCC that is less 
operationally complex and would be expected to require less collateral 
and liquidity from market participants than if OCC engaged in the 
alternative settlement processes discussed above.
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    \70\ 17 CFR 240.15c6-1.
    \71\ Securities Exchange Act Release No. 96930 (Feb. 15, 2023), 
88 FR 13872, 13873 (Mar. 6, 2023).
    \72\ Id. at 13881.
    \73\ Id. at 13917.
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    To address the operational realities concerning the Accord that 
will result from the Commission's adoption and implementation of a new 
standard settlement cycle of T+1 pursuant to Rule 15c6-1(a) under the 
Act, OCC and NSCC are proposing Phase 2 changes to further modify the 
Accord after the T+1 settlement cycle becomes effective. As described 
in greater detail below, the Phase 2 changes would allow the GSP and 
other changes that are part of the Phase 1 changes to continue to 
function appropriately and efficiently in the new T+1 settlement 
environment. Because of the phased approach, a separate mark-up is 
provided in confidential Exhibit 5C to this filing of the Phase 2 
changes against the Accord as modified through the Phase 1 changes.
    As described in more detail below, shortening the settlement cycle 
to T+1 will require NSCC to process stock settlement obligations 
arising from E&A Delivery Transactions one day earlier, i.e., on the 
day after the trade date, than is currently the case. Moving processing 
times ahead by a full day will require processing to occur before the 
guaranty transfers from OCC to NSCC.\74\ In this new T+1 processing 
environment, the Phase 2 changes would limit market disruption 
following a Common Member default because the Phase 2 changes would 
allow OCC to provide certain assurances with respect to its ability to 
make a GSP in the event of a Common Member default to NSCC that would 
permit NSCC to begin processing the defaulting Common Member's E&A/
Delivery Transactions prior to Guaranty Substitution occurring. This, 
in turn, will promote settlement through NSCC that is less 
operationally complex and would be expected to require less collateral 
and liquidity from market participants than if OCC engaged in 
alternative settlement processes. The specific changes included in 
Phase 2 are described below. The changes would facilitate the continued 
ability of the GSP to function in an environment with a shorter 
settlement cycle. These changes are generally designed to allow OCC to 
provide certain assurances with respect to its ability to make a GSP in 
the event of a Common Member default to NSCC that would permit NSCC to 
begin processing E&A/Delivery Transactions prior to Guaranty 
Substitution occurring by introducing new or amended terms and setting 
out the processes associated therewith. All of the descriptions below 
explain the changes to the Accord as they would be made after the 
Accord has already been modified through prior implementation of the 
proposed Phase 1 changes.
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    \74\ Given the reduction in the settlement cycle and existing 
processes that must be completed for settlement, it is OCC's 
understanding that the NSCC would not be able to safely compress its 
processing times further to allow processing to occur after the 
guaranty transfers from OCC to NSCC. OCC provided proposed 
processing timelines in confidential Exhibit 3G to this filing.
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Section 1--Definitions
    First, new definitions would be added, and existing definitions 
would be amended or removed in Section 1.
    The new defined terms would be as follows.
    <bullet> The term ``GSP Monitoring Data'' would be defined to mean 
a set of margin and liquidity-related data points provided by NSCC on 
each Activity Date prior to the submission of E&A/Delivery Transactions 
by OCC to be used for informational purposes at OCC and NSCC.
    <bullet> The term ``Final Guaranty Substitution Payment'' would be 
defined to mean an amount calculated by NSCC for each Settlement Date 
in accordance with Appendix A to the Accord, to include two components: 
(i) a portion of the NSCC Participating

[[Page 5965]]

Member's \75\ Required Fund Deposit deficit to NSCC calculated as a 
difference between the Required Fund Deposit deficit calculated on the 
NSCC Participating Member's entire portfolio and the Required Fund 
Deposit deficit calculated on the NSCC Participating Member's portfolio 
prior to submission of the E&A/Delivery Transactions; and (ii) the 
portion of the NSCC Participating Member's unpaid Supplemental 
Liquidity Deposit obligation attributable to the additional activity to 
be guaranteed.
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    \75\ See supra note 42.
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    <bullet> The term ``Historical Peak Guaranty Substitution Payment'' 
would be defined to mean the largest Final Guaranty Substitution 
Payment for an NSCC Participating Member and its affiliates that are 
also NSCC Participating Members over the 12 months immediately 
preceding the Activity Date, to include two components: (i) the 
Required Fund Deposit deficits associated with E&A/Delivery 
Transactions based on peak historical observations of the largest NSCC 
Participating Member and its affiliates that are also NSCC 
Participating Members; and (ii) the Supplemental Liquidity Deposit 
obligations associated with E&A/Delivery Transactions based on peak 
historical observations as calculated in accordance with applicable 
NSCC or OCC Rules and procedures.
    <bullet> The term ``Qualifying Liquid Resources'' would be defined 
to have the meaning provided by Rule 17Ad-22(a)(14) of the Exchange 
Act, 17 CFR 240.17Ad-22(a)(14), or any successor Rule under the 
Exchange Act.
    <bullet> The term ``Settlement Date'' would be defined to mean the 
date on which an E&A/Delivery Transaction is designated to be settled 
through payment for, and delivery of, the Eligible Securities 
underlying the exercised Stock Option \76\ or matured Stock Future,\77\ 
as the case may be.
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    \76\ See supra note 37.
    \77\ See supra note 38.
---------------------------------------------------------------------------

    <bullet> The term ``Weekday Expiration'' would be defined to mean 
any expiration for which the options expiration date occurs on a date 
other than a Friday or for which the Settlement Date is any date other 
than the first business date following a weekend.
    <bullet> The term ``Weekend Expiration'' would be defined to mean 
any expiration for which the options expiration date occurs on a Friday 
or for which the Settlement Date is the first business date following a 
weekend.
    The defined term that would be removed in Section 1 is as follows.
    <bullet> ``Guaranty Substitution Payment,'' which would be replaced 
by the new defined terms ``Final Guaranty Substitution Payment'' and 
``Historical Peak Guaranty Substitution Payment.''
    The defined terms that would be amended in Section 1 are as 
follows.
    <bullet> The definition for the term ``Eligible Securities'' 
generally contemplates the securities that are eligible to be used for 
physical settlement under the Existing Accord. In Phase 2, the term 
will be modified to exclude any transactions settled through NSCC's 
Balance Order System and any security undergoing a voluntary corporate 
action that is being supported by NSCC's CNS system. This is because 
the processing of E&A/Delivery Transactions and potential reversals of 
such transactions under the Phase 2 changes would not be feasible under 
the anticipated operation of NSCC's CNS and Balance Order Accounting 
Operations under the shortened T+1 settlement cycle.
Section 3--Historical Peak Guaranty Substitution Payment
    A new Section 3 would be added to describe the process by which OCC 
would send to NSCC evidence of sufficient funds to cover the Historical 
Peak Guaranty Substitution Payment. In particular, Section 3(a) would 
provide that on each Activity Date, at or before a time agreed upon by 
the Clearing Agencies (which may be modified on any given Activity Date 
with the consent of an authorized representative of OCC), NSCC will 
communicate to OCC the amount of the Historical Peak Guaranty 
Substitution Payment amount and the GSP Monitoring Data, which are to 
be used for informational purposes at OCC. The Historical Peak Guaranty 
Substitution Payment would reflect the largest GSP of the NSCC 
Participating Member and its affiliates over the prior twelve months 
and would be calculated based on the sum of the Required Fund Deposit 
deficits and Supplemental Liquidity Deposit associated with E&A/
Delivery Transactions. Section 3(b) would provide that OCC would then 
submit to NSCC an acknowledgement of the Historical Peak Guaranty 
Substitution Payment amount and evidence that OCC has sufficient cash 
resources in the OCC Clearing Fund to cover the Historical Peak 
Guaranty Substitution Payment.
    Section 3(c) would provide that if OCC does not provide NSCC with 
evidence within the designated time period that it has sufficient cash 
resources in the OCC Clearing Fund to cover the Historical Peak 
Guaranty Substitution Payment on the Activity Date, OCC will 
immediately contact NSCC to escalate discussions to discuss potential 
exposures and determine, among other things, whether OCC has other 
qualifying liquidity resources available to satisfy such amount.
    As described above, the Historical Peak Guaranty Substitution 
Payment is designed to serve as a reasonable proxy for the largest 
potential Final Guaranty Substitution Payment. Its purpose is to allow 
OCC to provide evidence that it likely will be able to satisfy the 
Final Guaranty Substitution Payment in the event of a Common Member 
default, which will provide NSCC with reasonable assurances such that 
NSCC can begin processing E&A/Delivery Transactions upon receipt and 
prior to the Guaranty Substitution occurring, which will minimize the 
probability of reversals in a default event in light of the shortened 
settlement cycle. The Historical Peak Guaranty Substitution Payment 
amount also will provide OCC with information that will allow OCC to 
include the amount of a potential GSP in its liquidity resource 
planning.
Section 6--Final Guaranty Substitution Payment; OCC's Commitment
    A new Section 6 would be added to provide the process by which NSCC 
would communicate the amount of, and OCC would commit to pay, the Final 
Guaranty Substitution Payment. In particular, Section 6(a) would 
provide that on each Settlement Date (or each Saturday for Weekend 
Expirations), by no later than the time(s) agreed upon by NSCC and OCC, 
NSCC will communicate to OCC the Final Guaranty Substitution Payment 
for each Common Member calculated by NSCC. NSCC would make such 
calculation according to a calculation methodology described in a new 
Appendix A to the Accord. This calculation would represent the sum of 
the Required Fund Deposit \78\ and the Supplemental Liquidity Deposit 
\79\ for the Common Member. As with the Phase 1 Accord, payment of the 
Final Guaranty Substitution Payment would be contingent on the mutual

[[Page 5966]]

suspension of the Common Member and payment of the Final Guaranty 
Substitution Payment would continue to be the means by which Guaranty 
Substitution may occur.
---------------------------------------------------------------------------

    \78\ The Required Fund Deposit is the portion of the defaulted 
Common Member's Required Fund Deposit deficit to NSCC, calculated as 
a difference between the Required Fund Deposit deficit calculated on 
the entire portfolio and the Required Fund Deposit deficit 
calculated on the Common Member's portfolio prior to the submission 
of E&A/Delivery Transactions. The Phase 2 changes would refine the 
existing calculation methodology for the Required Fund Deposit in 
order to provide for a more accurate amount.
    \79\ If NSCC calculates a liquidity shortfall with respect to a 
defaulted Common Member, the Supplemental Liquidity Deposit is the 
portion of that shortfall that is attributable to the additional 
activity to be guaranteed.
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    Section 6(b) would provide that, following NSCC's communication of 
the Final Guaranty Substitution Payment for each Common Member to OCC, 
and by no later than the agreed upon time, OCC must either (i) commit 
to NSCC that it will pay the Final Guaranty Substitution Payment in the 
event of a mutual suspension of a Common Member,\80\ or (ii) notify 
NSCC that it will not have sufficient cash resources to pay the largest 
Final Guaranty Substitution Payment calculated for every Common Member. 
Section 6(b)(i) would further provide that for Weekday Expirations, 
OCC's submission of E&A/Delivery Transactions to NSCC would constitute 
OCC's commitment to pay the Final Guaranty Substitution Payment on the 
Settlement Date in the event of a mutual suspension of a Common Member.
---------------------------------------------------------------------------

    \80\ If OCC does not have sufficient cash to pay the Final GSP, 
then it must confirm for NSCC the availability of other qualifying 
liquid resources and the expected timeline for converting such 
resources to cash.
---------------------------------------------------------------------------

    Section 6(c) would provide that if OCC notifies NSCC that it will 
not have sufficient cash resources to pay the Final Guaranty 
Substitution Payment, NSCC may, in its sole discretion (i) reject or 
reverse all E&A/Delivery Transactions, or (ii) voluntarily accept E&A/
Delivery Transactions subject to certain terms and conditions mutually 
agreed upon by NSCC and OCC.\81\ Section 6(c) would also provide that 
any necessary reversals of E&A/Delivery Transactions shall be delivered 
by NSCC to OCC at such time and in such form as the Clearing Agencies 
agree.
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    \81\ Such terms and conditions may include, but would not be 
limited to, OCC's agreement to (i) pay NSCC available cash resources 
in partial satisfaction of the Final Guaranty Substitution Payment; 
(ii) collect or otherwise source additional resources that would 
constitute NSCC Qualifying Liquid Resources to pay the full Final 
Guaranty Substitution Payment amount; and/or (iii) reimburse NSCC 
for any losses associated with closing out such E&A/Delivery 
Transactions.
---------------------------------------------------------------------------

    Section 6(d) would provide that if, at any time after OCC has 
acknowledged the Historical Peak Guaranty Substitution Payment in 
accordance with proposed Section 3(b) of the Accord or committed to pay 
the Final Guaranty Substitution Payment in accordance with proposed 
Section 6(b) of the Accord, OCC has a reasonable basis to believe it 
will be unable to pay the Final Guaranty Substitution Payment, OCC will 
immediately notify NSCC.
Section 8--Default by an NSCC Participating Member or OCC Participating 
Member
    Section 6(b)(i), which would be renumbered as Section 8(b)(i), 
would be amended to reflect the modified use of the Final Guaranty 
Substitution Payment in the event of a mutual suspension of a Common 
Member. Section 8(b)(i) would also be revised to remove the ability for 
OCC or NSCC to require that the Guaranty Substitution Payment be re-
calculated in accordance with an alternative methodology. This will not 
be necessary under the calculation methodology used in the Phase 2 
changes because the proposed methodology would result in a more 
accurate calculation. Section 8(b)(i) would further amend the Accord by 
providing NSCC with discretion to voluntarily accept Defaulted NSCC 
Member Transactions and assume the guaranty for such transactions, 
subject to certain terms and conditions mutually agreed upon by NSCC 
and OCC. The only remaining change to the Guaranty Substitution process 
from its operation under the Accord would be the shortened time 
duration under which OCC would elect (by way of its commitment) to make 
the Final Guaranty Substitution Payment and the timing under which the 
Guaranty Substitution will be processed in order to function in a T+1 
environment.
    In particular, Section 8(b)(i) would provide that, with respect to 
a Mutually Suspended Member, if OCC has committed to make the Final 
Guaranty Substitution Payment, it will make such cash payment in full 
by no later than the agreed upon time(s). Upon NSCC's receipt of the 
full amount of the Final Guaranty Substitution Payment, NSCC's Guaranty 
would attach (and OCC's Guaranty will no longer apply) to the Defaulted 
NSCC Member Transactions. NSCC would have no obligation to accept a 
Final Guaranty Substitution Payment and attach the NSCC Guaranty to any 
Defaulted NSCC Member Transactions for more than the Activity Date on 
which it has ceased to act for that Mutually Suspended Member and one 
subsequent Activity Date. If NSCC does not receive the full amount of 
the Final Guaranty Substitution Payment in cash by the agreed upon 
time, the Guaranty Substitution Time would not occur with respect to 
the Defaulted NSCC Member Transactions and Section 8(b)(ii), described 
below, would apply. NSCC would, however, have discretion to voluntarily 
accept Defaulted NSCC Member Transactions and assume the guaranty for 
such transactions, subject to certain terms and conditions mutually 
agreed upon by NSCC and OCC.
    Section 6(b)(ii), which would be renumbered as Section 8(b)(ii), 
would also be amended to reflect the modified use of the Final Guaranty 
Substitution Payment in the event OCC continues to perform or does not 
make the Final Guaranty Substitution Payment. In particular, Section 
8(b)(ii) would add an additional criterion of OCC not satisfying any 
alternative agreed upon terms for Guaranty Substitution to reflect this 
as an additional option under the Phase 2 changes. As amended, Section 
8(b)(ii) would provide that if OCC does not suspend an OCC 
Participating Member for which NSCC has ceased to act, OCC does not 
commit to make the Final Guaranty Substitution Payment, NSCC does not 
receive the full amount of the Final Guaranty Substitution Payment in 
cash by the agreed upon time, or OCC does not satisfy any alternative 
agreed upon terms for Guaranty Substitution, Guaranty Substitution with 
respect to all Defaulted NSCC Member Transactions for that Activity 
Date will not occur, all Defaulted NSCC Member Transactions for that 
Activity Date will be reversed and exited from NSCC's CNS accounting 
system, and NSCC will have no obligation to guaranty or settle such 
Defaulted NSCC Member Transactions. NSCC may, however, exercise its 
discretion to voluntarily accept the Defaulted NSCC Member 
Transactions, and assume the guaranty for such transactions, subject to 
certain agreed upon terms and conditions.
    Section 8(b) would also be modified to provide for escalated 
discussion between the Clearing Agencies in the event of an intraday 
NSCC Cease to Act and/or NSCC Participating Member Default, 
particularly to confirm that OCC has sufficient qualifying liquid 
resources to pay the projected Final Guaranty Substitution Payment for 
the Defaulting NSCC Member's projected E&A/Delivery Transactions based 
on information provided in GSP Monitoring Data for such Defaulting NSCC 
Member.
    Conforming changes would also be made to Section 8(d) to reflect 
the use of the new defined term ``Final Guaranty Substitution 
Payment.''
Other Proposed Changes as Part of Phase 2
    Certain other technical changes are also proposed as part of the 
Phase 2 changes, including to conform the Accord to the proposed 
changes described above. For example, Section 9(c) would be revised 
regarding information sharing to reflect the

[[Page 5967]]

introduction of the Historical Peak and Final Guaranty Substitution 
Payments and the GSP Monitoring Data; Section 4(c)(ix) would be 
conformed to reflect the addition of ``Settlement Date'' as a defined 
term in Section 1; various sections would be renumbered and internal 
cross-references would be adjusted to reflect the addition of new 
sections proposed herein; correct current references throughout the 
Accord to ``NSCC Rules and Procedures'' would be changed to simply read 
``the NSCC Rules;'' and various non-substantive textual changes would 
be made to increase clarity.
    Section 4(a) would also be modified to reflect that the Eligibility 
Master Files referenced in that paragraph, which identify Eligible 
Securities to OCC, are described in the SLA between OCC and NSCC. 
Section 9(b) would be modified to include OCC's available liquidity 
resources, including Clearing Fund cash balances in the information OCC 
provides to NSCC, and to specify that information will be provided on 
each Activity Date at an agreed upon time and in an agreed upon form by 
the Clearing Agencies. Finally, Section 16(b) would be modified to 
provide the correct current delivery address information for NSCC.
    The Phase 2 changes would also include an Appendix A that would 
describe in detail the calculation methodology for the Guaranty 
Substitution Payment. This would provide the detailed technical 
calculation to determine each of the Mutually Suspended Member's 
Required Fund Deposit deficit and liquidity shortfall to NSCC. The full 
text of Appendix A is filed confidentially with the Commission as 
Exhibit 5 to this filing.
Phase 2 Guaranty Substitution Process Changes
    As described above, the Phase 2 changes would modify the Guaranty 
Substitution process to reflect the shortened time duration under which 
the Guaranty Substitution will be processed in order to function in a 
T+1 environment. Below is a description of how that process would 
operate. The actual process would be implemented pursuant to a modified 
SLA between the Clearing Agencies.\82\ All times provided below are in 
Eastern Time and represent the latest time by which the specified 
action must occur, unless otherwise agreed by the Clearing Agencies.
---------------------------------------------------------------------------

    \82\ OCC provided a draft of the SLA illustrating such changes 
to the Commission as confidential Exhibit 3F to this filing.
---------------------------------------------------------------------------

    Weekend Expirations: On Friday (the Activity Date), NSCC would 
provide OCC with the Historical Peak GSP amount by 8:00 a.m. By 5:00 
p.m. on Friday, OCC must acknowledge the Historical Peak GSP and 
provide evidence of OCC's Clearing Fund cash resources sufficient to 
cover that amount, following which NSCC would provide the Eligibility 
Master File by 5:45 p.m. By 1:00 a.m. on Saturday, OCC would then 
provide NSCC with the E&A/Delivery Transactions file and by 8:00 a.m. 
NSCC would provide OCC with the Final GSP, which OCC must commit to pay 
by 9:00 a.m. in the event of a mutual suspension of a Common 
Member.\83\ By 8:00 a.m. Monday (the Settlement Date), if a cease to 
act is declared over the weekend (or the later of 10:00 a.m. or one 
hour after the cease to act is declared if declared on Monday), OCC 
must pay the Final GSP if there has been a mutual suspension of a 
Common Member. Finally, by 1:00 p.m. on Monday, OCC must provide 
reversals for the defaulted member's E&A/Delivery Transactions if OCC 
has not satisfied (or will not satisfy) the Final GSP.
---------------------------------------------------------------------------

    \83\ If OCC does not have sufficient cash resources to pay the 
Final GSP and the Clearing Agencies are unable to reach an agreement 
on additional terms for NSCC to accept E&A/Delivery Transactions, 
OCC must submit a reversal file by 12:30 a.m. on Monday so that NSCC 
can remove the E&A/Delivery Transactions from CNS prior to the start 
of NSCC's overnight processing. See confidential Exhibit 3H to this 
filing for additional details on action deadlines and processing 
times.
---------------------------------------------------------------------------

    Weekday Expirations: On the Activity Date, NSCC would provide OCC 
with the Historical Peak GSP amount by 8:00 a.m. By 5:00 p.m. on the 
Activity Date, OCC must acknowledge the Historical Peak GSP and provide 
evidence of its cash resources in the OCC Clearing Fund sufficient to 
cover that amount, following which NSCC would provide the Eligibility 
Master File by 5:45 p.m. By 1:00 a.m. on the Settlement Date (the day 
after the Activity Date in the T+1 environment), OCC would then provide 
NSCC with the E&A/Delivery Transactions file, which also constitutes 
OCC's commitment to pay the Final GSP. By 8:00 a.m. NSCC would provide 
OCC with the Final GSP. By the later of 10:00 a.m. on the Settlement 
Date or one hour after a cease to act is declared, OCC must pay the 
Final GSP if there has been a mutual suspension of a Common Member. 
Finally, by 1:00 p.m. on the Settlement Date, OCC must provide 
reversals for the defaulted member's E&A/Delivery Transactions if OCC 
has not satisfied (or will not satisfy) the Final GSP.
    For both Weekend Expirations and Weekday Expirations, Guaranty 
Substitution will take place only after the Common Members meet their 
start of day margin funding requirements at NSCC, if any. In a Common 
Member default event, the Guaranty Substitution will take place when 
OCC pays the Final GSP to NSCC.
    The Clearing Agencies note that the Phase 2 changes described above 
are designed to change the process by which the GSP is implemented such 
that the use of the GSP as a mechanism to facilitate the acceptance of 
settlement obligations by NSCC can continue to operate within the 
condensed timing for clearance and settlement in a T+1 environment. 
However, the ultimate use of the GSP, its purpose, and its substantive 
import would remain consistent with the Phase 1 changes.
Proposed Liquidity Risk Management Framework Changes
    OCC proposes changes to the Liquidity Risk Management Framework to 
incorporate the Phase 2 changes into its liquidity risk management 
practices. In the Contingency Funding Plan section, OCC would specify 
that it endeavors to maintain sufficient cash resources to cover its 
projected settlement demands. Projected settlement demands may include 
settlements associated with option exercise & assignment activity that 
create obligations for OCC under the Accord (e.g., Final GSP, 
Historical Peak GSP). Final and Historical Peak GSP would be defined in 
the Definitions section. OCC proposes a footnote referencing the 
proposed Phase 1 changes to the Comprehensive Stress Testing & Clearing 
Fund Methodology, and Liquidity Risk Management Description with 
respect to the Final GSP. Namely, to account for the liquidity demand 
associated with the potential payment of a Final GSP, OCC would include 
the peak amount of the entire actual NSCC Required Fund Deposit 
deficits and SLD start-of-day obligations, without regard to allocation 
between NSCC and OCC, specific to each CMO Group for the relevant type 
of expiration on a rolling twelve-month lookback. Moreover, OCC may 
require the deposit of cash by a Clearing Member pursuant to its 
current Rules if projected settlement demands exceed OCC liquidity 
resources available to make settlement in the event of a Clearing 
Member default.
    OCC also proposes related and clarifying changes in the document. 
For example, OCC would include a minor clarifying change to the 
Liquidity Risk Identification section to define GSP as a firm-specific 
liquidity demand. OCC would also amend the Stress Testing

[[Page 5968]]

and Liquidity Resource Sizing section to incorporate information 
pertaining to GSP obligations into the annual analysis presented to the 
Board on projected liquidity demands that OCC may face under a variety 
of scenarios.
Proposed By-Law Changes
    OCC proposes to update its By-Laws to conform with the revised 
Accord. OCC proposes to remove a reference to Balance Order Accounting 
Operation to align with the exclusion of transactions settled through 
NSCC's Balance Order System under the amended definition of Eligible 
Securities in the Phase 2 Accord.
Implementation Framework
    The proposed Phase 1 and Phase 2 changes will be implemented as 
follows:
    <bullet> Phase 1: Within 120 days after the date OCC and NSCC 
receive all necessary regulatory approvals for these proposed changes 
to the Accord, OCC will implement all Phase 1 changes. OCC would 
announce the implementation date by an Information Memorandum posted to 
its public website at least seven days prior to implementation.
    <bullet> Phase 2: On the compliance date with respect to the final 
T+1 amendments to Exchange Act Rule 15c6-1(a) established by the SEC, 
OCC will implement all Phase 2 changes, keep in place any applicable 
Phase 1 changes that carry over to Phase 2, and decommission all Phase 
1 changes that do not apply to Phase 2.\84\
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    \84\ If, due to the timing of regulatory approval, the 
implementation dates for Phase 1 and Phase 2 overlap, OCC would 
implement only the Phase 2 changes and Phase 1 changes that carry 
over to Phase 2.
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Anticipated Effect on and Management of Risk
    OCC believes that the proposed changes would reduce the nature and 
level of risk presented by OCC because the purpose of the proposed 
changes to enhance its stress testing processes and create the Guaranty 
Substitution Payment mechanism is to provide OCC and NSCC with 
additional default management tools to help manage liquidity and 
settlement risks that OCC believes would be presented to each covered 
clearing agency in connection with a Mutually Suspended Member. As 
described above in the Phase 1 changes, OCC believes that having the 
ability to make a Guaranty Substitution Payment to NSCC in regard to 
any unmet Required Fund Deposit or Supplemental Liquidity Deposit 
obligations of a Mutually Suspended Member would promote prompt and 
accurate clearance and settlement in the national system for the 
settlement of securities transactions by causing NSCC to guarantee 
certain securities settlement obligations that result from exercised 
options and matured futures contracts that are cleared and settled by 
OCC. OCC further believes that enhancing its stress testing processes 
will help to ensure that it maintains the resources to make such a 
payment. The Phase 2 changes would also promote prompt and accurate 
clearance and settlement in the national system for the settlement of 
securities transactions because, as described above, they would 
facilitate implementation of the new settlement cycle and support the 
Commission's stated goal of implementing necessary risk reducing 
changes in connection with the move to T+1 settlement, currently set 
for May 28, 2024. The Phase 2 changes would further enable OCC to 
provide certain assurances that would permit NSCC to begin processing 
E&A/Delivery Transactions prior to guaranty substitution occurring--
thereby promoting the continued effectiveness of the guaranty 
substitution process in an environment with a shorter settlement cycle. 
In the following ways, OCC believes that this proposal would be 
beneficial to and protective of OCC, NSCC, their participants, and the 
markets they serve.
    First, OCC's ability to make the Guaranty Substitution Payment 
would ensure that the relevant securities settlement obligations would 
be accepted by NSCC for clearance and settlement and therefore the size 
of the related settlement obligations could be decreased from netting 
through NSCC's CNS Accounting Operation and/or NSCC's Balance Order 
Accounting Operation. Second, this outcome would avoid a scenario in 
which OCC's Guaranty would continue to apply and the settlement 
obligations would be settled on a broker-to-broker basis between OCC 
Clearing Members pursuant to the applicable provisions in Chapter IX of 
OCC's Rules. As noted above, OCC believes that such a broker-to-broker 
settlement scenario could result in substantial collateral and 
liquidity requirements for OCC Clearing Members. OCC believes that 
these potential collateral and liquidity consequences would be due to 
the lost benefit of netting of the settlement obligations through 
NSCC's facilities and also due to the short time between a rejection by 
NSCC of the settlement obligations for clearing and the associated 
settlement date on which settlement would be otherwise required to be 
made bilaterally by OCC Clearing Members. This scenario also raises the 
potential for procyclical liquidity demands on OCC Clearing Members and 
participants during stressed market conditions. Third, OCC will plan to 
size its liquidity resource requirements to reasonable expectations 
with a high probability of making a Guaranty Substitution Payment in 
order to facilitate the settlement of a Mutually Suspended Member's 
obligations through NSCC. Accounting for net liquidity demands from a 
Mutually Suspended Member's settlement obligations at the central 
counterparty-level enhances liquidity in the financial system and 
promotes the efficient use of capital by reducing the demand for 
liquidity associated with gross settlement of obligations and enabling 
the application of resources at both clearing agencies to satisfy the 
Member's obligation. Fourth, OCC believes that the potential for the 
size of the settlement obligations to be comparatively larger than the 
Guaranty Substitution Payment coupled with the short time remaining to 
settlement could also increase the risk of default by the affected OCC 
Clearing Members at a time when a Common Member has already been 
suspended. Therefore, OCC believes that the proposed changes to 
implement the ability for OCC to make a Guaranty Substitution Payment 
to NSCC would allow OCC to avoid these risks by causing NSCC to accept 
the relevant obligations arising from exercised options and matured 
futures cleared and settled by OCC, as it ordinarily would, and 
guarantee their settlement, upon OCC making a Guaranty Substitution 
Payment to NSCC in accordance with the revised Accord.
Consistency With the Payment, Clearing and Settlement Supervision Act
    The stated purpose of the Clearing Supervision Act is 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 and strengthening the 
liquidity of systemically important financial market utilities.\85\ 
Section 805(a)(2) of the Clearing Supervision Act \86\ also authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like OCC, for which the Commission is the supervisory agency. Section 
805(b) of the Clearing Supervision Act \87\ states

[[Page 5969]]

that the objectives and principles for risk management standards 
prescribed under Section 805(a) shall be to:
---------------------------------------------------------------------------

    \85\ 12 U.S.C. 5461(b).
    \86\ 12 U.S.C. 5464(a)(2).
    \87\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    <bullet> promote robust risk management;
    <bullet> promote safety and soundness;
    <bullet> reduce systemic risks; and
    <bullet> support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and the Exchange Act in 
furtherance of these objectives and principles.\88\ Rule 17Ad-22 
requires registered clearing agencies, like OCC, to establish, 
implement, maintain, and enforce written policies and procedures that 
are reasonably designed to meet certain minimum requirements for their 
operations and risk management practices on an ongoing basis.\89\ 
Therefore, the Commission has stated \90\ that it believes it is 
appropriate to review changes proposed in advance notices against Rule 
17Ad-22 and the objectives and principles of these risk management 
standards as described in Section 805(b) of the Clearing Supervision 
Act.\91\
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    \88\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release 
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016), 
81 FR 70786 (October 13, 2016) (S7 17 CFR 240.17Ad-22. See 
Securities Exchange Act Release Nos. 68080 (October 22, 2012), 77 FR 
66220 (November 2, 2012) (S7-08-11) (``Clearing Agency Standards''); 
78961 (September 28, 2016), 81 FR 70786 (October 13, 2016).
    \89\ 17 CFR 240.17Ad-22.
    \90\ See, e.g., Exchange Act Release No. 89039, 85 FR at 36446.
    \91\ 12 U.S.C. 5464(b).
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    OCC believes the proposed changes are consistent with Section 
805(b)(1) of the Clearing Supervision Act \92\ because they would 
promote the reduction of risks to OCC, its Clearing Members and the 
markets OCC serves. As described above in the Phase 1 changes, OCC 
believes that the proposed enhancements to its stress testing processes 
and having the ability to make a Guaranty Substitution Payment to NSCC 
with respect to any unmet obligations of a Mutually Suspended Member 
would promote the reduction of risk because it would ensure that OCC 
maintains sufficient liquidity resources and that the relevant 
securities settlement obligations would be accepted by NSCC for 
clearance and settlement and therefore the size of the related 
settlement obligations for both the Mutually Suspended Member and its 
assigned delivery counterparties could be decreased from netting 
through NSCC's CNS Accounting Operation and/or NSCC's Balance Order 
Accounting Operation. This would also avoid a scenario in which OCC's 
Guaranty would continue to apply and the settlement obligations would 
be settled on a broker-to-broker basis between OCC Clearing Members, 
which OCC believes could result in substantial collateral and liquidity 
requirements for OCC Clearing Members and that, in turn, could also 
increase a risk of default by the affected OCC Clearing Members at a 
time when a Common Member has already been suspended. Additionally, the 
Phase 2 changes would facilitate implementation of the new settlement 
cycle and support the Commission's stated goal of implementing 
necessary risk reducing changes in connection with the move to T+1 
settlement. The Phase 2 changes would further enable OCC to provide 
certain assurances that would permit NSCC to begin processing E&A/
Delivery Transactions prior to guaranty substitution occurring--thereby 
promoting the continued effectiveness of the guaranty substitution 
process in an environment with a shorter settlement cycle. For these 
reasons, OCC believes that the proposed changes: (i) are designed to 
promote robust risk management; (ii) are consistent with promoting 
safety and soundness; and (iii) are consistent with reducing systemic 
risks and promoting the stability of the broader financial system.
---------------------------------------------------------------------------

    \92\ 12 U.S.C. 5464(b)(1).
---------------------------------------------------------------------------

    OCC believes that the proposed changes are also consistent with the 
SEC rules that apply to OCC as a covered clearing agency.\93\ In 
particular, SEC Rule 17Ad-22(e)(20) requires OCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to identify, monitor and manage risks related to 
any link that OCC establishes with one or more other clearing agencies, 
financial market utilities, or trading markets.\94\ As described in 
OCC's publicly available disclosure framework for financial market 
infrastructures,\95\ the Existing Accord between OCC and NSCC is one 
such link. As described above, OCC believes (i) the proposed 
modifications to OCC's stress testing procedures that are designed to 
enhance its ability to call for additional liquidity resources, and 
(ii) the implementation of the ability for OCC to make a Guaranty 
Substitution Payment to NSCC in the relevant circumstances involving a 
Mutually Suspended Member would help manage the risks presented to OCC 
and its Clearing Members by the settlement link with NSCC because the 
Guaranty Substitution Payment would ensure that the relevant securities 
settlement obligations would be accepted by NSCC for clearance and 
settlement and therefore the size of the related settlement obligations 
could be decreased from netting through NSCC's CNS Accounting Operation 
and/or NSCC's Balance Order Accounting Operation.
---------------------------------------------------------------------------

    \93\ 17 CFR 240.17Ad-22(a)(5).
    \94\ 17 CFR 240.17Ad-22(e)(20).
    \95\ See The Options Clearing Corporation Disclosure Framework 
for Financial Market Infrastructures, pg. 105, (2023), available at 
https://www.theocc.com/risk-management/pfmi-disclosures.
---------------------------------------------------------------------------

    For this same reason, OCC also believes that the proposed changes 
are consistent with the requirements of SEC Rules 17Ad-22(e)(3) and 
(7).\96\ SEC Rule 17Ad-22(e)(3) requires OCC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain a sound risk management framework for 
comprehensively managing, among other things, liquidity, credit and 
other risks that arise in or are borne by OCC.\97\ SEC Rule 17Ad-
22(e)(7) requires OCC, in relevant part, to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor and manage the liquidity risk 
that arises in or is borne by OCC and to, among other things, address 
foreseeable liquidity shortfalls that would not be covered by OCC's 
liquid resources.\98\ As noted, OCC believes the proposed stress 
testing enhancements and the ability to make a Guaranty Substitution 
Payment to NSCC would allow OCC to better manage liquidity and credit 
risks related to the settlement link with NSCC by ensuring that the 
relevant securities settlement obligations would be accepted by NSCC 
for clearance and settlement. It would avoid a scenario in which OCC's 
Guaranty would continue to apply and the settlement obligations would 
be settled on a broker-to-broker basis between OCC Clearing Members, 
which OCC believes could result in substantial collateral and liquidity 
requirements for OCC Clearing Members that, in turn, could also 
increase a risk of default by the affected OCC Clearing Members, 
particularly in circumstances where the prior suspension of a Mutually 
Suspended Member relates to broader stress in the financial system. 
Moreover, the incorporation of the Guaranty Substitution Payment into 
OCC's liquidity risk management practices would enhance OCC's ability 
to maintain additional liquidity resources to effect the settlement of 
exercise and assignment activity in the event of a

[[Page 5970]]

Common Member default, and therefore, potentially increase the 
promotion of market stability. Regarding the Phase 2 changes, OCC 
believes that the continued ability in a T+1 environment to make a 
Guaranty Substitution Payment to NSCC would allow OCC to better manage 
liquidity and credit risks related to the settlement link with NSCC by 
ensuring that the relevant securities settlement obligations would be 
accepted by NSCC for clearance and settlement.
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    \96\ 17 CFR 240.17Ad-22(e)(3), (7).
    \97\ 17 CFR 240.17Ad-22(e)(3).
    \98\ 17 CFR 240.17Ad-22(e)(7).
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III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission or the Board of Governors of the Federal Reserve System 
providing the clearing agency with prompt written notice of the 
extension. A proposed change may be implemented in less than 60 days 
from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission. The clearing agency shall post notice on its website 
of proposed changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

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

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#592b2c353c743a3634343c372d2a192a3c3a773e362f"><span class="__cf_email__" data-cfemail="b4c6c1d8d199d7dbd9d9d1dac0c7f4c7d1d79ad3dbc2">[email protected]</span></a>. Please include 
file number SR-OCC-2023-801 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-OCC-2023-801. 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 (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the advance notice that are filed with the 
Commission, and all written communications relating to the advance 
notice 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 the self-regulatory organization.
    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-2023-801 and should 
be submitted on or before February 14, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\99\
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    \99\ 17 CFR 200.30-3(a)(91).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01748 Filed 1-29-24; 8:45 am]
BILLING CODE 8011-01-P


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