73466 Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices 

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

2 17 CFR 240.19b–4. 

3 In Partial Amendment No. 1, OCC corrected an 

error in Exhibit 5A to SR–OCC–2024–011 without 

changing the substance of the proposed rule change. 

Partial Amendment No. 1 does not materially alter 

the substance of the proposed rule change or raise 

any novel regulatory issues. 

4OCC’s By-Laws and Rules can be found on 

OCC’s public website: https://www.theocc.com/ 

Company-Information/Documents-and-Archives/ 

By-Laws-and-Rules. 

5Terms provided under a Master Stock Lending 

Agreement (‘‘MSLA’’) between the parties to a Stock 

Loan may remain in effect as between the parties 

to the extent they are not inconsistent with the ByLaws and Rules, but do not impose any obligation 

on OCC. See OCC Rule 2202(b). 

6See OCC Announces New Platform Name and 

Launches Enhanced Transformation website (May 

10, 2022), https://www.theocc.com/newsroom/ 

views/2022/05-10-occ-announces-new-platformname-and-launches-enhanced-transformationwebsite. 

7As discussed in more detail below, OCC’s 

current programs are limited by certain inefficient 

legacy practices including, for example: (1) 

position-based recordkeeping that does not align 

with the contract-level accounting that is common 

throughout the stock loan industry, which adds 

complexity to the process of ensuring that all 

parties are in alignment on the state of their stock 

loans; (2) workflows that involve settlement of 

delivery versus payment obligations at the 

Depository prior to clearance or settlement at OCC, 

which adds further complexity to the reconciliation 

process and can lead to position breaks; and (3) 

payment flows common to stock loans that are not 

guaranteed under OCC’s Hedge Loan program and 

must currently be settled as between the parties 

away from OCC. 

Dated: September 5, 2024. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2024–20366 Filed 9–9–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–100930; File No. SR–OCC– 

2024–011] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Proposed Rule Change, as 

Modified by Partial Amendment No. 1, 

by The Options Clearing Corporation 

Concerning Its Stock Loan Programs 

September 4, 2024. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule 

19b–4 thereunder,2 notice is hereby 

given that on August 22, 2024, The 

Options Clearing Corporation (‘‘OCC’’ or 

‘‘Corporation’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared primarily by OCC. On 

September 3, 2024, OCC filed a partial 

amendment (‘‘Partial Amendment No. 

1’’) to the proposed rule change.3 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change, as modified by Partial 

Amendment No. 1 (hereafter ‘‘the 

proposed rule change’’), from interested 

persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

This proposed rule change would 

address limitations in the structure of 

OCC’s Stock Loan/Hedge (‘‘Hedge’’) 

Program and Market Loan Program 

(together, the ‘‘Stock Loan Programs’’) 

by creating the framework for a single, 

enhanced program designed to support 

current and future needs. The proposed 

enhancements would, among other 

things, (i) combine into the Market Loan 

Program favorable aspects of both Stock 

Loan Programs, including the 

submission of bilaterally negotiated 

transactions; (ii) conform the terms of 

stock loans submitted under the Market 

Loan Program (‘‘Market Loans’’) more 

closely to the provisions most 

commonly included in stock loan 

transactions executed under standard 

loan market documents; (iii) provide a 

uniform guaranty of terms across Market 

Loans, regardless of how those Market 

Loans are initiated under the enhanced 

program; (iv) support transactions under 

both Stock Loan Programs through 

OCC’s new clearance and settlement 

system; and (v) reorganize, restate, and 

consolidate provisions of OCC’s ByLaws and Rules governing the Stock 

Loan Programs. 

The proposed amendments to OCC’s 

Rules and By-Laws can be found in 

Exhibit 5A and Exhibit 5B to File No. 

SR–OCC–2024–011, respectively. 

Proposed conforming changes to OCC’s 

internal Margin Policy and Recovery 

and Wind-Down (‘‘RWD’’) Plan, which 

can be found in confidential Exhibits 5C 

and 5D to File No. SR–OCC–2024–011, 

respectively. Material proposed to be 

added is marked by underlining and 

material proposed to be deleted is 

marked with strikethrough text. For ease 

of presentation and to distinguish 

between changes to rule text versus 

relocation of existing rule text, Exhibits 

5A and 5B to File No. OCC–2024–011 

contain bracketed text to indicate when 

existing text has been relocated from the 

By-Laws to the Rules with changes as 

marked. That bracketed text describes 

changes that would be performed upon 

implementation of File No. SR–OCC– 

2024–011, but it is not intended to be 

rule text. All terms with initial 

capitalization that are not otherwise 

defined herein have the same meaning 

as set forth in the By-Laws and Rules.4

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, 

OCC included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. OCC has prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its capacity as a central 

counterparty registered with the 

Commission, OCC currently operates 

two programs through which it clears 

stock loan transactions: the Hedge 

Program and the Market Loan Program. 

Under both Stock Loan Programs, OCC 

becomes the lender to the borrower and 

the borrower to the lender, thereby 

guaranteeing the return of the full value 

of cash collateral to the Borrowing 

Clearing Member and the return of the 

Loaned Stock (or value of that Loaned 

Stock) to the Lending Clearing Member. 

Under the Market Loan Program, OCC 

also offers certain additional guarantees, 

discussed in more detail below, with 

respect to other payment obligations 

arising from the stock loan transactions 

(e.g., dividend equivalent payments and 

rebate payments). As a result of OCC’s 

novation of cleared stock loan 

transactions, the rights and obligations 

of the Borrowing and Lending Clearing 

Members are thereafter governed by 

OCC’s By-Laws and Rules.5 OCC’s ByLaws and Rules also provide for, among 

other things, how Clearing Members 

initiate Stock Loans at OCC, how those 

Stock Loans are recorded in OCC’s 

books and records, how returns and 

recalls are processed, and risk 

management procedures specific to 

Stock Loans in the event that OCC 

suspends one of the Clearing Member 

counterparties. 

As announced in 2022, OCC intends 

to replace its current clearance and 

settlement system (ENCORE) with a 

streamlined operational framework for 

clearance and settlement (Ovation).6

The move to Ovation gives OCC the 

opportunity to address limitations in the 

structure of OCC’s Stock Loan Programs 

and enhance OCC’s stock loan services 

to support current and future needs.7

OCC proposes a number of amendments 

to its By-Laws and Rules designed to, 


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8Unique reason codes were created by DTC for 

Clearing Members to designate stock loan 

transactions intended to be sent to OCC for 

novation and guarantee. 

9Currently, one Loan Market operates within 

OCC’s Market Loan Program—Automated Equity 

Finance Markets, Inc. (‘‘AQS’’), a subsidiary of 

Equilend Holdings LLC (‘‘Equilend’’). 

10See OCC Rules 2202(b) and 2202A(b). 

11The terms ‘‘substitute dividend’’ or ‘‘dividend 

equivalent payment’’ in respect of a stock loan 

transaction means a payment made by the 

Borrowing Clearing Member to the Lending 

Clearing Member to reflect any cash dividend or 

distribution made with respect to the Loaned Stock 

during the term of the stock loan. 

12 In respect of a stock loan transaction, a rebate 

is typically a fee payable from the Lending Clearing 

Member to the Borrowing Clearing Member, 

expressed as a rate based on the amount of cash 

Collateral held by the Lending Clearing Member 

(‘‘Positive Rebate’’). However, if the rebate rate is 

negative (‘‘Negative Rebate’’), the fee is payable 

from the Borrowing Clearing Member to the 

Lending Clearing Member. 

13See OCC Rule 2201(a)(iii); Rule 2201A(a)(iii). 

among other things, (i) combine into the 

Market Loan Program favorable aspects 

of both Stock Loan Programs, including 

the submission of bilaterally negotiated 

transactions; (ii) conform the terms of 

Market Loans cleared by OCC more 

closely to the provisions most 

commonly included in stock loan 

transactions executed under standard 

loan market documents; (iii) provide a 

uniform guaranty of terms across Market 

Loans, regardless of how those Market 

Loans are initiated under the enhanced 

program; (iv) support transactions under 

both Stock Loan Programs through 

OCC’s new clearance and settlement 

system; and (v) reorganize, restate, and 

consolidate provisions of OCC’s ByLaws and Rules governing the Stock 

Loan Programs. 

OCC believes these changes will 

address certain pain points that OCC’s 

members have raised and enhance the 

overall process. In particular, the 

proposed changes would allow 

members who currently participate in 

the Hedge Loan Program to submit 

transactions through an improved 

workflow to the Market Loan Program, 

under which the counterparties will 

benefit from OCC’s enhanced guaranty 

and the efficiency of allowing OCC’s 

systems to handle certain post-trade 

transactions that Hedge Loan Program 

participants must currently address 

bilaterally with each of their 

counterparties, away from OCC. In 

addition, the proposed changes would 

align how OCC records stock loan 

transactions in its books and records 

with an industry-standard, contractlevel approach, which is expected to 

alleviate operational burdens on 

members that must currently reconcile 

their internal records with OCC’s 

position-based records on a daily basis. 

These enhancements would also serve 

as a foundation for consolidating OCC’s 

Hedge Loan and Market Loan Programs. 

As discussed more fully below, OCC 

intends to eventually decommission the 

Hedge Program, after which the Market 

Loan Program would become OCC’s 

single Stock Loan Program. OCC would 

take a phased approach to 

decommissioning the Hedge Program 

and would commence its Hedge 

Program phase-out plan only after 

conferring with Clearing Members that 

they are prepared for the transition. 

(1) Purpose 

Background 

Stock Loan Initiation 

In the Hedge Program, OCC acts as the 

principal counterparty for stock loans 

that are executed bilaterally between 

Clearing Members and sent to OCC for 

clearance and settlement. Prospective 

Lending and Borrowing Clearing 

Members identify each other 

(independent of OCC), agree to 

bilaterally negotiated terms of the Hedge 

Loan, and then send the details of the 

stock loan to the Depository, the 

Depository Trust Company (‘‘DTC’’), 

with a certain ‘‘reason code,’’ 8 which 

designates the stock loan as a Hedge 

Loan for guarantee and clearance at 

OCC. The Lending Clearing Member 

then instructs DTC to transfer a 

specified number of shares of Eligible 

Stock to the account of the Borrowing 

Clearing Member versus transfer of the 

appropriate amount of cash collateral to 

the account of the Lending Clearing 

Member. This current process, in which 

settlement at DTC occurs before 

clearance at OCC, adds complexity to 

balancing and reconciliation under the 

current Hedge Program. 

In the Market Loan Program, stock 

loans are initiated through the matching 

of bids and offers that are agreed upon 

by the Market Loan Clearing Members 

or otherwise matched through a Loan 

Market. A Loan Market is an electronic 

platform that supports securities 

lending and borrowing transactions in 

the Market Loan Program by matching 

lenders and borrowers based on loan 

terms that each party is willing to 

accept.9 In order to initiate a Market 

Loan, the Loan Market sends a matched 

transaction to OCC, which in turn sends 

two separate but linked settlement 

instructions to DTC to effect the 

movement of Eligible Stock and cash 

collateral between the accounts of the 

Market Loan Clearing Members through 

OCC’s account at DTC. 

Scope of OCC’s Guaranty 

Regardless of whether a transaction is 

initiated under the Hedge Program or 

Market Loan Program, OCC novates the 

transaction and becomes the lender to 

the Borrowing Clearing Member and the 

borrower to the Lending Clearing 

Member.10 As the principal 

counterparty to the Borrowing and 

Lending Clearing Members, OCC 

guarantees the return of the full value of 

cash collateral to a Borrowing Clearing 

Member and guarantees the return of the 

Loaned Stock (or value of that Loaned 

Stock) to the Lending Clearing Member. 

Under the Market Loan Program, OCC 

also provides a limited guaranty of 

substitute dividend 11 and rebate 

payments,12 in each case limited to the 

amount OCC has collected in margins 

from the responsible Market Loan 

Clearing Member based upon 

instructions received by the Loan 

Market prior to the payment date. Under 

the Hedge Program, OCC does not 

currently offer a guaranty of dividends 

or distributions, which must be resolved 

bilaterally between the Borrowing and 

Lending Clearing Members. 

Mark-to-Market Payments 

After novation, as part of the 

guaranty, OCC processes mark-to-market 

payments for all cleared stock loans on 

a daily basis to collateralize all loans to 

the negotiated levels. Mark-to-market 

payments are based on the value of the 

loaned securities and made between 

Clearing Members using OCC’s cash 

settlement system. In the Hedge 

Program, the percentage of the value of 

the loaned securities, either 100% or 

102%, and the preferred mark-to-market 

rounding are dependent upon the terms 

of the Master Securities Loan Agreement 

(‘‘MSLA’’) between the two Clearing 

Member parties to the transaction. 

Currently, members may select between 

several default rates to which the mark 

price would be rounded to the nearest 

interval (1.00, .05, 0.25, 0.10, 0.05, and 

0.01). In the Market Loan Program, all 

Market Loans are collateralized based 

on the rate and rounding convention 

established by the Loan Market— 

currently 102% with rounding to the 

nearest dollar. 

In both Stock Loan Programs, daily 

mark-to-market of cash collateral 

typically are settled in the firm lien 

account or combined Market-Makers’ 

account of the Clearing Member.13

Settlements generally are combined and 

netted against other OCC settlement 

obligations in a Clearing Member’s 

account, including trade premiums and 

margin deficits. Clearing Member open 

positions in the Stock Loan Programs 

are factored into the Clearing Member’s 


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14See OCC Rules 601, 2203 & 2203A. 

15See OCC Rule 1001. 

16See OCC Rule 2209(a). 

17See OCC Rule 2209A(a). 

18See OCC Rule 2209(b), (f); Rules 2209A(b), (c). 

19See OCC Rule 2209A(b), (f). 

20See OCC Rule 2209A(b)(1), (c)(1). 

21See OCC Rule 2212. 

22See Exchange Act Release No. 69534 (May 8, 

2013), 78 FR 28267 (May 14, 2013) (File No. SR– 

OCC–2013–03). 

23See OCC Rule 302(e), (f)(1). 

24 26 U.S.C. 871(m). 

25 In September 2015, the Treasury Department 

adopted final regulations based on a proposal 

issued in December 2013 expanding the types of 

derivatives to which Section 871(m) applies to 

include certain listed options transactions with an 

effective date of January 1, 2017. See T.D. 9734, 80 

FR 56866 (Sept. 18, 2015). The Treasury 

Department adopted final regulations providing 

additional guidance on section 871(m) in January 

2017. See T.D. 9815, 82 FR 8144 (Jan. 24, 2017). 

overall margin 14 and Clearing Fund 

contribution requirements.15

Position Aggregation 

OCC aggregates all stock loan 

positions and stock borrow positions of 

a Clearing Member relating to the same 

Eligible Stock for reporting and margin 

calculation purposes. OCC separately 

identifies stock loan and stock borrow 

positions resulting from each of the 

Stock Loan Programs, and such 

positions are not fungible with positions 

resulting from the other program. 

Position aggregation in both Stock Loan 

Programs is a legacy practice and does 

not follow industry-standard bookkeeping practices. Because of position 

aggregation, certain industry standard 

post-trade activity must be performed 

bilaterally away from OCC, such as rerate transactions that change the rebate 

rate on an individual loan. 

Dividends and Distributions 

Dividend equivalent payments for the 

Market Loan Program are ordinarily 

effected through DTC’s Dividend 

Service. If a Loan Market has advised 

OCC that the dividend or distribution 

for such Market Loan is not tracked by 

DTC’s Dividend Service, or if OCC 

determines, in its discretion, to remove 

a Market Loan from the Dividend 

Service, OCC Rule 2206A(a)(ii) 

currently provides that dividend 

equivalent payments are effected 

through OCC’s cash settlement system 

the day following the expected dividend 

or distribution payment date. OCC Rule 

2206A(a)(ii) further provides that the 

calculation of the margin in respect of 

dividend equivalent payments shall be 

solely based on calculations provided 

by the Loan Market, and OCC shall have 

no responsibility to verify the accuracy 

of the Loan Market’s calculation. In 

addition, OCC Rule 2206A(a)(iii) 

provides that with respect to non-cash 

dividends and distributions, a Loan 

Market may determine in its discretion 

to fix a cash settlement value for which 

the Loan Market may instruct OCC to 

effect collection and payment. In the 

event of a Borrowing Clearing Member’s 

default, OCC guarantees dividend 

equivalent payments to the extent that 

OCC has collected margin equal to such 

dividend equivalent according to the 

instructions provided by the Loan 

Market. 

Termination of Stock Loans 

Hedge Loans are typically terminated 

when either (i) a Borrowing Clearing 

Member instructs DTC to transfer a 

specified quantity of the Loaned Stock 

to the Lending Clearing Member against 

payment of the settlement price by the 

Lending Clearing Member to the 

Borrowing Clearing Member, after 

which DTC notifies OCC of the 

transaction with special codes after the 

transaction has settled; or (ii) the 

Lending Clearing Member gives notice 

to the Borrowing Clearing Member that 

the Lending Clearing Member is 

terminating the Stock Loan, or a portion 

thereof and specifies the number of 

shares of the Loaned Stock in respect of 

which the Lending Clearing Member is 

terminating the Stock Loan.16 The 

current process of initiating return 

transactions for the Hedge Program 

through DTC can lead to position breaks 

if the return transactions are not 

properly coded. Market Loans are 

typically terminated by a Market Loan 

Clearing Member giving notice to the 

relevant Loan Market calling for the 

recall or return of a specified quantity 

of the Loaned Stock.17 The Loan Market 

then sends details of the matched 

return/recall transaction to OCC, which 

validates the transaction and sends a 

pair of delivery orders to DTC in 

connection with the recall/return. 

However, in certain circumstances 

when a Clearing Member under either 

Stock Loan Program fails to return the 

specified quantity of Loaned Stock or to 

pay the applicable settlement price for 

a Loaned Stock, the counterparty 

Clearing Member may choose to execute 

a ‘‘buy-in’’ or ‘‘sell-out’’ of the Loaned 

Stock on its own.18 The Clearing 

Member executing a buy-in or sell-out is 

then required to provide notice to OCC 

and its counterparty, in the case of a 

Hedge Loan,19 or the Loan Market, in 

the case of a Market Loan,20 of the buyin or sell-out after execution is 

complete. Termination is not complete 

until the records of OCC, which are the 

official record of open and closed stock 

loan transactions, reflect the termination 

of the Stock Loan, and Clearing 

Members remain liable for all 

obligations related to open stock loan 

positions as reflected in the records of 

OCC. 

Offset and Re-Matching of MatchedBook Positions 

A portion of the activity in OCC’s 

Hedge Program relates to what is often 

referred to as matched-book activity, 

when a Hedge Clearing Member 

maintains in an account a stock loan 

position for a specified number of 

shares of an Eligible Stock reflecting a 

stock lending transaction with one 

Hedge Clearing Member (the Borrowing 

Clearing Member) and also maintains in 

that same account a stock borrow 

position for the same number, or lesser 

number, of shares of the same Eligible 

Stock with another Hedge Clearing 

Member (the Lending Clearing Member) 

(such positions being ‘‘Matched-Book 

Positions’’). In the event of a Clearing 

Member suspension, OCC has authority 

to re-match Matched-Book Positions of 

the defaulting Clearing Member in the 

Hedge Loan Program.21 Such rematching in suspension eliminates risk 

associated with price dislocation if OCC 

were required to instruct the surviving 

lender to buy-in and the surviving 

borrower to sell-out the same quantity of 

Loaned Stock in order to unwind the 

Matched-Book Positions. 

Canadian Clearing Members 

OCC expanded the Hedge Program to 

accommodate Canadian Hedge Clearing 

Members in 2013.22 To be eligible for 

the Hedge Program, a Canadian Clearing 

Member must appoint CDS Clearing and 

Depository Services Inc. (‘‘CDS’’), 

Canada’s national securities depository, 

to act as its agent through CDS’s 

arrangements with DTC and the 

National Securities Clearing Corporation 

(‘‘NSCC’’) to provide cross-border 

service to clear and settle trades with 

U.S. counterparties.23 Currently, 

Canadian Clearing Members are not 

eligible for the Market Loan Program. 

Canadian Clearing Members are also 

subject to additional requirements 

intended to allow OCC to perform its 

clearance and settlement services free 

from tax withholding obligations with 

respect to payments to such members. 

Specifically, OCC has established rules 

to address the application of Section 

871(m) of the Internal Revenue Code of 

1986, as amended (‘‘I.R.C.’’) 24 to listed 

options transactions effective on January 

1, 2017.25 Section 871(m) imposes a 

30% withholding tax on ‘‘dividend 

equivalent’’ payments that are made or 


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26OCC Rule 202(a). 27See OCC Rule 202. FFI Clearing Members 

satisfy this requirement by (1) entering into a 

‘‘qualified intermediary agreement’’ with the 

Internal Revenue Service (‘‘IRS’’) under which the 

Clearing Member assumes primary withholding 

responsibility (such member being a ‘‘Qualified 

Intermediary Assuming Primary Withholding 

Responsibility’’) and qualifies under IRS procedures 

for exemption from withholding under the Foreign 

Account Tax Compliance Act (‘‘FATCA’’), 26 U.S.C. 

1471–1474, such that OCC is not required to 

withhold any amount with respect to any payment 

or deemed payment to such FFI Clearing Member 

under FATCA or Chapter 3 of subtitle A of the 

I.R.C. (‘‘Chapter 3’’), 26 U.S.C. 1441–1446, for 

transactions in the FFI Clearing Member’s customer 

accounts; and (2) entering into an agreement with 

the IRS that permits OCC to make dividend 

equivalent payments or deemed payments to such 

FFI Clearing Member free from U.S. withholding tax 

for transactions or activity in the FFI Clearing 

Member’s capacity as principal through its firm 

account (such member being a ‘‘Qualified 

Derivatives Dealer’’). 

28See OCC Rule 202(b)(1). 

deemed to be made to non-U.S. persons 

with respect to certain derivatives that 

reference equity of a U.S. issuer. OCC 

Rule 202 provides that Clearing 

Members that are non-U.S. entities for 

U.S. federal tax purposes (‘‘FFI Clearing 

Members’’) must establish to the OCC’s 

satisfaction that the member’s conduct 

of transactions or activities with or 

through OCC will not result in the 

imposition of taxes or withholding or 

reporting obligations with respect to 

amounts paid or received by OCC (other 

than U.S. federal and State income taxes 

imposed on OCC’s net income).26 When 

taxes or obligations would be imposed 

but for the qualification of a member for 

a special U.S. or foreign tax status, 

ongoing membership of such members 

is conditioned on the member to qualify 

for, maintain, and document such status 

to OCC’s satisfaction.27 In addition, an 

FFI Clearing Member is prohibited from 

conducting transactions with or through 

OCC that would result in the imposition 

of taxes or withholding or reporting 

obligations with respect to amounts 

paid or received by OCC (other than 

U.S. federal and State income taxes 

imposed on OCC’s net income).28

Notwithstanding these requirements, 

which OCC implemented to facilitate 

the clearance and settlement of listed 

options transactions, OCC has no 

current tax withholding or reporting 

obligations for Canadian Hedge Clearing 

Members’ transactions under the Hedge 

Program because substitute dividend 

payments are handled bilaterally 

between Hedge Clearing Members, away 

from OCC. 

Proposed Changes 

OCC is proposing a number of 

amendments to enhance the structure 

and operation of the Stock Loan 

Programs discussed above and provide 

a framework for combining those 

programs into a single Stock Loan 

Program. First, OCC proposes to make 

several changes to the rules governing 

its Market Loan Program. Specifically, 

the proposed rule change would 

enhance OCC’s Market Loan Program 

by: 

(a) expanding the Market Loan Program to 

include bilaterally negotiated stock loans 

submitted by Clearing Members directly to 

OCC, for which the original counterparties 

shall remain paired in OCC’s system for 

purposes of post-trade activity, including 

modifications, recalls, and returns; 

(b) allowing for and recognizing 

supplementary or additional terms under an 

MSLA between the counterparties to such 

bilaterally negotiated transactions submitted 

under the Market Loan Program, as OCC’s 

Rules currently recognize under the Hedge 

Loan Program; 

(c) fixing cash collateral delivered and 

returned versus a bilaterally negotiated 

Market Loan submitted directly to OCC at 

102%, as is the current practice for Market 

Loans submitted through a Loan Market, and 

allowing Clearing Members to select a default 

rate at which mark-to-market payments 

would be rounded to the nearest level for 

Market Loans submitted directly to OCC, as 

is the current practice for Hedge Loans; 

(d) allowing for Clearing Members to 

cancel pending transactions by sending 

instructions directly to OCC as opposed to 

through a Loan Market; 

(e) establishing rules for affirmation of 

Market Loan transactions submitted by 

Clearing Members directly to OCC, as 

opposed to through a Loan Market; 

(f) allowing OCC’s clearance and 

settlement system to calculate and handle 

cash distributions, including substitute 

dividends and rebates; 

(g) allowing OCC’s clearance and 

settlement system to accept and handle 

contract modifications agreed to by the 

parties to bilaterally negotiated contracts 

submitted through the Market Loan Program, 

including modifications to rebate rate, 

interest rate benchmark, and loan terms; 

(h) implementing additional OCC controls 

over the buy-in process in the case of the 

Borrowing Clearing Member’s failure to 

deliver the Loaned Stock following a recall 

by the Lending Clearing Member in 

situations other than the suspension of the 

Borrowing Clearing Member under Chapter 

XI of the Rules; 

(i) supporting Canadian Clearing Members 

in the Market Loan Program while preventing 

certain transactions that could otherwise 

introduce tax withholding obligations; and 

(j) providing that in lieu of being a 

participant at the Depository for purposes of 

delivering or receiving Eligible Stock in 

connection with the initiation and 

termination of Market Loans, an Appointing 

Clearing Member may appoint an Appointed 

Clearing Member who is a member of the 

Depository to deliver or receive Eligible 

Stock, in the same way as how the Rules 

currently allow for Appointed Clearing 

Members to deliver or receive underlying 

securities arising from the exercise or 

maturity of an Appointing Clearing Member’s 

physically-settled equity options or stock 

futures. 

As discussed in more detail below, 

OCC intends that with these 

enhancements to the Market Loan 

Program, OCC would eventually 

decommission the Hedge Program, after 

which the Market Loan Program would 

become OCC’s single stock loan 

program. In the interim, however, and 

in addition to enhancements (a) through 

(j) to the Market Loan Program, the 

proposed rule changes would apply 

amendments to both Stock Loan 

Programs for the transition to OCC’s 

new clearance and settlement system 

by: 

(k) replacing OCC’s current practice of 

aggregating new stock loan positions and 

stock borrow positions for the same Clearing 

Member in the same Eligible Stock with 

contract-level accounting, consistent with 

industry-standard bookkeeping practices; 

(l) aligning settlement of daily mark-tomarket of cash collateral through the account 

in which the stock borrow or stock loan 

position sits, rather than requiring that markto-market settlement occur in a Clearing 

Member’s firm lien account or combined 

Market-Makers’ account; 

(m) simplifying the mark-to-market 

calculation to focus on the change to the 

contract value of a Clearing Member’s Stock 

Loans; and 

(n) allowing for re-matching of MatchedBook Positions across OCC’s Stock Loan 

Programs in the event of a Clearing Member 

default. 

In conjunction with these changes to 

the Stock Loan Programs, OCC would 

also make certain other clarifying, 

conforming, and organizational changes 

to OCC’s By-Laws and Rules, and rulefiled policies that reference those ByLaws or Rules. In particular, OCC would 

reorganize, restate, and consolidate 

provisions of OCC’s By-Laws governing 

the Stock Loan Programs into Chapter 

XXII (Hedge Loan Program) and Chapter 

XXIIA (Market Loan Program) of OCC’s 

Rules, as amended by this proposed rule 

change. As part of these changes, OCC 

would preserve the governance 

requirements concerning amendments 

to the stock loan-related By-Laws 

migrated to the Rules by amending 

Article XI, Section 2 of the OCC ByLaws. 

Plan To Consolidate OCC’s Stock Loan 

Programs 

OCC plans to consolidate its Stock 

Loan Programs into a single, enhanced 

stock loan program. OCC intends to 

achieve this consolidation in three 

phases. The first phase, which is 

described in this proposed rule change, 

would enhance the Market Loan 

Program in a way that would allow that 


khammond on DSKJM1Z7X2PROD with NOTICES
73470 Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices 

29Currently, a Clearing Member that participates 

in the Hedge Loan Program that desires to expand 

its participation into the Market Loan Program is 

subject to a business expansion review under OCC’s 

Third-Party Risk Management Framework. See 

Third-Party Risk Management Framework, available 

at https://www.theocc.com/risk-management/riskmanagement-framework (providing for assessments 

for Clearing Member onboarding, including with 

respect to expanded relationships). 

30OCC has provided results of a survey and other 

informal discussions with Clearing Members 

concerning the enhancements to the OCC’s Stock 

Loan Programs in confidential Exhibit 3B to SR– 

OCC–2024–011. Members have expressed interest 

in the enhancements such as having the rebate 

amounts calculated, settled, and guaranteed by 

OCC. The migration from Hedge to the Market Loan 

Program is necessary for such expansion to OCC’s 

services. 

program to eventually become OCC’s 

single, enhanced stock loan program. 

The first phase will also involve certain 

enhancements to both the Hedge and 

Market Loan Programs in connection 

with the implementation of OCC’s new 

system for clearance and settlement. 

After OCC implements the 

enhancements and the new clearance 

and settlement system becomes OCC’s 

system of record, OCC will begin 

authorizing and encouraging Hedge 

Clearing Members to begin submitting 

bilateral transactions through the 

enhanced Market Loan Program. While 

OCC would require Hedge Clearing 

Members to provide the appropriate 

documentation and certifications 

required of Market Loan Clearing 

Members and submit to certification 

testing prior to utilizing the enhanced 

program, OCC does not plan to require 

business expansions for Hedge Clearing 

Members migrating to the Market Loan 

Program because they are already 

approved for stock loan activity.29

Currently, the business expansion for 

Market Loan Program participation 

serves mainly to ensure that the 

Clearing Member is properly subscribed 

through a Loan Market, which will no 

longer be necessary to participate in the 

Market Loan Program. 

During the second phase, which also 

is covered by this proposed rule change, 

OCC would encourage Clearing 

Members to transition to the Market 

Loan Program and would monitor the 

movement of activity from the Hedge 

Program to the enhanced Market Loan 

Program. Based on interest expressed by 

Clearing Members,30 OCC anticipates 

that Clearing Members will be 

motivated to migrate activity to the 

Market Loan Program because of OCC’s 

expanded guarantee under that program 

and the operational enhancements 

under this proposed rule change. Once 

transition plans for each Clearing 

Member are understood, OCC would 

announce that on a future date, OCC 

will no longer accept new loans through 

the Hedge Program, but would continue 

to support existing Hedge Loans. The 

decision to make this announcement 

will be made by OCC’s Chief Executive 

Officer or Chief Operating Officer based 

upon factors including, but not limited 

to, the number of participants that are 

able to conduct business under the 

enhanced Market Loan Program, the 

amount of transactions flowing through 

the enhanced Market Loan Program, the 

proportion of loan balances between the 

two Stock Loan Programs, and feedback 

from members about when they expect 

to be ready to migrate fully to the 

enhanced Market Loan Program. OCC’s 

goal is to transition all Hedge Program 

participants to the enhanced Market 

Loan Program within a year after 

implementing the enhanced program. 

Beginning on the announced date, 

existing Hedge Loans will naturally 

terminate through return or recall 

instructions until none are left. OCC 

does not expect that this period will last 

more than six months from the 

announced date given the average term 

for stock loans. 

This second phase would be reflected 

in proposed Rule 2213(e)(2), which 

would address the termination of the 

Hedge Loan Program. Section 2(c) of 

OCC By-Law Article XXI, which would 

become OCC Rule 2213(e)(1) as part of 

the reorganization of the Stock Loan ByLaws and Rules, already provides OCC 

authority, upon two business days’ 

notice to Clearing Members, to 

terminate the outstanding Hedge Loans 

relating to one or more particular 

Eligible Stock at its sole discretion for 

certain enumerated reasons, including 

the impending termination of that 

business on the part of OCC. OCC Rule 

2213(e)(2) would allow OCC to take a 

phased approach to terminating the 

Hedge Loan Program by first, upon 

approval by the Chief Executive Officer 

or Chief Operating Officer, announcing 

that OCC will cease to accept the 

initiation of new Hedge Loans. OCC 

Rule 2213(e)(2) also would provide that 

the determination to terminate the 

Hedge Loan Program will be made based 

upon factors including, but not limited 

to, the number of participants that are 

able to conduct business under the 

Market Loan Program, the amount of 

transactions flowing through the Market 

Loan Program, the proportion of loan 

balances between the two Stock Loan/ 

Hedge Programs and the Market Loan 

Program, and feedback from members 

about when they expect to be ready to 

migrate fully to the Market Loan 

Program. During this phasing out, 

Clearing Members would be allowed to 

maintain open positions in Hedge Loans 

until termination of those positions 

through returns and recalls initiated by 

the Clearing Members. 

The third phase, which is not covered 

by this proposed rule change, would be 

the ultimate decommission of the Hedge 

Program Rules. Once all Hedge Loans 

terminate through return or recall, OCC 

intends to file another proposed rule 

change that would remove the Hedge 

Program from OCC’s By-Laws and 

Rules. Thereafter, the Market Loan 

Program would then become OCC’s 

single ‘‘Stock Loan Program.’’ Until 

then, OCC is proposing to amend its 

Rules to avoid ambiguity by using 

‘‘Hedge Loan’’ instead of ‘‘Stock Loan’’ 

when referring to Stock Loans under the 

Hedge Program unless in reference to 

Stock Loans under either of the Stock 

Loan Programs, consistent with the 

current definition of that term in Article 

I of the By-Laws. 

Market Loan Program Enhancements 

OCC proposes enhancements to the 

Market Loan Program that would (a) 

expand the Market Loan Program to 

allow for submission of Market Loans 

bilaterally negotiated by Clearing 

Members; (b) recognize MSLAs under 

the Market Loan Program; (c) fix the 

value of cash collateral delivered and 

returned versus the Loaned Stock at 

102% of the value of the Loaned Stock, 

as Market Loans are currently 

collateralized, and allow for flexible 

pricing, as under the current Hedge 

Loan Program; (d) provide for the 

cancellation of pending transactions 

that have not yet been accepted by OCC; 

(e) establish rules for affirmation of 

Market Loan transactions submitted by 

Clearing Members directly to OCC; (f) 

facilitate the calculation and processing 

of cash distributions, including 

substitute dividends and rebate 

payments, by OCC’s new clearance and 

settlement system, rather than by a Loan 

Market; (g) provide for modification of 

Market Loan terms agreed to by Market 

Loan Clearing Members; (h) implement 

additional OCC controls over the buy-in 

process in the case of a Borrowing 

Clearing Member’s failure to deliver 

after the Lending Clearing Member 

initiated a recall, as well as to prepare 

those controls and OCC’s other Market 

Loan and Hedge Loan Rules for the 

shortening of the standard settlement 

cycle for securities transactions; (i) 

support Canadian Clearing Members in 

the Market Loan Program while 

preventing certain transactions that 

could introduce tax withholding 

obligations; and (j) provide a framework 

for allow an Appointing Clearing 

Member to settle its Market Loan 


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31Surveys of stock loan industry participants 

indicate most firms have a significant spend for 

stock loan post-trade and reconciliation processing. 

Based on this industry feedback, OCC believes that 

a service that can provide operational efficiencies 

and further reduce manual processing and 

operational risk would be well received. OCC’s 

review of this feedback is provided in confidential 

Exhibit 3B to SR–OCC–2024–011. 32See By-Law Art. I, § 1.H.(2). 

33See OCC By-Law Art. I, § 1.L.(5) (defining 

‘‘Loan Market’’ as ‘‘an electronic platform . . . that 

supports securities lending and borrowing 

transactions by lenders and borrowers based on 

loan terms that each party is willing to accept’’); 

OCC Rules 2202A(a)(i) (‘‘If the matched transaction 

passes [OCC]’s validation process . . .’’); 

2202A(a)(ii) (‘‘previously reported matched 

transaction’’ and ‘‘related matched transaction’’); 

2202A(b) (‘‘the matched stock loan transaction 

submitted by the Loan Market’’); 2209A(a)(1) 

(‘‘matched return/recall transaction’’). 

activity through an Appointed Clearing 

Member in lieu of maintaining 

membership at a Depository. 

(a) Bilaterally Negotiated Market Loans 

OCC is proposing to expand the 

Market Loan Program to include 

bilaterally negotiated Market Loans 

submitted directly by Clearing 

Members. Under the Market Loan 

Program, OCC currently accepts 

electronic messages from the Loan 

Market for new loans and returns. OCC 

would expand the Market Loan Program 

to accept submissions directly from 

Clearing Members (or their third-party 

service providers). Following the 

affirmation of a new loan or return, OCC 

would instruct DTC to settle the 

transaction using the account of the 

lender, the borrower, or the Appointed 

Clearing Members, or using OCC’s DTC 

account. While there would be two 

separate avenues for submitting loans 

(i.e., through a Loan Market or direct 

submission of bilaterally negotiated 

Loans to OCC), the scope of OCC’s 

guaranty and post-trade processing for 

all transactions would be uniform. By 

allowing for automated submission of 

transactions to OCC prior to DTC 

settlement and by controlling the 

settlement process, the enhanced 

program would help reduce the burden 

and risks associated with the balancing 

and reconciliation under the current 

Hedge Program.31 As under the current 

Hedge Program, counterparties to 

bilaterally negotiated contracts 

submitted through the Market Loan 

Program would remain paired in OCC’s 

system for purposes of recalls, returns, 

and contract modifications. 

Because certain proposed Rules 

would apply differently to Loans 

matched anonymously through a Loan 

Market and those that would be 

initiated bilaterally, whether through a 

Loan Market or with OCC directly, OCC 

would add definitions of ‘‘Anonymous 

Market Loan’’ and ‘‘Disclosed Market 

Loan’’ to OCC Rule 101. Anonymous 

Market Loans would be defined as those 

initiated through a Loan Market and for 

which the identities of the Lending 

Clearing Member and Borrowing 

Clearing Member are not disclosed to 

each other. Disclosed Market Loans 

would be defined to include either those 

Market Loans (i) initiated through a 

Loan Market and for which the 

identities of the Lending Clearing 

Member and Borrowing Clearing 

Member are disclosed to each other, or 

(ii) initiated directly between the 

Lending Clearing Member and 

Borrowing Clearing Member away from 

a Loan Market such that the identities 

of the Lending Clearing Member and 

Borrowing Clearing Member are 

disclosed to each other. Paragraph (h) to 

proposed OCC Rule 2202A (Initiation of 

Market Loans) would provide that a 

Market Loan may be either an 

Anonymous Market Loan or a Disclosed 

Market Loan. Paragraph (a) to proposed 

OCC Rule 2206A (Maintaining Stock 

Loan and Stock Borrow Positions in 

Accounts) would provide that the 

identities of the Lending Clearing 

Member and Borrowing Clearing 

Member would be elements identified 

for stock loan positions and stock 

borrow positions resulting from 

Disclosed Market Loans. 

To expand the Market Loan Program 

to bilateral transactions, OCC would 

amend OCC Rule 2202A. Specifically, 

the proposed rule change would amend 

current OCC Rule 2202A(a)(i), which 

would be renumbered to OCC Rule 

2202A(a)(1) as part of the restatement of 

the Stock Loan Program rules, to add 

that, in addition to initiation through a 

Loan Market, a Market Loan may be 

initiated when a Lending Clearing 

Member and Borrowing Clearing 

Member send details of a stock loan 

between the two Clearing Members 

directly to OCC. To ensure that the 

original counterparties to such a 

Disclosed Market Loan remain paired in 

OCC system, notwithstanding OCC’s 

novation, OCC would also amend 

current Article XXIA, Section 5 of 

OCC’s By-Laws (Maintaining Stock Loan 

and Stock Borrow Positions in 

Accounts), which would become OCC 

Rule 2206A, by adding a new sentence 

to the beginning of that provision that 

introduces the concept of ‘‘matched 

pairs,’’ consistent with the OCC ByLaw’s definition of Hedge Loans.32

In addition to providing for the 

initiation of bilateral Market Loans, OCC 

would also amend its Rules to 

accommodate direct submission of other 

types of post-trade transactions for 

which the Rules currently rely on 

actions taken by a Loan Market. 

Specifically, OCC would amend the first 

paragraph of current OCC Rule 2209A(a) 

(Termination of Market Loans), which 

would be numbered as OCC Rule 

2216A(a) as part of the broader 

reorganization of the Market Loan 

Program Rules, and new OCC Rule 

2214A (Modifications) by providing that 

termination or modification of a Market 

Loan, respectively, may be initiated 

either through a Loan Market or OCC, 

depending on the way in which the 

Loan was initiated. Such instructions 

would be made through the Loan 

Market for Anonymous Market Loans; 

through OCC for Disclosed Market 

Loans initiated through OCC directly; 

and through either the Loan Market or 

OCC for Disclosed Market Loans 

initiated through a Loan Market. OCC 

would similarly amend the definitions 

of ‘‘Recall’’ and ‘‘Return,’’ as migrated 

from the By-Laws to OCC Rule 101, to 

reflect the separate channels for 

initiating such a transaction. OCC 

would also make other conforming 

changes to the text of the Rules to reflect 

submission of bilaterally negotiated 

loans directly to OCC: 

• Throughout the rules governing the 

Market Loan Program, OCC would also 

remove references to ‘‘matching’’ or 

‘‘matched’’ transactions (i.e., matched 

through a Loan Market) to reflect that 

Market Loan transactions could also be 

initiated bilaterally, either through a 

Loan Market or directly with OCC.33

• The definition of ‘‘Market Loan 

Program,’’ as migrated from Section 1 of 

Article I of the OCC By-Laws to OCC 

Rule 101, would be amended to 

recognize that Market Loans may be 

initiated either through a Loan Market 

or through direct submission of 

bilaterally negotiated Loans to OCC. 

(b) Recognizing MSLAs 

Parties to a bilaterally negotiated 

stock loan transaction typically execute 

an MSLA. Under current OCC Rule 

2202(b), Hedge Clearing Members are 

permitted to establish and maintain 

additional terms under the MSLA that 

are not extinguished through OCC’s 

novation provided that the additional 

terms are not inconsistent with anything 

in OCC’s By-Laws or Rules. Examples of 

such additional or supplementary terms 

include a term structure or fees for buyin transactions. The proposed rule 

change would add the same provision to 

the Market Loan Program in proposed 

OCC Rule 2202A(b)(2)(E). As described 

below, the recognition of MSLAs within 

the Market Loan Program would also 


khammond on DSKJM1Z7X2PROD with NOTICES
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34OCC has included a copy of the survey results 

in confidential Exhibit 3B to SR–OCC–2024–011. 

35OCC has included a copy of the survey results 

in confidential Exhibit 3B to SR–OCC–2024–011. 

facilitate the re-matching of Matched 

Book Positions in suspension because 

OCC would give priority to re-matching 

counterparties with existing MSLAs, 

both when re-matching within and 

across the Stock Loan Programs. 

(c) Collateral and Mark-to-Market 

Pricing 

To accommodate the submission of 

bilaterally negotiated Market Loans 

directly to OCC, OCC proposes to 

establish rules that would fix the 

collateral for Market Loans at 102%— 

the same rate at which Market Loans 

submitted through a Loan Market are 

collateralized today. Specifically, OCC 

would amend current OCC Rule 2204A 

(Mark-to-Market Payments), which 

would become proposed OCC Rule 

2209A per the reorganization discussed 

below, to provide in proposed 

paragraph (b) (Market-to-Market 

Payment Amount) that the 

collateralization rate for all Market 

Loans would be 102%, regardless of 

whether initiated through a Loan Market 

or submitted directly to OCC. 

Accordingly, OCC would delete the 

current text in Rule 2204A and the 

definition of the term ‘‘Collateral’’ in 

Article XXIA of the OCC By-Laws, as 

migrated to OCC Rule 101, that provides 

that the collateralization rate shall be set 

by the relevant Loan Market. OCC 

believes that fixing collateral at 102% 

would help to preserve the 

compatibility of OCC’s cleared offering 

with standard practices for over-thecounter (‘‘OTC’’), uncleared stock loans 

while minimizing complexity in OCC’s 

risk management processes. 

OCC previously considered 

standardizing collateralization at 100% 

because in a cleared transaction, OCC’s 

guaranty replaces the additional 

collateral in protecting Lenders from 

market risk in the event of a 

counterparty default. In a survey OCC 

submitted to all Clearing Members who 

participate in OCC’s Stock Loan 

Programs, the vast majority of 

respondents objected to a proposal to 

standardize collateralization at 100%.34

The most common reasons cited for this 

objection were (i) desire to align the 

collateral amount and mark-to-market 

cashflows for members who commonly 

have uncleared positions at the OTCstandard 102% and a matching position 

within clearing; and (ii) loss of the 

additional 2% in collateral would 

materially reduce what the income 

lenders earn by investing the cash 

collateral, which is one of the reasons 

lenders choose to lend their shares. In 

response to this feedback, OCC now 

proposes to fix collateral at 102%, 

which would align OCC’s offering with 

standard OTC practices and with OCC’s 

current practice within the Market Loan 

Program. Fixing the collateral at a single 

rate—as under the current Market Loan 

Program—would also minimize 

complexity in OCC’s risk management 

of stock loan positions by establishing a 

single rate across all Market Loans. 

OCC also proposes to establish rules 

that would allow Clearing Members 

submitting Market Loans directly to 

OCC to select the default rate at which 

mark-to-market payments would be 

rounded up to the nearest level, which 

is the current practice for Hedge Loans. 

Specifically, OCC would amend OCC 

Rule 2201A (Instructions to the 

Corporation), which would become 

proposed OCC Rule 2207A, to reflect 

that the default rate is one of the 

standing instructions that Market Loan 

Clearing Members must submit with 

respect to Market Loans submitted 

directly to OCC. Rounding rates for 

Market Loans submitted through a Loan 

Market would not change. If the default 

rate differs between a Borrowing 

Clearing Member and a Lending 

Clearing Member, the Lending Clearing 

Member’s default rate would govern the 

Market Loan. When surveyed, Clearing 

Members cited the same reasons for 

supporting flexibility in pricing as they 

did in objecting to fixing collateral at 

100%.35 OCC currently offers this 

flexibility in the Hedge Program today. 

OCC believes that offering the same 

flexibility with respect to bilaterally 

negotiated Market Loans submitted to 

OCC directly will aid Clearing Members 

in aligning cash flows between cleared 

and OTC stock loan transactions. 

(d) Cancellation of Pending 

Transactions 

To facilitate the acceptance of 

bilaterally negotiated contracts in the 

Market Loan Program, OCC is proposing 

to modify its Rules that concern the 

cancellation of pending transactions to 

accommodate the submission of 

cancellation instructions by Clearing 

Members, in addition to a Loan Market. 

Under current OCC Rule 2202A(a)(ii), a 

Loan Market may instruct OCC to 

disregard a previously reported matched 

transaction that is pending settlement at 

DTC, after which OCC instructs DTC to 

cancel the previously issued delivery 

order. Upon confirmation that DTC has 

processed such cancellation 

instructions, the related matched 

transaction is deemed null and void and 

given no effect. OCC has no obligation 

to any Market Loan Clearing Member in 

acting pursuant to a Loan Market’s 

instruction to disregard a previously 

reported transaction. The proposed rule 

change would amend OCC Rule 

2202A(a)(ii), which would be 

renumbered as proposed OCC Rule 

2202A(a)(2), to recognize the ability of 

a Market Loan Clearing Member to 

submit an instruction to cancel a 

pending transaction directly to OCC for 

bilaterally negotiated transactions 

submitted under the Market Loan 

Program. 

The proposed changes would also add 

a new OCC Rule 2215A (Cancelation of 

Pending Instructions) to address the 

cancellation of pending post-trade 

instructions other than cancellation of 

loan initiation under Rule 2202A. For 

example, under OCC’s current OCC Rule 

2202A, Hedge Clearing Members 

currently have the capability to cancel 

return instructions or recall instructions 

pending with DTC. Similarly, Market 

Loan Clearing Members currently may 

cancel pending transactions by issuing a 

cancellation instruction to the Loan 

Market, which may then instruct OCC to 

disregard a previously reported 

transaction under current OCC Rule 

2202A(a)(ii). This new OCC Rule 2215A 

would preserve that ability under the 

enhanced program by allowing members 

that submit bilaterally negotiated 

Market Loans to issue cancellation 

instructions directly to OCC, as they do 

now to DTC and the Loan Market. 

(e) Transaction Affirmation 

Currently, Market Loan Program 

transactions are presumed matched 

when sent to OCC by a Loan Market. 

OCC would establish a transaction 

affirmation process for loans submitted 

directly to OCC, rather than through a 

Loan Market: 

• New Loans: Counterparties to a new 

loan would be required to affirm the 

transaction details prior to OCC 

submitting the new loan to DTC for 

settlement. New loans that are not 

affirmed by the time that OCC stops 

accepting instructions for the day would 

be rejected. This affirmation process 

would be reflected in proposed OCC 

Rule 2202A(a)(1), which would provide 

that a Market Loan is initiated when (i) 

the Loan Market sends details of a stock 

loan transaction to OCC or (ii) a Lending 

Clearing Member and Borrowing 

Clearing Member send details to OCC of 

a stock loan transaction between them 

and such details, as applicable, are 

either matched by OCC or affirmed by 

the Clearing Members. 

• Returns: Provided that the 

Borrowing Clearing Member initiated a 


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36OCC anticipates that upon implementation of 

these proposed changes, the cut-off for rejections 

will be 30 minutes prior to DTC’s standard 

settlement submission deadline. 

37OCC’s settlement procedures for Stock Loan 

termination are intended to facilitate its Clearing 

Member’s compliance with requirements under 

applicable rules of the Commission and selfregulatory organizations, including the 

requirements imposed by Regulation SHO. See 

Exchange Act Release No. 59294 (Jan. 23, 2009), 74 

FR 5958 (Feb. 3, 2009) (SR–OCC–2008–20). 

However, the ultimate responsibility for compliance 

with Regulation SHO rests with the Clearing 

Member, and OCC has no liability for any Clearing 

Member’s failure to comply with its obligations. 

See, e.g., OCC Rules 2209A(g) (‘‘[OCC] shall not be 

held liability for any Clearing Member’s failure to 

comply with its responsibilities and obligations 

under the federal and state securities laws, 

including, but not limited to, Regulation SHO, or 

any applicable rules of the relevant Loan Market or 

any exchange or self-regulatory organization.’’). 

38The standard settlement cycle currently 

corresponds with the one stock loan business day 

after submission of the recall. See OCC Rule 

2209A(a)(3). 

39OCC would evaluate the price per share paid 

or received against market prices on that stock loan 

business day, consistent with the Clearing 

Member’s obligation to immediately give OCC 

written notice of the buy-in or sell-out. In making 

its determination, OCC would account for 

transaction costs, fees or interest paid or incurred 

in connection with the buy-in and sell-out that may 

be included in the Buy-In and Sell-Out Costs 

provided by the Clearing Member executing the 

buy-in or sell-out. 

40See OCC Rule 2209(b), (f). 41Buy-ins and sell-outs under OCC Rule 2216A 

would require manual affirmation, subject to 

automatic affirmation following a cut-off time 

discussed above. 

return within OCC’s timeframe for 

submitting such instruction on a stock 

loan business day, the Lending Clearing 

Member would have the opportunity to 

affirm or reject the initiation of a return 

by a cut-off time on the same business 

day.36 Any returns pending after that 

cut-off time would be deemed affirmed 

and submitted to DTC for processing. 

This auto-affirmation would be reflected 

in proposed OCC Rule 2216A(a)(2). 

Based on conversations with Clearing 

Members, OCC believes this affirmation 

process balances Lending Clearing 

Members’ desire to have the opportunity 

to affirm or reject return instructions, 

while also addressing Borrowing 

Clearing Members’ concerns that delay 

in affirmation or allowing the 

transaction to pend indefinitely could 

have regulatory consequences for the 

Borrowing Clearing Member.37

• Recalls: Recalls would not need to 

be affirmed. Per standard MSLA terms, 

a Borrowing Clearing Member will be 

deemed to have affirmed the initiation 

of a recall provided that the Lending 

Clearing Member requested the return of 

the specific quantity of Loaned Stock no 

earlier than the standard settlement date 

that would apply to a purchase or sale 

of the Loaned Stock in the principal 

market of such Loaned Stock.38 This 

understanding would be added to 

proposed OCC Rule 2216A(a)(3). 

• Contract Modifications: Contract 

modifications to the rebate rate, interest 

rate benchmark, or loan term submitted 

by either a Borrowing Clearing Member 

or Lending Clearing Member, the 

proposed Rule amendments for which 

are discussed below, would not become 

effective until affirmed by both parties. 

This affirmation requirement would be 

added to new OCC Rule 2214A(a). 

• Buy-Ins & Sell-Outs: For Market 

Loans submitted directly through the 

Corporation, the Borrowing Clearing 

Member and Lending Clearing will be 

given the opportunity to affirm or reject 

a buy-in or sell-out, respectively, by a 

cut-off time specified by OCC on the 

stock loan business day the buy-in or 

sell-out transaction is received by OCC. 

If the Clearing Member does not affirm 

or reject the buy-in or sell-out by that 

time, OCC would deem the buy-in or 

sell-out to be complete if OCC 

determines that the Buy-In or Sell-Out 

Costs for the Loaned Stock initiated is 

more than the lowest market price and 

less than the highest market price for 

the Loaned Stock on the stock loan 

business day the buy-in or sell-out is 

submitted to OCC.39 Otherwise, the buyin or sell-out would be rejected. As with 

buy-ins and sell-outs under the Hedge 

Program today,40 any objection that the 

contraparty has with respect to the 

timeliness of the buy-in or sell-out or 

the reasonableness of the Buy-In or SellOut Costs are matters that must be 

resolved between the Lending Clearing 

Member and the Borrowing Clearing 

Member, away from OCC. These 

understandings and processes would be 

reflected in paragraphs (b)(2)(B) and 

(c)(2) of proposed OCC Rule 2216A. 

To support Clearing Members in 

making the affirmations required under 

these rules, OCC’s new stock loan 

system would support automatic 

affirmation based on system settings 

that could be selected by the Clearing 

Member.41 Through OCC’s new 

clearance and settlement system, 

Clearing Members will be able to create 

and manage standing instructions for 

affirmation of their Market Loans based 

on variables including the type of 

transaction, the counterparty, the 

amount, or the rebate rate. For example, 

a member would be able to set 

instructions to: (i) affirm every 

transaction; (ii) limit affirmation to a 

certain set of counterparties; (iii) 

establish more granular rules, such as 

affirming any transaction with a rebate 

rate less than 250 basis points; or (iv) 

combine one or more of the above 

instructions. When new loans are 

received, the system would check 

whether there is a standing instruction 

that applies to the new loan. If no 

instruction is found, then the new loan 

would be pended for affirmation, 

subject to the above referenced Rules. If 

a standing instruction applies, then OCC 

would follow that instruction as 

satisfaction of the affirmation 

requirement. Authority to permit such 

standing instructions currently exists 

under current OCC Rule 2201A 

(Instructions to the Corporation), the 

applicable provision of which would be 

renumbered OCC Rule 2207A(a)(2). 

(f) Cash Distributions 

The proposed changes would allow 

OCC to calculate and effect cash 

entitlements through its new clearance 

and settlement system, including 

dividends, distributions and rebates. 

OCC proposes to revise paragraphs 

(a)(ii) and (a)(iii) of current OCC Rule 

2206A (Dividends and Distributions; 

Rebates), renumbered as proposed OCC 

Rule 2211A(b) and (c), to reflect that 

under OCC’s new clearance and 

settlement system, OCC shall assume 

responsibility for calculating the margin 

add-on collected with respect to 

dividend equivalent payments. While 

OCC shall continue to effect dividend 

equivalent payments primarily through 

the facilities of DTC using its dividend 

tracking service, OCC would effect the 

payments through OCC’s new clearance 

and settlement system if OCC 

determines that the dividend or 

distribution for a Market Loan is not 

tracked through DTC’s dividend 

tracking service or if OCC has 

determined to remove a Market Loan 

from the dividend tracking service, as 

under OCC’s current Rules. In addition, 

OCC would continue to add non-cash 

dividends and distributions to the 

Loaned Stock if OCC determines that 

such dividends and distributions are 

legally transferable and the transfer can 

be effected through DTC. The 

determination to fix a cash value for 

non-cash dividends and distributions 

not added to the Loaned Stock would be 

OCC’s under the proposed changes, 

rather than the Loan Market. Because 

OCC will no longer be reliant on the 

Loan Market for OCC’s margin add-on 

process and settlement of dividend 

equivalent payments, OCC proposes to 

eliminate the limitations under the 

current Rule, including the current 

provision that OCC’s guaranty is limited 

by the amount of margin OCC collected 

in reliance on the Loan Market’s 

calculation. This change would not have 

any effect on OCC’s margin 

methodology. OCC would continue to 


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42See infra item (k) (Contract-Level 

Recordkeeping). 

43As a practical matter, if the Borrowing Clearing 

Member initiates a return, it would have the shares 

in its possession to return. Accordingly, the 

proposed controls are limited to buy-ins following 

failure to deliver initiated by a recall by the Lending 

Clearing Member. 44See OCC Rule 2209A(a)(3). 

collect a margin add-on for such cash 

distributions. 

The proposed changes would also add 

paragraph (d) to proposed OCC Rule 

2211A to address the rights of a Lending 

Clearing Member with respect to 

optional dividends (i.e., a dividend the 

shareholder can elect to receive in cash, 

stock, or some combination of the two). 

Proposed OCC Rule 2211A(d) would 

provide that a Lending Clearing Member 

will have the right to elect an option 

only if it recalls the Loaned Stock in 

time to make such election. If the 

Lending Clearing Member does not 

recall the Loaned Stock, the Lending 

Clearing Member would be entitled to 

receive the default option set by the 

issuer of the Loaned Stock. OCC 

understands this proposed rule would 

match the Loan Market’s current process 

for optional dividends. Because optional 

dividends on Market Loans are 

currently governed by the Loan Market’s 

processes, OCC’s rules do not currently 

address the rights of a Lending Clearing 

Member with respect to optional 

dividends. 

OCC would also amend its rules to 

facilitate calculation, collection, and 

payment of rebates under the new 

clearance and settlement system. OCC 

Rule 2206A(b) currently provides that 

OCC generally will collect and pay 

rebate payments on a monthly basis as 

instructed by the Loan Market. As with 

dividend equivalent payments, the Loan 

Market is currently responsible for 

calculation of the rebate payments. OCC 

would amend OCC Rule 2206A(b), 

which would be renumbered OCC Rule 

2211A(e), to reflect that OCC shall 

assume responsibility for calculating 

rebate payments under its new 

clearance and settlement system. OCC 

also proposes to amend the Rule so that 

OCC will be prepared if and when the 

stock loan industry transitions to daily, 

rather than monthly, collection of rebate 

payments. Because OCC anticipates that 

upon implementation of the new 

system, OCC will continue to calculate 

and collect rebate on a monthly basis, 

proposed OCC Rule 2211A(e) would 

provide that the calculation and 

collection of rebate payments could also 

be made on such other basis, not to 

exceed monthly. 

(g) Market Loan Modifications 

OCC is proposing to add a new rule 

to support contract modifications to the 

Market Loan Program made possible by 

the change to contract-level 

recordkeeping, discussed below. 

Modifications agreed to by the Market 

Loan Clearing Members over the life of 

a Market Loan would be accepted by 

OCC and handled by OCC’s new 

clearance and settlement system. 

Specifically, modifications would be 

permitted regarding the (a) rebate rate; 

(b) interest rate benchmark; and (c) loan 

term. Any modifications would be 

maintained in OCC’s books and records 

at the contract level. OCC’s new 

clearance and settlement system would 

allow, but not require, submission of 

these terms.42 The channel through 

which modification requests would be 

processed would be determined by the 

manner in which the loan was initiated. 

Clearing Members would be required to 

submit post-trade transactions for 

Anonymous Market Loans through the 

Loan Market on which the transaction 

was initiated, consistent with current 

practice. Clearing Members may submit 

post-trade transactions for Disclosed 

Market Loans to OCC directly or, if the 

Disclosed Market Loan was submitted 

through a Loan Market, Clearing 

Members would have the option of 

submitting the post-trade transaction 

through the Loan Market. 

The proposed change would add a 

new rule, which would be numbered 

OCC Rule 2214A as part of the broader 

proposed reorganization of Chapter 

XXIIA. In addition to specifying the 

terms subject to modification, proposed 

OCC Rule 2214A would provide that 

OCC shall update the relevant terms in 

its books and records if, as applicable, 

(1) the Loan Market notifies OCC that 

the parties agreed to the modification, 

or, (2) with respect to Market Loans 

initiated directly through OCC, the 

parties provided OCC with matching or 

affirmed instructions, as discussed 

above. OCC would provide notice of the 

modified terms in the daily reports that 

OCC is required to make available to 

Market Loan Clearing Members under 

proposed OCC Rule 2210A. 

(h) Buy-In Controls and Settlement 

Cycle 

The proposed changes would also 

provide OCC with additional controls 

over the buy-in process for the recall of 

a Market Loan initiated by a Lending 

Clearing Member if the Borrowing 

Clearing Member fails to return the 

Loaned Stock in situations other than 

suspension of the Borrowing Clearing 

Member.43 Under current OCC Rule 

2209A, a Lending Clearing Member is 

entitled to initiate a buy-in if a recall 

transaction fails to settle by the 

Settlement Time on the first stock loan 

business day after submitting the 

recall.44 Under OCC’s current rules, the 

Borrowing Clearing Member may return 

the Loaned Stock up until the time that 

the Lending Clearing Member that 

initiated the return or recall provides 

written notice to the Loan Market that 

it has executed the buy-in or sell-out. 

This process can lead to situations in 

which the Borrowing Clearing Member 

may return the Loaned Stock during the 

period between when buy-in becomes 

permissible, but before the Lending 

Clearing Member executes the 

transaction and provides written notice. 

OCC proposes to provide for 

enhanced controls over the buy-in 

process by amending current OCC Rule 

2209A(b), which would be renumbered 

OCC Rule 2216A(b) as part of the 

reorganization of Chapter XXIIA of 

OCC’s Rules. Proposed OCC Rule 

2216A(b) would be amended to provide 

that upon timely notice from the 

Lending Clearing Member that it intends 

to execute a buy-in after a Borrowing 

Clearing Member fails to return the Loan 

Stock following a recall transaction, 

OCC would prevent the Borrowing 

Clearing Member from returning the 

Loaned Stock while the Lending 

Clearing Member executes the buy-in. 

Until such time as the Lending Clearing 

Member provides such notice, OCC 

would recognize the Borrowing Clearing 

Member’s return of the Loaned Stock. 

The stock loan and stock borrow 

positions would remain open until such 

time as the Lending Clearing Member 

provides notice that the buy-in is 

complete. 

(i) Supporting Canadian Clearing 

Members 

As described above, Canadian 

Clearing Members are currently limited 

to participation in OCC’s Hedge 

Program. The proposed changes would 

support Canadian Clearing Members in 

the Market Loan Program while 

preventing certain transactions that 

could give rise to tax withholding 

obligations. 

First, OCC would revise certain of 

OCC’s current By-Laws and Rules to 

recognize Canadian Clearing Members 

as potential participants in the Market 

Loan Program and address certain 

unique operational capabilities that will 

be required to support that 

participation: 

• OCC would revise paragraph (f) of 

OCC Rule 302 (Operational Capability) 

to include Canadian Clearing Members 

as among those members that qualify for 

participation in the Market Loan 


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45OCC understands that dividends on Eligible 

Stock of issuers that are not Canadian residents are 

exempt from taxation on dividends under 

subsection 212(2.1) of the Income Tax Act (Canada) 

when paid as part of a fully collateralized stock 

lending arrangement pursuant to 2021 amendments 

thereto. 

46The U.S. Supreme Court has characterized 

interest as ‘‘compensation for the use or forbearance 

of money.’’ See Deputy v. du Pont, 308 U.S. 488, 

498 (1940). Positive Rebate is a payment from the 

Lending Clearing Member to the Borrowing 

Clearing Member equal to the amount of cash 

collateral posted by the Borrowing Clearing Member 

multiplied by a positive rebate rate. The Lending 

Clearing Member has the right to use the cash 

collateral during the term of the stock loan. 

Accordingly, Positive Rebate represents a payment 

by the Lending Clearing Member to the Borrowing 

Clearing Member for the right to use the cash 

collateral and therefore is properly characterized as 

interest. 

Program, including by providing for 

such Canadian Clearing Members to 

settle transactions through a CDS subaccount at the Depository, as they do 

under the Hedge Program today. 

• OCC would further revise and 

restate paragraph (f) to consolidate the 

subparagraphs specific to the 

operational requirements for 

participation in the Hedge Loan 

Program and the Market Loan Program. 

The current division can be attributed to 

the evolution of those programs, which 

led OCC to make approval for 

participation in the Hedge Loan 

Program—OCC’s initial Stock Loan 

Program—a condition for participation 

in the Market Loan Program. The 

proposed changes would consolidate 

the provisions so that the present 

division does not serve as an 

impediment to the planned 

decommission of the Hedge Loan 

Program. Requirements specific to a 

particular program, or a particular 

means of initiating a Stock Loan through 

one of the Stock Loan Programs, would 

be amended to delineate the scope of 

applicability. 

• OCC would revise OCC Rule 306A 

(Event-Based Reporting) to reflect that a 

Canadian Clearing Member’s obligation 

to notify OCC if CDS has or likely will 

cease to act for that Canadian Clearing 

Member extends to such members that 

participate in both Stock Loan 

Programs. 

• OCC would replicate OCC Rule 

2201(c), which concerns a Canadian 

Clearing Member’s appointment of CDS 

for purposes of settling Hedge Loan 

delivery-versus-payment transactions, 

as proposed OCC Rule 2207A(c). As 

such, the same requirements would 

apply to Canadian Clearing Members 

that participate in the Market Loan 

Program. 

In making its determination to extend 

the Market Loan Program to Canadian 

Clearing Members, OCC has also 

considered OCC’s ability to offer that 

program’s expanded guaranty to 

Canadian Clearing Members without 

incurring tax or withholding obligations 

on the associated payment obligations. 

Under the expanded Market Loan 

Program, OCC would clear and settle the 

types of cash distributions, such as 

substitute dividend and rebate 

payments, that OCC does not guarantee 

under the Hedge Program and must be 

resolved bilaterally by Hedge Clearing 

Members, away from OCC. OCC believes 

its current Rules already provide the 

framework to allow Canadian Clearing 

Members to transact under the Market 

Loan Program without imposing tax 

withholding obligations on payments 

made or received by OCC. As discussed 

above, OCC currently imposes 

obligations on Canadian Clearing 

Members intended to allow OCC to clear 

listed options transactions free from tax 

withholding obligations on dividend 

equivalent payments or deemed 

payments. Current OCC Rule 202 

generally would also allow OCC to make 

substitute dividend payments to 

Canadian Clearing Members as Lending 

Clearing Members under the enhanced 

Market Loan Program without imposing 

tax or withholding obligations. While 

OCC understands that, subject to the 

conditions in OCC Rule 202, OCC’s 

payments of substitute dividends to 

Canadian Clearing Members would not 

be subject to withholding, OCC would 

report substitute dividend payments to 

the IRS using information provided by 

the Canadian Clearing Members, as OCC 

currently does for dividend equivalent 

payments or deemed payments to 

Canadian Clearing Members in 

connection with listed options 

transactions. Pursuant to current OCC 

Rule 202(b)(5), the Canadian Clearing 

Member is required to indemnify OCC 

for any loss, liability or expense 

(including taxes and penalties) it may 

sustain as a result of the member’s 

failure to comply with requirements of 

OCC Rule 202(b). 

Current OCC Rule 202(b) also 

provides OCC with authority to prohibit 

or limit specific transactions with 

respect to non-U.S. members that may 

give rise to tax or withholding 

obligations. Pursuant to that authority, 

OCC expects to impose certain 

limitations on the Market Loan activity 

of Canadian Clearing Members to 

address specific situations in which tax 

withholding obligations might 

otherwise arise, including limitations on 

transactions involving (i) Canadian 

underlying securities, (ii) Positive 

Rebate, and (iii) Negative Rebate. 

(i) Canadian Securities 

Pursuant to OCC Rule 202(b), OCC 

would preclude Canadian Clearing 

Members from executing Market Loan 

transactions as a Borrowing Clearing 

Member, whether on behalf of a 

customer or for its own account, for 

which the Loaned Stock is issued by a 

Canadian issuer because of tax 

withholding obligations under Canadian 

law for substitute dividend payments 

that would be owed by the Canadian 

Clearing Member in its capacity as the 

lender. OCC understands that under 

Canadian law, the loan of a security 

issued by a Canadian company would 

be treated as a loan of the underlying 

shares for Canadian tax purposes. The 

substitute dividend paid by the 

Canadian Clearing Member as the 

Borrowing Clearing Member to OCC, in 

its capacity as the lender, would be a 

payment made by the Canadian Clearing 

Member, as a corporation, to OCC of a 

dividend payable on the underlying 

securities under subparagraph 

260(8)(a)(ii) of the Income Tax Act 

(Canada), and the payment would be 

subject to Canadian withholding tax 

under subsection 212(2) of that act. 

Accordingly, a Borrowing Clearing 

Member would be precluded from 

initiating a Market Loan in its capacity 

as a Borrowing Clearing Member 

because the Canadian Clearing Member 

could not fulfil its obligation under 

OCC’s Rules to provide a substitute 

dividend payment free from tax and 

withholding obligations. OCC 

understands that no similar tax 

withholding obligation would exist for 

substitute dividend payments with 

respect to a Canadian underlying 

security made by OCC, in its capacity as 

the borrower, to a Canadian Clearing 

Member that was a Lending Clearing 

Member.45

(ii) Positive Rebate 

OCC believes that OCC Rule 202 also 

allows OCC to clear and settle Positive 

Rebate payments to Canadian Clearing 

Members in connection with Market 

Loans without introducing tax 

withholding obligations. While neither 

the I.R.C. or IRS regulations specifically 

provide for the treatment of rebate 

payments, OCC believes that Positive 

Rebate would be treated as interest for 

U.S. federal tax purposes because 

Positive Rebate compensates the 

Borrowing Clearing Member for the use 

of the cash collateral by the Lending 

Clearing Member,46 and would therefore 

constitute U.S.-source ‘‘fixed or 

determinable annual or periodic 

income,’’ or ‘‘FDAPI,’’ under section 

1442 of the I.R.C. While U.S.-source 

FDAPI generally is subject to a 30% U.S. 

withholding tax when paid to a foreign 


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47See Treas. Reg. 1.1441–1(e)(5)(iv) (‘‘If a 

withholding agent makes a payment of an amount 

subject to withholding under chapter 3, a reportable 

payment (as defined in section 3406(b)), or a 

withholdable payment to a qualified intermediary 

that represents to the withholding agent that it has 

assumed primary withholding responsibility for the 

payment, the withholding agent is not required to 

withhold on the payment.’’). 

48See supra note 27. 

49See 26 U.S.C. 894; Canada Treaty, Art. XI(1). 

50See OCC Rule 202(b)(4). 

51See Exchange Act Release No. 97439 (May 5, 

2023), 88 FR 30373, 30373 (May 11, 2023) (SR– 

OCC–2023–002). 

corporation, exemptions from 

withholding apply to (i) payments to a 

Qualified Intermediary in its capacity as 

an intermediary that has accepted 

primary withholding responsibility, and 

(ii) interest paid to a Canadian Clearing 

Member that qualifies for an exemption 

from withholding on interest under 

Article XI of the Convention Between 

the United States of America and 

Canada with Respect to Taxes on 

Income, October 16, 1980, as amended 

by subsequent Protocols (the ‘‘Canada 

Treaty’’). 

A Qualified Intermediary that has 

accepted primary withholding 

responsibility is exempt from U.S. 

federal withholding on payments from a 

withholding agent, including U.S.- 

source interest, received in its capacity 

as an intermediary.47 Accordingly, OCC 

understands that rebate payments 

(whether Positive Rebate or Negative 

Rebate) to a Canadian Clearing Member 

in its capacity as a Qualified 

Intermediary, may be made by OCC free 

from withholding, consistent with 

treatment of dividend equivalent 

payments in connection with listed 

options transactions. As discussed 

above,48 Canadian Clearing Members 

are required to be Qualified 

Intermediaries as a condition of 

membership under OCC Rule 202. As 

with substitute dividends, OCC would 

add payment of rebates for transactions 

in a Canadian Clearing Member’s 

capacity as a Qualified Intermediary to 

the current reporting OCC submits to 

the IRS for dividend equivalent 

payments on listed options, based on 

information to be received from the 

Canadian Clearing Member pursuant to 

current OCC Rule 202(b)(3). 

With respect to Positive Rebate 

payments on Market Loans initiated by 

a Canadian Clearing Member in its 

capacity as principal, OCC would 

require Canadian Clearing Members to 

demonstrate, pursuant to OCC Rule 202, 

that such payments are subject to 

exemption from U.S. withholding 

obligations under the Canada Treaty. 

Article XI(1) of the Canada Treaty 

reduces the rate of withholding from 

30% to zero for U.S.-source interest 

beneficially owned by a resident of 

Canada entitled to treaty benefits, 

provided that income is not attributable 

to a permanent establishment, within 

the meaning of the Canada Treaty, or 

effectively connected with a trade or 

business conducted in the United 

States.49 Under current OCC Rule 

202(b)(2), an FFI Clearing Member must 

certify annually to OCC that the member 

satisfies the requirements of OCC Rule 

202 by submitting appropriate tax 

documentation. A Canadian Clearing 

Member participating in the Market 

Loan Program may evidence its 

entitlement to the benefits of the Canada 

Treaty with respect to interest by 

providing OCC with a correct and 

complete IRS Form W–8 BEN–E. Under 

OCC’s current Rules, a FFI Clearing 

Member must promptly inform OCC in 

writing if it undergoes a change in 

circumstances that would affect its 

compliance with Rule 202(b) or 

otherwise knows or has reason to know 

that it is not, or will not be, in 

compliance with OCC Rule 202(b), in 

each case, within two days of 

knowledge thereof.50

(iii) Negative Rebate 

Although exemptions for withholding 

requirements would apply to payment 

of Negative Rebate to a Canadian 

Clearing Member acting as a Qualified 

Intermediary with respect to customer 

transactions, OCC understands that 

there is a risk that no exemption from 

U.S. tax withholding would apply to the 

payment of Negative Rebate to a 

Canadian Clearing Member outside its 

capacity as a Qualified Intermediary. 

Therefore, pursuant to OCC Rule 202(b), 

OCC would limit Canadian Clearing 

Members from initiating Market Loans 

with a Negative Rebate as a Lending 

Clearing Member other than in its 

capacity as a Qualified Intermediary. In 

addition, OCC would limit Canadian 

Clearing Members’ ability to modify the 

rebate on a Market Loan to a Negative 

Rebate as a Lending Clearing Member 

other than in its capacity as a Qualified 

Intermediary. OCC’s new clearance and 

settlement system will prevent a 

Canadian Clearing Member from 

initiating or modifying a Market Loan to 

a Negative Rebate in its capacity as a 

Lending Clearing Member for its firm 

account. 

(j) Provide for Appointed and 

Appointing Clearing Members 

Currently, OCC Rule 302 requires that 

all participants in the Market Loan 

Program must be members of the 

Depository, DTC. As discussed above, 

OCC would also extend the Market Loan 

Program to Canadian Clearing Members 

by allowing for such members to settle 

Market Loan transactions through a CDS 

sub-account maintained at DTC. 

However, OCC recently filed and the 

Commission approved a proposed rule 

change to allow OCC to expand its 

membership to other types of 

participants who may or may not be 

members of the Depository, including 

bank members and members of 

jurisdictions other than the U.S. and 

Canada.51

In order to build a framework for 

accommodating such new types of 

members in the Market Loan Program, 

OCC proposes to revise OCC Rules 101, 

302 and proposed OCC Rules 2202A, 

2207A and 2216A to allow a Clearing 

Member participating in the Market 

Loan Program (the Appointing Clearing 

Member) to appoint an Appointed 

Clearing Member to make settlement of 

obligations arising from the initiation or 

termination of Market Loans, in a 

similar manner to how OCC Rule 901 

currently allows for Appointed and 

Appointing Clearing Members with 

respect to delivery or receipt of 

underlying securities arising from the 

exercise of equity options and maturity 

of stock futures, or how OCC Rule 2201 

current allows Canadian Clearing 

Members to appoint CDS as its agent for 

purposes of effective delivery orders for 

stock loan and stock borrow 

transactions. In lieu of membership at 

the Depository, establishing a 

relationship with an Appointed Clearing 

Member would be a means by which 

Clearing Members could access the 

Market Loan Program. Specifically, OCC 

would revise the current definitions in 

OCC Rule 101 for ‘‘Appointed Clearing 

Member’’ and ‘‘Appointing Clearing 

Member’’ to reference the initiation and 

termination of Market Loans. The 

definitions would also refer to proposed 

Rule 2207A (Instructions to the 

Corporation), which like current OCC 

Rule 901(f) would contain a paragraph 

providing the mechanism for such 

appointments. Proposed OCC Rules 

2202A and 2216A (Termination of 

Market Loans) would also provide for 

OCC to submit delivery orders to the 

Depository’s account for the Appointed 

Clearing Member in connection with the 

initiation or termination of a Market 

Loan, respectively. 

Enhancements To Facilitate OCC’s New 

Clearance and Settlement System 

In addition to the enhancements (a) 

through (j) above, which are specific to 

the Market Loan Program, except when 


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52 If these additional terms are not recorded on a 

Market Loan submitted to OCC, OCC would not 

make any assumptions and the fields would be left 

blank in OCC’s system. 

53See OCC By-Law Art. XXI, § 2(b); Art. XXIA, 

§ 5(a). 

otherwise indicated, the proposed rule 

change would also implement 

enhancements to both Stock Loan 

Programs to support the implementation 

of OCC’s new clearance and settlement 

system. Specifically, the proposed 

changes would (k) replace the legacy 

practice of position aggregation with 

contract-level recordkeeping; (l) align 

the settlement of daily mark-to-market 

of cash collateral to accounts; (m) 

simplify the mark-to-market calculation 

to focus on the change to the contract 

value of a Clearing Member’s Stock 

Loan; and (n) allow for re-matching of 

Matched-Book Positions across both 

Stock Loan Programs in the event of a 

Clearing Member default and 

suspension. 

(k) Contract-Level Recordkeeping 

OCC proposes to eliminate the legacy 

practice of aggregating stock loan and 

stock borrow positions for the same 

Eligible Stock in favor of contract-level 

accounting, consistent with industrystandard bookkeeping practices. Under 

the new contract-based approach, each 

Stock Loan (i.e., a stock loan position or 

stock borrow position) would be a 

distinct contract and no aggregation 

would be done when positions are 

recorded in accounts. Every new loan 

that is recorded will generate a new 

stock borrow position and stock loan 

position for the number of shares lent 

and borrowed. Contract-level 

recordkeeping would allow Clearing 

Members to see more precisely the 

contracts with shares lent by lender and 

borrower, which aligns to industry 

standard recordkeeping. By maintaining 

stock loan positions and stock borrow 

positions at the contract level, OCC 

would also be able to record additional 

terms, including but not limited to: (a) 

rebate rate; (b) whether the rebate rate 

is a fixed or a floating value (and if 

floating the interest rate benchmark); 

and (c) end date if it is a term loan. 

Clearing Member submission of these 

additional terms would not be 

mandatory, and OCC would assume that 

no such terms exist unless otherwise 

directed by its Clearing Members.52

To implement contract-level 

recordkeeping, the proposed rule 

change would amend Article XXI, 

Sections 2 (Hedge Program) and Article 

XXIA, Section 5 (Market Loan Program) 

of OCC’s By-Laws, retained portions of 

which would migrate to become OCC 

Rules 2203 and 2206A, respectively. 

Specifically, OCC would amend 

proposed Rule 2203(c)(1)–(2) and 

2206A(b)(1)–(2) to delete the text 

providing for the aggregation of 

positions, which OCC proposes to 

eliminate. In addition, OCC would 

delete the last sentence of Article XXI, 

Section 2(b) and Article XXIA, Section 

5(b), as relocated to proposed OCC 

Rules 2203(d)(2)(B) and 2006A(a)(2), 

which provide that OCC shall identify 

stock loan and stock borrow positions 

resulting from Hedge Loans separately 

from positions resulting from Market 

Loans. Because OCC proposes to 

eliminate position aggregation 

altogether, this prohibition against 

aggregating positions across programs 

would no longer be relevant. 

The proposed changes would also 

allow OCC to record additional terms at 

the contract level. The By-Laws 

currently provide that upon acceptance 

of a Hedge Loan or Market Loan, OCC 

creates a stock loan position and stock 

borrow position in the account 

designated by the Lending Clearing 

Member and Borrowing Clearing 

Member, respectively, that identifies the 

Eligible Stock, the number of shares 

loaned, the amount of Collateral 

received, and the identities of the 

Lending Clearing Member or the 

Borrowing Clearing Member, as 

applicable.53 OCC proposes to amend 

proposed OCC Rules 2203(d)(2)(A) and 

2206A(a)(1) to provide that in addition 

to those terms, which are required for 

OCC’s acceptance of a Hedge Loan or 

Market Loan, OCC would record such 

additional terms that the Clearing 

Members may provide at the contract 

level. Such additional terms could 

include, but are not limited to, rebate 

rate, interest rate benchmark and loan 

term. Pursuant to proposed additions to 

proposed OCC Rules 2202(b)(2)(E) and 

2202A(b)(2)(E), recording additional 

terms that are not associated with OCC’s 

guaranty (i.e., rebate rate and interest 

rate benchmark with respect to Hedge 

Loans, and loan term with respect to 

both Hedge Loans and Market Loans) 

would not impose any additional 

obligations on OCC. Rather, they would 

be additional terms as between the 

parties that survive OCC’s novation and 

would be recorded in OCC’s system for 

the Clearing Members’ convenience. 

In addition to the changes related to 

proposed OCC Rules 2203 and 2206A 

above, OCC would make conforming 

changes to other provisions to reflect the 

change from position-level to contractlevel record keeping: 

• Current Interpretation and Policy 

.01 to OCC Rules 2201 and 2201A (i.e., 

proposed OCC Rules 2206(b) and 

2206A(d) per the reorganization 

discussed below), which concern the 

transfer of stock loan positions or stock 

borrow positions between Clearing 

Member accounts, would be amended to 

delete the phrase ‘‘all or any portion of’’ 

as it relates to stock loan or stock 

borrower positions, and the text 

‘‘provided, that any such transfer will 

result in the transfer of all shares related 

to the relevant stock loan position or 

stock borrow position’’ would be added. 

These changes reflect that stock loan 

positions and stock borrow positions 

would be recorded at the contract level 

and would not be aggregated. 

Accordingly, any transfer of a stock loan 

position or stock borrow position (each 

representing an individual contract) 

would be for all shares that are the 

subject of the contract. 

• Current Interpretation and Policy 

.02 to OCC Rule 2201 (i.e., proposed 

OCC Rule 2206(c)(1) per the 

reorganization discussed below), which 

concerns how OCC would apply Hedge 

Loan return instructions received from 

DTC to a Clearing Member’s default 

account, would be modified to eliminate 

functionality in ENCORE for Clearing 

Members to designate OCC accounts in 

DTC delivery orders that is not currently 

utilized by Clearing Members 

participating in the Hedge Loan Program 

and, accordingly, is not being built for 

the new clearance and settlement 

system. To account for the shift to 

contract-level recordkeeping, OCC 

would also add OCC Rule 2206(c)(2), 

which would provide that returns will 

decrease the number of shares borrowed 

beginning with the oldest Hedge Loan 

between the Borrowing Clearing 

Member and the Lending Clearing 

Member on OCC’s books and records. If 

the return exhausts the oldest Hedge 

Loan, OCC would decrement the next 

oldest, and so on and so forth. 

• Current Interpretation and Policy 

.02 to OCC Rule 2201A (i.e., proposed 

OCC Rule 2206A(e) per the 

reorganization discussed below), which 

concerns how Market Loan return 

instructions would be applied to a 

Clearing Member’s accounts, would be 

amended to reflect that if there are 

insufficient shares in the account 

designated by the delivery order 

submitted to OCC, or in the default 

account if the delivery order did not 

specify an account, OCC would reject 

the return instruction rather than fulfill 

the return to the extent of the shares in 

the designated or default account, as 

applicable. If an account was designated 

in the delivery order, OCC would fulfill 

the return based only on that account 

and would reject the return instruction 


khammond on DSKJM1Z7X2PROD with NOTICES
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54See Exchange Act Release No. 40083 (June 11, 

1998), 63 FR 33424–01 (Jun 18, 1998) (File No. SR– 

OCC–98–03); Exchange Act Release No. 39738 (Mar. 

10, 1998), 63 FR 13082 (Mar. 17, 1998) (File No. 

SR–OCC–97–11). 55See OCC Rules 2204(a); 2204A(a). 56See OCC Rule 2212. 

if sufficient shares were not available in 

that account rather than applying shares 

in the default account to cover the 

excess. 

• Current OCC Rule 2209A(a)(2) (i.e., 

proposed OCC Rule 2216A(a)(5) per the 

reorganization discussed below), which 

concerns the termination of Market 

Loans upon receipt of end-of-day 

information from DTC concerning 

return or recall delivery orders, would 

be amended to delete the phrase ‘‘and 

reduce the respective Clearing Members’ 

open stock loan and stock borrow 

positions accordingly.’’ This phrase 

refers to adjustments required for 

aggregated stock loan and stock borrow 

positions, which would not be relevant 

under the contract-level recordkeeping 

proposal. OCC would also remove the 

phrase ‘‘the end of the day’’ with respect 

to the stock loan activity files it receives 

from DTC because OCC receives and 

processes such information from DTC 

throughout the business day. 

(l) Aligning Mark-to-Market Settlement 

to Accounts 

Under the proposed rules designed to 

facilitate OCC’s new clearance and 

settlement system, OCC would end the 

practice of limiting cash settlement of 

daily mark-to-market of cash collateral 

to the Clearing Member’s firm account 

or combined Market-Makers’ account. 

Instead, cash settlement will occur in 

the account in which the stock loan or 

stock borrow position is held. OCC 

implemented the current structure for 

settlement of mark-to-market payments 

in 1997 and 1998.54 At that time, OCC 

believed that settlement through a firm’s 

lien account would prevent premiums 

by option writers (which constitute 

customer funds) from being netted 

against stock loan mark-to-market 

payments from a clearing member 

(which do not constitute customer 

funds). The assumption at the time 

appears to have been that stock loan 

transactions would be limited to loans 

initiated by a Clearing Member in its 

capacity as principal. However, fully 

paid for lending programs have 

developed over the last two decades that 

allow customers to earn returns on their 

portfolios by allowing their broker to 

lend their shares. 

The proposed change would align 

mark-to-market cash settlements with 

positions by deleting current OCC Rules 

2201(a)(iii) and 2201A(a)(iii), as 

relocated to proposed OCC Rules 

2207(a)(1)(C) and 2207A(a)(1)(C), which 

require Clearing Members to provide 

OCC with standing instructions 

identifying the Clearing Member’s firm 

accounts or combined Market-Makers’ 

accounts from which mark-to-market 

payments are to be made. No standing 

instruction would be needed because 

OCC will simply settle the mark-tomarket payments in whichever account 

the stock loan or stock borrow position 

is held. In addition, OCC would amend 

current OCC Rules 2204(a) and 

2204A(a), the relevant portions of which 

would be renumbered OCC Rules 

2209(a) and 2209A(a), respectively, to 

provide that any mark-to-market 

payment shall be made in the account 

in which the Hedge Loan or Market 

Loan is held. 

OCC would also delete the last clause 

to Interpretation and Policy .04 to Rule 

1104, which concerns the use of a 

Liquidating Settlement Account to 

satisfy mark-to-market obligations 

arising from a suspended Clearing 

Member’s stock loan or borrow 

positions in customers’ accounts. That 

clause provides for use of the 

Liquidating Settlement Account 

notwithstanding that such mark-tomarket payments may settle in another 

account under current Rules 2201(a) 

and 2201A(a). This clarifying clause 

would no longer be relevant because of 

the alignment of settlement with the 

accounts in which the positions are 

held. 

(m) Simplifying Mark-to-Market 

Calculations 

Because OCC proposes to end the 

practice of aggregating stock loan and 

stock borrow positions, OCC also 

proposes to simplify the mark-to-market 

calculation described in proposed OCC 

Rules 2209 and 2209A. Currently, the 

mark-to-market calculation focuses on 

the value of the loaned shares of stock.55

Specifically, it takes the quantity of 

stock that is on loan each morning and 

marks it to a closing price each night. 

Quantities of stock that correspond to 

new loans put on during the day are 

also marked to the end-of-day closing 

price. As such, the calculation was 

designed with the practice of 

aggregating stock loan and stock borrow 

positions for the same Eligible Stock in 

mind. The proposed mark-to-market 

calculation will instead focus on the 

change to the contract value of a 

Clearing Member’s stock loans. 

Specifically, proposed OCC Rules 

2209(b) and 2209A(b) would provide 

that the mark-to-market payment will be 

the amount necessary to cause the 

amount of Collateral to be equal to the 

Collateral requirement applicable to the 

Stock Loan. For Hedge Loans, the 

Collateral requirement is either 100% or 

102% of the mark-to-market value of the 

Loaned Stock, depending on which 

percentage the parties selected when 

initiating the Hedge Loan. For Market 

Loans, as discussed above, the Collateral 

requirement would be fixed at 102% of 

the value of the Loaned Stock, which is 

the collateralization for all Market Loans 

currently. While this proposed 

amendment would change the way OCC 

makes mark-to-market calculations, the 

change would have no impact on the 

results of the calculation. 

(n) Re-Matching Matched Book 

Positions in Suspension Across Stock 

Loan Programs 

The proposed changes would also 

extend OCC’s authority to close out and 

re-establish the Matched-Book Positions 

of a suspended Clearing Member to the 

Market Loan Program and would allow 

re-matching in suspension across the 

Hedge and Market Loan Programs. 

Under the current Hedge Program, OCC 

has authority to terminate MatchedBook Positions by offset and rematching with other Clearing 

Members.56 OCC’s authority to re-match 

Matched-Book Positions in suspension 

facilitates the orderly and efficient 

termination and re-establishment of 

stock loans involving suspended 

Clearing Members, thereby mitigating 

operational and price dislocation risks 

that may arise for non-defaulting 

Clearing Members if OCC were required 

to unwind positions by recalling all 

borrowed securities from specific 

Borrowing Clearing Members and 

returning those securities to specific 

Lending Clearing Members. Extending 

such re-matching authority to the 

Market Loan Program and allowing rematching across OCC’s two Stock Loan 

Programs would also align OCC’s closeout processes with how OCC already 

margins stock loan and borrow 

positions. Specifically, stock loan and 

borrow positions covering the same 

Eligible Stock in either program are 

treated under OCC’s margin 

methodology as fungible and are 

permitted to offset one another in 

calculating a Clearing Member’s margin 

requirement for the relevant account. 

OCC would extend re-matching 

authority and allow for re-matching 

across programs by inserting a new OCC 

Rule 2219A to the Rules governing the 

Market Loan Program. The new rule 

would be similar in structure and 

content to current OCC Rule 2212, 

which concerns re-matching in 


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suspension for the Hedge Program. 

Proposed OCC Rule 2219A(a) would 

provide that, in the event that a 

suspended Clearing Member has 

Matched-Book Positions within the 

Hedge or Market Loan Programs, OCC 

will, upon notice to affected Clearing 

Members, close out the suspended 

Clearing Member’s Matched-Book 

Positions to the greatest extent possible 

by (i) the termination by offset of stock 

loan and stock borrow positions that are 

Matched-Book Positions in the 

suspended Clearing Member’s 

account(s) and (ii) OCC’s re-matching in 

the order of priority in paragraph (c) of 

stock borrow positions for the same 

number of shares in the same Eligible 

Stock maintained in a designated 

account of a Matched-Book Borrowing 

Clearing Member against a stock lending 

position for the same number of shares 

in the same Eligible Stock maintained in 

a designated account of a Matched-Book 

Lending Clearing Member. 

Under proposed OCC Rule 2219A(b), 

as under current OCC Rule 2212(b), the 

Matched-Book Borrowing Clearing 

Member and Matched-Book Lending 

Clearing Member would not be required 

to issue instructions to DTC to terminate 

the relevant stock loan and stock borrow 

positions or to initiate new stock loan 

transactions to reestablish such 

positions, as the affected positions 

would be re-matched without requiring 

the transfer of securities against the 

payment of settlement prices. 

Proposed OCC Rule 2219A(c), as 

under current OCC Rule 2212(c), would 

provide that OCC shall make reasonable 

efforts to re-match Matched-Book 

Borrowing Clearing Members with 

Matched-Book Lending Clearing 

Members that maintain MSLAs 

executed between them, based upon 

information provided by Clearing 

Members to OCC on an ongoing basis. 

OCC would be entitled to rely on, and 

would have no responsibility to verify, 

the MSLA records provided by Clearing 

Members and on record as of the time 

of re-matching. As under current OCC 

Rule 2212(d), proposed Rule OCC 

2219A(c)(1) through (13) would require 

the termination by offset and rematching be done using a matching 

algorithm in which the Matched-Book 

Positions of the suspended Clearing 

Member are first terminated by offset 

and then affected Matched-Book 

Borrowing Clearing Members and 

Matched-Book Lending Clearing 

Members are re-matched in order of 

priority based first upon whether the rematched Clearing Members have an 

existing MSLA between them or, in the 

case of Anonymous Market Loans, can 

be kept anonymous by re-matching with 

a Matched-Book Position that is another 

Anonymous Market Loan initiated 

through the same Loan Market. OCC 

believes prioritizing the re-matching of 

Disclosed Market Loans between parties 

that have MSLAs and re-matching that 

results in maintaining Anonymous 

Market Loans will limit the number of 

returns that may be initiated for rematching that results in Disclosed 

Market Loans between parties who have 

not executed an MSLA. 

Specifically, under the re-matching 

algorithm, OCC would select the largest 

stock loan or stock borrow position in 

a given Eligible Stock from the 

suspended Clearing Member’s MatchedBook Positions within the Hedge 

Program. The selected positions would 

then be re-matched with the largest 

available stock borrow or stock loan 

positions within the Hedge Program, as 

applicable, for the selected Eligible 

Stock for which a MSLA exists between 

a Matched-Book Borrowing Clearing 

Member and a Matched-Book Lending 

Clearing Member. OCC would repeat 

this process until all potential rematching between Matched-Book 

Borrowing Clearing Members and 

Matched-Book Lending Clearing 

Members with MSLAs is completed for 

positions within the Hedge Program. 

Simultaneously, OCC would perform 

the same re-matching process within the 

Market Loan Program for (i) MatchedBook Positions that are Disclosed 

Market Loans for which a MSLA exists 

between a Matched-Book Borrowing 

Clearing Member and a Matched-Book 

Lending Clearing Member, and (ii) 

Matched-Book Positions that are 

Anonymous Market Loans initiated 

through the same Loan Market. After rematching to the extent possible within 

the Market Loan Program based on 

manner of initiation and trade source, 

OCC would proceed to re-match 

Matched-Book Positions within the 

Market Loan Program for which an 

MSLA exists between a Matched-Book 

Borrowing Clearing Member and a 

Matched-Book Lending Clearing 

Member, without regards to whether 

Matched-Book Position was part of a 

Disclosed Market Loan or Anonymous 

Market Loan. 

After matching Matched-Book 

Positions to the extent possible between 

borrowers and lenders with existing 

MSLAs within both the Hedge Program 

and the Market Loan Program, OCC 

would then select the largest remaining 

stock loan or stock borrow positions for 

a given Eligible Stock regardless of 

whether the position is a Hedge Loan or 

a Market Loan and re-match it with the 

largest available stock borrow or stock 

loan position for the selected Eligible 

Stock in the other Stock Loan Program 

for which an MSLA exists between the 

lenders and borrowers in the other 

Stock Loan Program, regardless of 

whether the Market Loan selected or 

matched is a Disclosed Market Loan or 

Anonymous Market Loan. OCC would 

repeat this process until it has 

rematched all Matched-Book Positions 

to the extent possible between parties to 

existing MSLAs between the two Stock 

Loan Programs. 

After re-matching among lenders and 

borrowers with existing MSLAs, the 

process would then be repeated for all 

remaining Matched-Book Positions for 

which MSLAs do not exist between the 

lenders and borrowers. OCC would first 

complete such rematching to the extent 

possible within each program. The rematching process would then be 

repeated for all remaining MatchedBook Positions across the Stock Loan 

Programs for which MSLAs do not exist 

between the lenders and borrowers. 

Remaining positions that are not able to 

be rematched either within or across 

programs would then be closed-out 

pursuant to the rules governing closeout of Hedge Loans or Market Loans, as 

applicable. 

Under proposed OCC Rule 2219A(d), 

as under current OCC Rule 2212(e), in 

the event Borrowing and Lending 

Clearing Members are re-matched 

through this process, the re-matched 

positions would be governed by the predefined terms and instructions 

established by the Lending Clearing 

Member pursuant to renumbered OCC 

Rule 2207 (for Hedge Loans) or Rule 

2207A (for Market Loans). For MatchedBook Positions re-matched across 

programs, the resulting re-matched loan 

would be a Hedge Loan. If the rematched positions were Anonymous 

Market Loans, the resulting Loan would 

be an Anonymous Market Loan. 

However, if one of the positions was a 

Disclosed Market Loan or the positions 

were Anonymous Market Loans 

initiated through different Loan 

Markets, the resulting loan would be a 

Disclosed Market Loan. Going forward, 

such a Disclosed Market Loan would be 

deemed to have been initiated through 

OCC, which would facilitate rematching within the Market Loan 

Program for parties who are not 

subscribers to a Loan Market. Pursuant 

to proposed OCC Rule 2219A(j), the rematched Clearing Members may choose 

to execute an MSLA or close-out the rematched positions in accordance with 

proposed OCC Rules 2213 or 2216A, as 

applicable. 

Under proposed OCC Rule 2219A(e), 

which corresponds to the second 

sentence of current OCC Rule 2212(e), 


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57See Exchange Act Release No. 97439, supra 

note 51, 88 FR at 30377 (membership standards); 

Exchange Act Release No. 83735 (July 27, 2018), 83 

FR 37855, 36859 (File No. SR–OCC–2018–008) 

(Clearing Fund). 

58See By-Law Art. I, § 1.B.(4), E.(3), H.(1), L.(2), 

L.(5), M.(3)–(4), M.(7)–(9), S. (19), (21)–(23). Rule 

101 provides that terms in the Rules have the 

meanings defined in the By-Laws or as set forth in 

the Rules. 

59References to the definition of the terms ‘‘stock 

borrow position’’ and ‘‘stock loan position’’ in 

proposed Rule 101 would be retained in the ByLaws because these terms are referenced in certain 

other definitions in the By-Laws, as well as Article 

VI, Section 27 of the OCC By-Laws (Close-Out 

Netting). 

any change in Collateral requirements 

arising from a change in the terms of 

stock loan or stock borrow positions 

between a Lending Clearing Member 

and Borrowing Clearing Member with 

re-matched positions would be included 

in the calculation of the mark-to-market 

payment obligations on the stock loan 

business day following the completion 

of the positions adjustments as set forth 

in proposed OCC Rule 2219A(f). 

Under proposed OCC Rule 2219A(f), 

as under current OCC Rule 2212(f), the 

termination by offset and re-matching of 

positions would be complete upon OCC 

completing all position adjustments in 

the accounts of the suspended Clearing 

Member and the Borrowing Clearing 

Members and Lending Clearing 

Members with re-matched positions and 

the applicable systems reports are 

produced and provided to the Clearing 

Members reflecting the transactions. 

Under proposed OCC Rules 2219A(g) 

through (i), from and after the time OCC 

has completed the position adjustments 

as set forth in proposed OCC Rule 

2219A(f), the suspended Clearing 

Member would have no further 

obligations under the By-Laws and 

Rules with respect to such positions; 

however, a Borrowing Clearing Member 

with re-matched stock borrow positions 

would remain obligated as a Borrowing 

Clearing Member and a Lending 

Clearing Member with re-matched stock 

loan positions would remain obligated 

as a Lending Clearing Member as 

specified in the By-Laws and Rules 

applicable to the Stock Loan Programs. 

Furthermore, upon notification that 

OCC has completed the termination by 

offset and re-matching of stock loan and 

borrow positions, the suspended 

Clearing Member and Borrowing 

Clearing Members and Lending Clearing 

Members with re-matched positions 

would be required promptly to make 

any necessary bookkeeping entries at 

DTC to ensure the accuracy and efficacy 

of those stock loan terms not governed 

by OCC’s By-Laws and Rules. Under 

proposed OCC Rule 2219A(j), as under 

current OCC Rule 2212(j), Borrowing 

Clearing Members and Lending Clearing 

Members that have been re-matched 

would be required to work in good faith 

to either (i) reestablish any terms, 

representations, warranties and 

covenants not covered by the By-Laws 

and Rules (e.g., establish an MSLA) or 

(ii) terminate the re-matched stock loan 

or borrow positions in the ordinary 

course pursuant to OCC Rules 2213 or 

2216A, as applicable, as soon as 

reasonably practicable. 

Because OCC has designed proposed 

OCC Rule 2219A to address the process 

for re-matching in suspension in both 

Stock Loan Programs, OCC further 

proposes to delete current OCC Rule 

2212, which concerns re-matching in 

suspension for the Hedge Program, and 

replace it, as renumbered to proposed 

OCC Rule 2217, with a cross-reference 

to proposed OCC Rule 2219A. 

By-Laws and Rules Reorganization and 

Restatement 

OCC would also make a number of 

other clarifying, conforming, and 

organizational changes to OCC’s ByLaws and Rules, and rule-filed policies 

that reference the By-Law and Rules 

provisions governing the Stock Loan 

Programs. 

(a) Reorganization 

OCC proposes to reorganize the 

provisions of OCC’s By-Laws and Rules 

relating to the Stock Loan Programs into 

newly revised Chapter XXII (Hedge 

Loan Program) and Chapter XXIIA 

(Market Loan Program). This 

consolidation of rules governing the 

Stock Loan Programs is similar to 

changes OCC made to migrate By-Laws 

governing OCC’s Clearing Fund and 

membership standards to the Rules.57

As part of these changes, OCC would 

preserve the governance requirements 

concerning amendments to the stock 

loan-related By-Laws migrated to the 

Rules by amending Article XI, Section 2 

of the By-Laws. 

The provisions governing the Stock 

Loan Programs are currently found in 

Articles XXI and XXIA of OCC’s ByLaws and Chapters XXII and XXIIA of 

the OCC Rules. Because the proposed 

changes to the Stock Loan Programs 

would substantially amend the relevant 

By-Law and Rule provisions, OCC 

believes that this is an appropriate 

opportunity to consolidate the primary 

provisions that address the Stock Loan 

Programs into Chapters XXII and XXIIA 

of the Rules. As a result, the content of 

Articles XXI and XXIA of the By-Laws 

would be consolidated into Chapters 

XXII, XXIIA and, with respect to 

definitions, Chapter I of the OCC Rules, 

subject to the proposed amendments 

described in this rule filing. OCC would 

also migrate to the OCC Rules the 

definitions currently located in Article I 

of the By-Laws that are specific to the 

Stock Loan Programs.58 To account for 

migrated definitions of terms that are 

used elsewhere in the By-Laws, OCC 

would revise the By-Law definition to 

refer to the definition of that term in 

OCC Rule 101.59 OCC believes that 

consolidating the provisions governing 

the Stock Loan Programs into one place 

would provide more clarity around, and 

enhance the readability of, OCC’s rules 

governing the Stock Loan Programs. 

OCC has included a chart mapping the 

provisions moved from the By-Laws to 

the Rules, and the resulting 

renumbering of existing Rules, in 

Exhibit 3A to File No. SR–OCC–2024– 

011. 

To preserve the governance 

requirements for amendments to the ByLaw provisions that would be migrated 

to the Rules, OCC would also amend 

Article XI of the By-Laws. Specifically, 

OCC would amend Article XI, Section 2 

of the By-Laws, which requires the 

affirmative vote of two-thirds of the 

directors then in office (but not less than 

a majority of the number of directors 

fixed by the By-Laws) to amend certain 

enumerated provisions. Specifically, 

OCC would add Rule 2201, Rule 2203, 

Rule 2204, Rule 2205, Rule 2206(a) and 

(d), Rule 2213(e)(1), Rule 2214(e)(1), 

Rule 2201A, Rule 2203A, Rule 2204A, 

Rule 2205A and Rule 2206A(a)–(c) and 

(f) to these enumerated provisions. 

(b) Restatement 

In addition to consolidating the ByLaws and Rules specific to the Stock 

Loan Programs within the Rules, OCC 

proposes to restate those provisions and 

make certain other changes for clarity 

and consistency. The changes would 

include (i) global changes across the ByLaws and Rules to add courtesy titles 

and standardize terms; (ii) integration of 

Interpretations and Policies within the 

Stock Loan Program rules into the body 

of the text of the Rules themselves; and 

(iii) certain other administrative or 

technical changes to the rule text. 

(i) Global Changes 

Global changes to be applied across 

the By-Laws and Rules concerning the 

Stock Loan Programs include: 

• Adding courtesy titles to the 

beginning of paragraphs or other 

subdivisions, where appropriate, to aid 

the reader in locating provisions 

governing specific topics. 

• Replacing references to ‘‘Stock 

Loan’’ that are specific to the Hedge 

Program with ‘‘Hedge Loan’’ in order to 


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60See, e.g., Exhibit 5A to SR–OCC–2024–011, 

proposed OCC Rule 101.S.(6), (7), (9), (10); Rules 

2201–2206; Rules 2209–2216. 

61See, e.g., Exhibit 5A to SR–OCC–2024–011, 

proposed OCC Rule 1006(h)(C); Rule 2202; Rules 

2206–2210; Rules 2213- 2214; Rule 2215–17; Rule 

2202A; Rules 2207A–2212A; Rules 2216A–2219A. 

62See, e.g., Exhibit 5A to SR–OCC–2024–011, 

proposed OCC Rule 2206(b) (replacing Rule 2201, 

I&P .01); Rule 2206(c)(1) (replacing Rule 2201 I&P 

.02); Rule 2206(d) (replacing By-Law Art. XXI § 5, 

I&P .01); Rule 2214(e)(1) (replacing By-Law Art. XXI 

§ 2, I&P.01); Rule 2206A(d) (replacing Rule 2201A, 

I&P .01); Rule 2206A(e) (replacing Rule 2201A, I&P 

.02); Rule 2206A(f) (replacing I&P By-Law Art. 

XXIA § 5, I&P .01). 

63See, e.g., Exhibit 5A to SR–OCC–2024–011, 

proposed OCC Rule 2202(b)(1)–(3); Rule 2203(b)(1)– 

(2), (c)(1)–(2), (d)(1)–(2); Rule 2204(a)–(b); Rule 

2205(a)–(b); Rule 2207(a)(1)–(3); Rule 2213(b)(1)– 

(2); Rule 2214(b)(1)–(6), (c)(1)–(4); Rule 2216(a)–(d); 

Rule 2202A(b)(1)–(3); Rule 2206A(a)(1)–(2); Rule 

2207A(a)(1)–(3); Rule 2216A (d)(1)–(2); Rule 

2218A(a)–(d). 

64See, e.g., Exhibit 5A to SR–OCC–2024–011, 

proposed Rule 2202(b)(2)(A)–(E). 

65See, e.g., Exhibit 5A to SR–OCC–2024–011, 

proposed OCC Rule 101.C.(4), L.(2), M.(1), S.(2) 

(conforming language in definitions specific to 

Hedge Loans and Market Loans); Rule 2213 

(modifying title to ‘‘Termination of Hedge Loans’’ 

based on a similar title for current Market Loan 

Rule 2209A); Rule 2202A(b)(2)(E) (amending the 

Rule for initiation of Market Loans to include 

novation provisions governing Hedge Loans). 

66See, e.g., Exhibit 5A to SR–OCC–2024–011, 

proposed OCC Rule 2202(d) & I&P .01 (deleting 

duplicative Borrowing Clearing Member obligations 

located in proposed OCC Rules 2209 and 2211); 

Rule 2202A(e) (deleting duplicative Borrowing 

Clearing Member obligations located in proposed 

OCC Rules 2209A and 2211A). 

67See https://www.theocc.com/ParticipantResources (linking to reference guides and timelines 

for the launch of Ovation). 

68 15 U.S.C. 78q–1(b)(3)(F). 

better differentiate between Hedge 

Loans and Market Loans while the 

Hedge Program is still in place. Use of 

the defined term ‘‘stock loan’’ would be 

retained when referring to either a 

Hedge Loan or a Market Loan or both as 

the context requires.60 Reference to the 

‘‘Stock Loan/Hedge Program’’ would 

remain unchanged. 

• Replacing references to ‘‘Hedge 

Clearing Member’’ or ‘‘Market Loan 

Clearing Member’’ with ‘‘Clearing 

Member,’’ ‘‘Borrowing Clearing 

Member,’’ or ‘‘Lending Clearing 

Member,’’ as applicable, to simplify 

OCC’s membership structure and reflect 

that Clearing Members may be 

authorized to transact in either 

program.61

(ii) Interpretations and Policies 

OCC would also relocate current 

Interpretations and Policies (‘‘I&P’’) 

within Chapters XXI and XXIA of the 

Rules by moving those provisions 

within the body of the applicable Rules, 

subject to any further amendments 

discussed herein. The location of the 

text as reorganized within the Rules is 

included in Exhibit 3A to SR–OCC– 

2024–011 and noted in footnotes to the 

proposed rule text in Exhibit 5A to SR– 

OCC–2024–011.62 OCC believes that 

consolidating the I&Ps, which have no 

less legal effect than the text of the 

Rules themselves, would provide more 

clarity around, and further enhance the 

readability of, OCC’s Rules governing 

the Stock Loan Programs. 

In certain instances, OCC is proposing 

to eliminate the existing Interpretations 

and Policies altogether: 

• Interpretations and Policies .01 to 

current OCC Rules 2202 and 2202A, 

which concern the position information 

OCC provides to Clearing Members on 

an intraday basis, would be deleted 

because they concern a topic covered by 

and more properly addressed in 

proposed OCC Rules 2210 and 2210A 

(Daily Reports). The specific 

information referenced in those 

Interpretations and Policies—i.e., new 

position, transfer positions, returns and 

cancels—would be integrated into the 

proposed Rules. 

• I&P .01 to current OCC Rule 2210 

(Suspension of Hedge Clearing 

Members—Pending and Open Stock 

Loans) and OCC Rule 2210A 

(Suspension of Market Loan Clearing 

Members—Pending and Open Market 

Loans)—which refers the reader to 

Interpretation and Policy .02 of OCC 

Rule 1104 for a description of OCC’s 

private auction process—would be 

deleted. In its place, a cross-reference to 

that description would be added to 

paragraph (b) of that Rule, as 

renumbered to OCC Rule 2215 per the 

reorganization discussed above. 

(iii) Administrative Changes 

OCC would also improve the clarity 

and readability of certain Rules, 

including by: 

• breaking certain lengthy Rule 

provisions into subparagraphs with 

additional convenience headings to aid 

the reader in navigating the 

requirements and obligations therein; 

• numbering provisions with 

multiple paragraphs that are currently 

unnumbered, in whole or in part, or 

with lengthy provisions that can be split 

into multiple paragraphs, and adding 

convenience headings to paragraphs, 

where such convenience headings 

would be helpful to the reader.63

• renumbering subdivisions in 

Chapters XXII and XXIIA based on a 

consistent numbering convention for (a) 

paragraphs, (1) subparagraphs, and (A) 

items.64

• updating cross-references found 

throughout the By-Laws and Rules 

based on the proposed reorganization 

and renumbering. 

• improving consistency of the text 

between similar Hedge Program and 

Market Loan Program rules; 65

• deleting duplicative provisions of 

the Rules that merely refer the reader to 

substantive rights and obligations 

located elsewhere in the Rules; 66

OCC would also make conforming 

edits to OCC’s Margin Policy and the 

Recovery and Orderly Wind-Down Plan 

(‘‘RWD Plan’’). Specifically, OCC’s 

Margin Policy references OCC’s default 

management practices under current 

Rules 2211 and 2211A, which provide 

that OCC may instruct a non-defaulting 

Clearing Member to buy-in or sell-out of 

positions. The proposed rule change 

would renumber those references to 

Rules 2216 and 2218A, respectively. 

OCC would also amend the description 

of the margin add-on in the Margin 

Policy to capture the full range of factors 

that determine the margin add-on 

charge for stock loan activity (i.e., 

collateral rate, mark-to-market pricing, 

dividends and distributions announced 

by an issuer, and rebate payments). 

Similarly, references in the RWD Plan to 

Section 2(c) of Article XXI of the ByLaws and Rule 2209A(d), which refer to 

OCC’s authority to terminate the Stock 

Loan Programs, would be renumbered to 

proposed Rules 2213(e) and 

2216A(d)(2), respectively, and the 

excerpted text of those Rules appearing 

in the RWD Plan would be conformed 

with the text as amended by this 

proposed rule change. 

Implementation Timeframe 

OCC will implement the proposed 

changes at the time Ovation becomes 

OCC’s system of record, which is 

planned to launch no earlier than July 

of 2025.67 OCC will announce the 

implementation date of the proposed 

change by Information Memorandum 

posted to its public website at least four 

weeks prior to implementation. OCC 

plans to launch Ovation and implement 

the proposed changes no later than 

December 31, 2025, and OCC will 

announce another intended 

implementation date by Information 

Memorandum posted to its public 

website if the changes will not be 

implemented by that date. 

(2) Statutory Basis 

OCC believes the proposed rule 

change is consistent with Section 17A of 

the Exchange Act and the rules and 

regulations thereunder. Section 

17A(b)(3)(F) of the Exchange Act 68

requires, among other things, that the 

rules of a clearing agency (i) promote 

the prompt and accurate clearance and 


khammond on DSKJM1Z7X2PROD with NOTICES
73482 Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices 

69 15 U.S.C. 78q–1(b)(3)(F). 

70 17 CFR 240.17Ad–22(e)(13). 

71 17 CFR 240.17Ad–22(e)(23). 

72 17 CFR 240.17Ad–22(e)(13). 

73 17 CFR 240.17Ad–22(e)(23). 

74 15 U.S.C. 78q–1(b)(3)(F). 

75 17 CFR 240.17Ad–22(e)(13). 

settlement of securities transactions 

and, to the extent applicable, derivative 

agreements, contracts, and transactions; 

(ii) assure the safeguarding of securities 

and funds which are in the custody or 

control of the clearing agency or for 

which it is responsible; (iii) in general, 

protect investors and the public interest; 

and (iv) are not designed to permit 

unfair discrimination among 

participants in the use of the clearing 

agency. OCC believes that the proposed 

rule change would promote the prompt 

and accurate clearance and settlement of 

stock loan transactions, assure the 

safeguarding of securities and funds at 

OCC, protect investors and the public 

interest, and not unfairly discriminate 

among Clearing Members for the reasons 

below. 

Enhancements To Facilitate OCC’s New 

Clearance and Settlement System 

As described above, the proposed 

changes would involve certain changes 

to accommodate OCC’s new clearance 

and settlement system, including by 

transitioning away from the legacy 

practice of aggregating positions in the 

same Eligible Stock into stock loan and 

stock borrow positions to contract-level 

record keeping. Contract-level 

recordkeeping would allow Clearing 

Members to see more precisely the 

contracts with shares lent by lender and 

borrower, which aligns to the record 

keeping industry standard. Allowing for 

terms to be recorded at the contract 

level will allow OCC to record other 

terms at the contract level, including 

terms related to OCC’s guaranty of 

substitute dividend and rebate 

payments. Eliminating position 

aggregation would also allow OCC to 

simplify the calculation for mark-tomarket payments in OCC’s Rules. And 

by aligning mark-to-market payments to 

the accounts in which a stock loan 

position is held, OCC would end the 

practice of requiring cash mark-tomarket payments for stock loan or stock 

borrow positions to settle in a Clearing 

Member’s firm lien account or 

combined Market-Makers’ account. 

Aligning mark-to-market cash 

settlements with the accounts in which 

the position is held simplifies OCC’s 

processes and reduces complexity. 

Accordingly, OCC believes that 

conforming its practices for maintaining 

stock loan and stock borrow positions to 

industry standards and simplifying its 

processes for marking those positions to 

market helps to promote the prompt and 

accurate clearance and settlement of 

stock loan transactions, and protect 

investors and the public interest by 

reducing operational complexity that 

could cause delay and impose costs on 

market participants. 

The proposed changes to allow for rematching of Matched-Book Positions in 

suspension also promote the prompt 

and accurate clearance and settlement of 

securities and derivatives transactions, 

the safeguarding of securities and funds 

at OCC, and the protection of securities 

investors and the public interest in 

accordance with Section 17A(b)(3)(F) of 

the Exchange Act 69 and Rule 17Ad– 

22(e)(13) 70 and (e)(23) 71 thereunder. 

Rule 17Ad–22(e)(13) requires covered 

clearing agencies to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to, in part, ensure 

the covered clearing agency has the 

authority and operational capacity to 

take timely action to contain losses and 

liquidity demands and continue to meet 

its obligations in the event of a Clearing 

Member default.72 Rule 17Ad–22(e)(23) 

requires covered clearing agencies to 

maintain written policies and 

procedures reasonably designed to, 

among other things, provide for publicly 

disclosing all relevant rules and 

material procedures, including key 

aspects of its default rules and 

procedures.73

As noted above, a significant portion 

of the activity in OCC’s Hedge Program 

relates to matched-book activity. Under 

the current Hedge Program Rules, OCC 

has authority to perform an orderly 

close out of a suspended Hedge Clearing 

Member’s Matched-Book Positions 

through the termination by offset and 

rematching of such positions without 

requiring the transfer of securities 

against the payment of settlement prices 

as currently required under OCC Rule 

2211. As a result, the Hedge Program 

rules minimize the potential for 

operational and execution risks and 

eliminate any risk resulting from 

potential price dislocation between 

recall and return transactions. 

Extending this authority to the Market 

Loan Program would provide the same 

benefits. In addition, by allowing rematching across OCC’s Stock Loan 

Programs, the proposed rule change 

would more closely align OCC’s closeout process with the assumptions 

underlying OCC’s margin methodology, 

STANS. Specifically, STANS assumes 

stock loan and borrow positions 

covering the same Eligible Stock in 

OCC’s Stock Loan Programs are fungible 

and are permitted to offset one another 

in calculating a Clearing Member’s 

margin requirement for the relevant 

account. Allowing for re-matching 

across Stock Loan Programs is 

consistent with this assumption. OCC 

believes the proposed rule change will 

strengthen the risk management 

processes in place at OCC by mitigating 

the risks involved in the buy-in/sell-out 

of Matched-Book Positions as well as 

provide the overall marketplace with 

more stability with respect to the Stock 

Loan Programs. OCC therefore believes 

the proposed rule change is designed to 

promote the prompt and accurate 

clearance and settlement of securities 

transactions, the safeguarding of 

securities and funds in the custody or 

control of OCC or for which it is 

responsible and, in general, to protect 

investors and the public interest in 

accordance with Section 17A(b)(3)(F) of 

the Exchange Act,74 and would establish 

default procedures for the Market Loan 

Program that ensure that OCC can take 

timely action to contain losses and 

liquidity pressures and continue 

meeting its obligations in the event of a 

participant default in accordance with 

Rule 17Ad–22(e)(13).75

In addition, OCC would use a 

matching algorithm to re-match stock 

loan and stock borrow positions in order 

of priority based on the largest available 

stock borrow or stock loan positions, as 

applicable, for the selected Eligible 

Stock for which a MSLA exists between 

the Borrowing and Lending Clearing 

Members or for which both positions are 

Anonymous Market Loans. In the event 

parties to a resulting Disclosed Market 

Loan do not have existing securities 

lending relationships, those members 

may choose to either work in good faith 

to reestablish any terms, 

representations, warranties and 

covenants not governed by the By-Laws 

and Rules (e.g., MSLA) or to terminate 

the re-matched stock loan or borrow 

positions in the ordinary course 

pursuant to renumbered OCC Rules 

2213 and 2216A, as soon as reasonably 

practicable. The proposed rule change 

therefore provides for an objective 

process for re-matching stock loan and 

borrow positions and ensures that 

members that initiated Anonymous 

Market Loans or that have existing 

securities lending relationships are rematched to the greatest extent possible 

and would still allow for Clearing 

Members that are re-matched but that do 

not have existing securities lending 

relationships to terminate such 

positions in the ordinary course 

pursuant to renumbered OCC Rules 


khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices 73483 

76 15 U.S.C. 78q–1(b)(3)(F). 

77 17 CFR 240.17Ad–22(e)(23). 

78See Exchange Act Release No. 79435 (Nov. 30, 

2016), 81 FR 87984 (Dec. 6, 2016) (File No. SR– 

OCC–2016–014). As the Commission recognized, 

application of Section 871(m) to listed options 

transactions would ‘‘have significant implications 

for OCC and its Clearing Members’’—especially 

with respect to Non-U.S. Clearing Members, for 

which OCC would be required ‘‘to develop and 

maintain systems (i) to identify transactions that are 

Section 871(m) Transactions, (ii) to determine the 

amount of any dividend equivalents, (iii) to 

effectuate withholding, and (iv) to remit the 

withheld tax to the IRS.’’ Id. at 87986. Treasury has 

yet to release guidance on key aspects of Section 

871(m) that would be needed to build such systems. 

See IRS Notice 2024–44, Extension of the Phase-in 

Period for the Enforcement and Administration of 

Section 871(m), available at https://www.irs.gov/ 

pub/irs-drop/n-24-44.pdf. Like the changes 

implemented when Section 871(m) went into effect, 

this proposed change would transfer the costs and 

liability associated with tax withholding 

requirements to the Non-U.S. Clearing Members, 

thereby eliminating the potential uncertainty and 

risks in the daily settlement of funds at OCC that 

otherwise would be imposed if those withholding 

obligations rested with OCC. 

2213 and 2216A. As a result, OCC 

believes that the proposed rule change 

is designed to not permit unfair 

discrimination among participants in 

the use of the clearing agency in 

accordance with Section 17A(b)(3)(F) of 

the Exchange Act.76 Furthermore, the 

proposed rule change would make key 

aspects of OCC’s default procedures 

with respect to the close out of 

Matched-Book Positions in suspension 

public by amending OCC’s Rules, which 

are posted to OCC’s website, consistent 

with Rule 17Ad–22(e)(23).77

Market Loan Program Enhancements 

The proposed enhancements specific 

to the Market Loan Program would also 

promote the prompt and accurate 

clearance and settlement of stock loan 

transactions and, in general, protect 

investors and the public interest. 

Allowing for bilaterally negotiated Stock 

Loans in the Market Loan Program 

would allow OCC to expand its guaranty 

of cash distributions, such as substitute 

dividend and rebate payments, to such 

loans, limiting existing counterparty 

risks that remain for Hedge Loans, in 

which such payments must be resolved 

by the counterparties away from OCC. 

Transitioning bilaterally negotiated 

transactions to the Market Loan Program 

would also reduce operational burden 

associated with the reconciliation 

process and risk associated with errors 

that currently occur under the Hedge 

Program because settlement at DTC 

currently occurs prior to OCC’s 

validation and acceptance of the 

transaction. Under the enhanced Market 

Loan Program, such bilaterally 

negotiated transactions would be 

submitted directly to OCC, which would 

validate the trade before sending 

delivery instructions to DTC, thereby 

helping to identify and resolve any 

errors prior to settlement occurring. 

Accordingly, OCC believes that 

expanding the Market Loan Program to 

include direct submission of bilaterally 

negotiated stock loans would promote 

the prompt and accurate clearance and 

settlement of stock loan transactions 

and protect investors and the public 

interest. 

Allowing for the submission of 

bilateral transactions through the 

Market Loan Program would also help 

simplify OCC’s post-trade processing of 

stock loan transactions. For instance, 

allowing Borrowing Clearing Members 

to send return instructions directly to 

OCC for bilaterally initiated Market 

Loans would help eliminate errors in 

the Hedge Program that occur when 

notices of returns initiated through DTC 

are not received by OCC with the correct 

reason codes, resulting in position 

breaks. The proposed changes would 

disclose OCC’s process for affirming 

transactions related to bilaterally 

negotiated Market Loans submitted 

directly to OCC, which would give 

members opportunities to affirm or 

reject transactions within time-frames 

specified by OCC, after which OCC 

would either reject the transaction if not 

affirmed (i.e., new loans) or would be 

deemed affirmed and processed 

accordingly (i.e., returns, buy-ins, sellouts), thereby avoiding transactions that 

would pend indefinitely. The proposed 

changes would also accommodate 

modifications to certain terms, such as 

the rebate rate, interest rate benchmark 

or the loan term, without the need for 

those loans to be returned. The 

proposed changes would also improve 

OCC’s control over the buy-in process 

by giving OCC the authority to prevent 

situations in which a Borrowing 

Clearing Member that failed to deliver 

the Loaned Stock in response to a recall 

instruction then attempts to deliver the 

Loaned Stock after the Lending Clearing 

Member may initiate a buy-in. 

OCC’s new clearance and settlement 

system would also assume certain 

processes currently performed by a Loan 

Market, including calculation of 

payments with respect to cash 

distributions for substitute dividend and 

rebate payments. Consolidating such 

processing at OCC will help ensure 

consistency across Market Loans, 

regardless of whether initiated through 

a Loan Market or directly with OCC. 

Assuming the responsibility to calculate 

such payments would also allow OCC to 

eliminate Rules intended to limit OCC’s 

guaranty for such payments to the 

margin OCC collected in reliance on the 

Loan Market’s determinations. OCC 

would also modify the Market Loan 

rules concerning the collateralization 

rate and mark-to-market pricing, which 

are currently set by the Loan Market. 

Fixing collateral at the single rate of 

102%, which is the Loan Market’s rate, 

would minimize complexity in the 

evaluation of a member’s Stock Loan 

portfolio for the purposes of liquidation 

in the event of a default. Accordingly, 

OCC believes that these post-trade 

processing enhancements to the Market 

Loan Program would promote the 

prompt and accurate clearance and 

settlement of stock loan transactions 

and protect investors and the public 

interest. 

Finally, the proposed enhancements 

to support Canadian Clearing Members 

in the Market Loan Program would also 

promote the prompt and accurate 

clearance and settlement of stock loan 

transactions, assure the safeguarding of 

securities and funds at OCC, and protect 

investors and the public interest. The 

introduction of withholding 

responsibilities would introduce new 

complications and risks into OCC’s 

clearance and settlement process and 

could create uncertainty around the 

settlement of funds at OCC, as discussed 

in detail in connection with OCC’s 

proposed rule change to address the 

implementation of I.R.C. Section 871(m) 

with respect to OCC’s listed options 

transactions.78 The proposed rule 

change would implement prudent, 

preventive measures to protect OCC 

against the obligation for any 

withholding (and any resulting liability) 

by (a) applying similar conditions for 

the payment of substitute dividends as 

those for dividend equivalent payments 

for listed options; (b) preventing a 

Canadian Clearing Member from 

executing Market Loans in its capacity 

as a Borrowing Clearing Member for 

Canadian Securities, which may give 

rise to withholding obligations under 

Canadian law; (c) clarifying Canadian 

Clearing Member membership 

requirements such that Positive Rebate 

transactions would be subject to 

exemptions from withholding under 

U.S. law; and (d) preventing a Canadian 

Clearing Member from executing Market 

Loans with Negative Rebate in its 

capacity as a Borrowing Clearing 

Member for its own account, which may 

give rise to withholding obligations 

under U.S. Law. OCC believes these 

steps are necessary to prevent tax 

withholding obligations that OCC is not 

currently able to identify or collect. 

Thus, OCC believes the proposed rule 

change is designed to promote the 

prompt and accurate clearance and 


khammond on DSKJM1Z7X2PROD with NOTICES
73484 Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices 

79 15 U.S.C. 78q–1(b)(3)(F). 

80 Id. 

81 Id. 

82 17 CFR 240.17Ad–22(e)(1). 83 15 U.S.C. 78q–1(b)(3)(I). 

84See, e.g., OCC Rules 201 and 303. 

85See OCC Rule 306. 

settlement of securities and derivatives 

transactions, the safeguarding of 

securities and funds at OCC, and the 

protection of securities investors and 

the public interest in accordance with 

Section 17A(b)(3)(F) of the Exchange 

Act.79

Furthermore, while the proposed rule 

change would impose additional 

requirements and restrictions on 

Canadian Clearing Members, the 

proposed rules are intended to address 

specific issues and potential risks to 

OCC arising from those Canadian 

Clearing Members whose membership 

and participation in the Market Loan 

Program creates potential withholding 

obligations for OCC. Because Canadian 

Clearing Members are already subject to 

similar requirements to accommodate 

dividend equivalent payments or 

deemed payments for listed options 

transactions without imposing 

withholding obligations under Section 

871(m), OCC believes that the additional 

conditions and requirements with 

respect to participation in the Market 

Loan Program will not impose a 

significant burden. In addition, the 

limitations on certain transactions OCC 

proposes because of the heightened risk 

of withholding obligations are narrowly 

tailored to address the specific risks 

based on the Canadian Clearing 

Member’s role in the transaction and 

whether it is transacting in its capacity 

as principal or on behalf of a customer. 

Therefore, OCC believes that the 

proposed rule change is not unfairly 

discriminatory among participants in 

the use of the clearing agency and is 

therefore consistent with Section 

17A(b)(3)(F) of the Exchange Act.80

By-Laws and Rules Reorganization and 

Restatement 

OCC believes that the proposed 

reorganization and restatement of OCC’s 

By-Laws and Rules specific to OCC’s 

Stock Loan Programs is consistent with 

Section 17A(b)(3)(F) of the Exchange 

Act 81 and Rule 17Ad–22(e)(1),82 which 

requires OCC to, among other things, 

maintain written policies and 

procedures reasonably designed to 

ensure a well-founded, clear, 

transparent, and enforceable legal basis 

for each aspect of OCC’s activities. OCC 

believes that the proposed 

reorganization improves the clarity and 

transparency of its By-Laws and Rules 

by consolidating provisions governing 

the clearance and settlement of stock 

loan transactions in the Rules, rather 

than split across OCC’s By-Laws and 

Rules. Similarly, OCC believes that 

integrating Interpretations and Policies 

into the text of the Rules helps enhance 

clarity and transparency by placing 

those provisions closer to the text they 

interpret. In addition, the global changes 

and administrative changes discussed 

above would apply consistent terms and 

numbering conventions, improve 

consistency of the text between similar 

Hedge Program and Market Loan 

Program rules, and remove duplicative 

provisions. Accordingly, OCC believes 

the proposed changes help ensure 

OCC’s By-Laws and Rules, which form 

the legal basis for OCC’s clearance and 

settlement of stock loan transactions, are 

clear and transparent. 

(B) Clearing Agency’s Statement on 

Burden on Competition 

Section 17A(b)(3)(I) of the Exchange 

Act requires that the rules of a clearing 

agency not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.83 With 

the exception of the Rules specific to 

Canadian Clearing Members, addressed 

further below, the proposed changes are 

meant to enhance OCC’s Stock Loan 

Programs, and would apply equally to 

all Clearing Members. 

The transition to the Market Loan 

Program is not expected to impose a 

burden on competition or inhibit access 

for Clearing Members who currently 

transact exclusively through the Hedge 

Loan Program because the enhanced 

Market Loan Program would allow for 

the clearance of bilaterally negated 

transactions submitted to OCC for 

clearance, as the Hedge Loan Program 

does today. Accordingly, the changes do 

not require any participant in the Hedge 

Loan Program to transact through a Loan 

Market. In addition, OCC plans to 

authorize Clearing Members that 

currently participate in the Hedge Loan 

Program to transact through the Market 

Loan Program without requiring 

additional onboarding from a 

membership perspective, subject to 

providing the necessary authorizations 

required of all Market Loan Program 

participants, thereby reducing the 

administrative burden of the transition. 

All Clearing Members would be subject 

to training with respect to the new ways 

of submitting transactions through the 

Market Loan Program. In addition, the 

proposed changes would facilitate, 

rather than burden, competition with 

respect to Canadian Clearing Members 

by allowing them, for the first time, to 

participate in the Market Loan Program. 

The proposed rule change could 

potentially impact or burden 

competition by imposing upon 

Canadian Clearing Members certain 

requirements and limitations with 

respect to participation in the Market 

Loan Program. For example, Canadian 

Clearing Members would be required to 

provide certain documentation to satisfy 

OCC that participation will not impose 

tax or withholding obligations arising 

from payments under the Market Loan 

Program, as well as to allow OCC to 

satisfy its own tax reporting obligations. 

However, OCC does not believe that 

conditioning Canadian Clearing 

Members’ participation on compliance 

with OCC Rule 202 would impose a 

significant burden on competition. 

Canadian Clearing Members are already 

subject to ongoing certification and 

reporting provisions of Rule 202 for 

derivative equivalent payments made or 

deemed to be made to such members 

with respect to options. As a matter of 

standard practice, Clearing Members are 

required to inform OCC of material 

changes in, for example, their formal 

organization, ownership structure, or 

financial condition 84 and are subject to 

ongoing financial reporting 

requirements.85 OCC believes the 

proposed rule change would impose 

reasonable reporting and notification 

requirements with respect to Canadian 

Clearing Members’ tax compliance 

status similar to those rules referenced 

above. 

The proposed restrictions on certain 

Market Loan transactions with Negative 

Rebate rates and transactions for which 

the Loaned Stock is a Canadian Security 

are also narrowly tailored. These 

restrictions address specific issues and 

potential risks to OCC arising from those 

firms whose membership creates 

potential withholding obligations for 

OCC. The proposed restriction on 

transactions with Negative Rebate for a 

Canadian Clearing Member’s own 

account in its capacity as a Lending 

Clearing Member would eliminate the 

uncertainty in funds settlement that 

would arise if OCC were subject to 

withholding or tax obligations with 

respect to Negative Rebate payments 

owed to the Canadian Clearing Member. 

Canadian Clearing Members would not 

be restricted from entering into Market 

Loans with Negative Rebate as a 

Lending Clearing Member for its 

customer accounts, for which OCC 

could make Negative Rebate payments 

free from withholding obligations by 

virtue of the Canadian Clearing 

Member’s status as a Qualified 


khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 89, No. 175 / Tuesday, September 10, 2024 / Notices 73485 

86 15 U.S.C. 78q–1(b)(3)(F). 

87 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

Intermediary, or as a Borrowing Clearing 

Member, either for its own account or 

for its customer accounts. 

The proposed restriction on 

transactions where the Loaned Stock is 

a Canadian Security when the Canadian 

Clearing Member is the Borrowing 

Clearing Member would similarly 

eliminate uncertainty in funds 

settlement that would arise if OCC or 

the Canadian Clearing Member were 

subject to tax withholding obligations 

with respect to substitute dividends on 

the Canadian Security. Canadian 

Clearing Members would not be 

restricted from executing Market Loan 

transactions on Canadian Securities as a 

Lending Clearing Member. As discussed 

further above, OCC believes that the 

proposed rule change is necessary to 

eliminate potential complications and 

risk to its clearance and settlement 

process that would be presented by 

OCC’s potential withholding 

responsibilities (and which would be a 

direct consequence of providing its 

clearance and settlement services for 

these Canadian Clearing Members). OCC 

believes the proposed rule change is 

necessary to promote the prompt and 

accurate clearance and settlement of 

securities and derivatives transactions, 

to assure the safeguarding of securities 

and funds in the custody or control of 

OCC or for which it is responsible, and 

in general, to protect investors and the 

public interest in accordance with 

Section 17A(b)(3)(F) of the Exchange 

Act.86 Accordingly, OCC believes any 

burden on competition that this 

proposed change could be regarded as 

imposing are necessary and appropriate 

to promote the prompt and accurate 

clearance and settlement of stock loan 

transactions as required by the 

Exchange Act. Furthermore, as stated 

above, all of OCC’s current Canadian 

Clearing Members are already Qualified 

Intermediaries, FATCA Compliant, and 

Qualified Derivatives Dealers. 

Therefore, applying the same 

requirements as conditions to 

participate in the Market Loan Program 

would not impose any additional 

burden on those members. 

For the foregoing reasons, OCC 

believes that the proposed rule change 

is in the public interest, would be 

consistent with the requirements of the 

Exchange Act applicable to registered 

clearing agencies, and would not 

impose a burden on competition that is 

unnecessary or inappropriate in 

furtherance of the purposes of the 

Exchange Act. 

(C) Clearing Agency’s Statement on 

Comments on the Proposed Rule 

Change Received From Members, 

Participants or Others 

Written comments were not and are 

not intended to be solicited with respect 

to the proposed rule change and none 

have been received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the self-regulatory organization 

consents, the Commission will: 

(A) by order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rulesregulations/self-regulatoryorganization-rulemaking); or 

• Send an email to rule-comments@

sec.gov. Please include file number SR– 

OCC–2024–011 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Vanessa Countryman, Secretary, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–1090. 

All submissions should refer to file 

number SR–OCC–2024–011. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (https://www.sec.gov/ 

rulesregulations/self-regulatoryorganization-rulemaking). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of OCC 

and on OCC’s website at https://

www.theocc.com/CompanyInformation/ 

Documents-and-Archives/By-Laws-andRules. 

Do not include personal identifiable 

information in submissions; you should 

submit only information that you wish 

to make available publicly. We may 

redact in part or withhold entirely from 

publication submitted material that is 

obscene or subject to copyright 

protection. 

All submissions should refer to file 

number SR–OCC–2024–011 and should 

be submitted on or before October 1, 

2024. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.87

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2024–20329 Filed 9–9–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–100927; File No. SR–LTSE– 

2024–02] 

Self-Regulatory Organizations; LongTerm Stock Exchange, Inc.; Notice of 

Withdrawal of Proposed Rule Change 

To Establish Fees for Industry 

Members Related to Certain Historical 

Costs of the National Market System 

Plan Governing the Consolidated Audit 

Trail 

September 4, 2024. 

On January 2, 2024, Long-Term Stock 

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

with the Securities and Exchange 

Commission (the ‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a 


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