[Federal Register Volume 89, Number 190 (Tuesday, October 1, 2024)]
[Notices]
[Pages 79978-79984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22412]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101189; File No. SR-OCC-2024-013]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change by The Options Clearing 
Corporation Concerning Modifications to its By-Laws and Rules Primarily 
To Discontinue Certain Outmoded or Unused Products and Services

September 25, 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 September 13, 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. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would make modifications to its By-Laws 
and Rules primarily to discontinue certain outmoded or unused products 
and services.
    Proposed changes to OCC's By-Laws are contained in Exhibit 5A [sic] 
that OCC provided as part of File No. SR-OCC-2024-013. Proposed changes 
to OCC's Rules are contained in Exhibit 5B [sic] that OCC provided as 
part of File No. SR-OCC-2024-013. Material proposed to be added is 
underlined and material proposed to be deleted is marked in 
strikethrough text.
    All terms with initial capitalization that are not defined herein 
have the same meaning as set forth in the OCC By-Laws and Rules.\3\
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    \3\ OCC'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.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

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

    OCC is the sole clearing agency for standardized equity options 
listed on national securities exchanges registered with the Commission. 
OCC also clears certain stock loan and futures transactions. In its 
role as a clearing agency, OCC acts as a central counterparty (``CCP'') 
guarantying all contracts it clears, meaning OCC becomes the buyer to 
every seller and the seller to every buyer (or the lender to every 
borrower and the borrower to every lender, in the case of stock loan 
transactions). As a CCP, OCC maintains a platform called ENCORE 
consisting of OCC's core clearing, risk management, and data management 
applications launched in 2000. Among other functions, ENCORE serves as 
OCC's real-time processing engine, receiving trade and post-trade data 
from a variety of sources on a transaction-by-transaction basis to 
facilitate OCC's clearance and settlement operations. OCC intends to 
retire ENCORE and implement a new, updated clearance and settlement 
system, known as ``Ovation,'' that will leverage more current 
technology and enhanced security features. Ovation is designed to 
provide a more robust solution to meet market participants' needs and 
OCC's responsibilities, including in OCC's role as a systemically 
important financial market utility. As part of the transition to the 
Ovation system, OCC is considering which features of ENCORE should be 
carried over to Ovation and

[[Page 79979]]

which should be retired, as well as other updates to its By-Laws and 
Rules to conform to current capability and support future requirements.
1. Purpose
    This proposed change by OCC would modify the By-Laws and Rules to 
address certain outmoded or unused functions or products that OCC 
proposes to discontinue. OCC also proposes certain miscellaneous 
changes to provide greater clarity to its By-Laws and Rules.\4\
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    \4\ OCC is also proposing these changes, with a view toward its 
planned transition to a new core clearing system, which OCC calls 
Ovation.
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    First, OCC proposes to no longer facilitate the settlement of 
commissions and fees owed between Clearing Members that are party to a 
Clearing Member Trade Assignment (``CMTA'') arrangement. OCC members 
have not used or expressed an interest in having OCC facilitate such 
settlement of commissions and fees. Second, OCC proposes to delete 
provisions related to OTC option products because these OTC option 
products are not currently traded.
    Third, OCC proposes to no longer require that Clearing Members 
maintain records of both parties to a trade because trade counterparty 
information is not necessary for OCC's clearing and settlement 
purposes. Accordingly, OCC has not developed Ovation to aggregate such 
information and provide it to Clearing Members for purposes of 
compliance with this rule. Implementing this non-clearing data element 
in Ovation would require significant investment of resources to develop 
functionality that could impact Ovation's release timeline.
    Fourth, OCC proposes to amend its Rules to provide that when a 
Clearing Member wants to ``give-up'' one or more positions in cleared 
contracts that are futures or futures options to another Clearing 
Member, it need not designate the specific account of the Given-Up 
Clearing Member to which such positions must be allocated. Rather, the 
Given-Up Clearing Member will be able to indicate the account to which 
it wishes the futures or futures options positions to be allocated in 
order to provide more flexibility to Clearing Members and better 
facilitate give-up allocations to the appropriate account.
    Fifth, OCC proposes to clarify that, when an opening or closing 
indicator is not included on a trade for an options or a futures 
contract, OCC will default the trade to an opening position for all 
account types, including market makers. Defaulting to an open position 
when there is no indicator will help ensure that an existing position 
is not inadvertently closed out.
    Sixth, OCC proposes to amend its Rules to reflect that when a 
particular class of exercised options is subject to broker-to-broker 
settlement, the settlement obligation will not be considered discharged 
until both the Delivering and Receiving Clearing Member submit matching 
notices as to the number of units of the underlying security delivered 
(received). This change will better reflect the manner in which OCC 
currently handles broker-to-broker settlements.
    Seventh, OCC also proposes to delete the ``associated Market 
Maker'' account subtype, which is not currently used by Clearing 
Members.
Proposed Rule Changes
    As noted, this proposed change by OCC is primarily designed to 
modify the By-Laws and Rules to address certain outmoded or unused 
functions or products that OCC proposes to discontinue, particularly as 
OCC works toward its transition to a new core clearing system. ENCORE 
is OCC's existing clearing system, and it was launched in 2000. Since 
then, it has operated as OCC's real-time processing engine to receive 
trade and post-trade data from a variety of sources on a transaction-
by-transaction basis, maintain clearing member positions, calculate 
margin and clearing fund requirements, and provide reporting to OCC 
staff, regulators, and Clearing Members. As stated in the Commission's 
notice of no objection to OCC's advance notice filing related to 
adoption of cloud infrastructure for new clearing, risk management and 
data management applications,\5\ OCC's objective is the eventual 
retirement of ENCORE and its replacement with a resilient successor 
clearing system, which OCC calls Ovation. In connection with this 
transition by OCC to a successor clearing system and the related 
development work to design the successor system to support an 
appropriate scope of operations, OCC plans to discontinue certain 
existing functions or products that are outmoded or unused, as 
described in more detail below.
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    \5\ See Securities Exchange Act Release No. 96113 (Oct. 20, 
2022), 87 FR 64824 (Oct. 26, 2022) (File No. SR-OCC-2021-802).
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    The proposed rule change would amend the By-Laws and Rules to: (i) 
discontinue OCC's facilitation of the settlement of commissions and 
fees owed between Clearing Members that are party to a CMTA 
arrangement; (ii) remove provisions related to OTC option products that 
are inoperative; (iii) no longer require that Clearing Members must 
maintain records of both parties to a trade; (iv) provide that a 
Giving-Up Clearing Member in connection with futures and futures 
options is not required to provide instructions that identify the 
designated account of the Given-Up Clearing member; (v) clarify and 
make uniform across all account types the default treatment of 
confirmed trades in futures and options as opening transactions; (vi) 
clarify its rules about the discharge of settlement obligations when 
OCC directs that exercise and assignment activity for a specific class 
of options will be subject to broker-to-broker settlement; and (vii) 
delete the Associated Market-Maker account type.
OCC to No Longer Facilitate Settlement of Commissions and Fees Between 
CMTA Clearing Members
    OCC's Rules 407 and 504 currently provide for a voluntary service 
at the election of Clearing Members that are parties to a CMTA 
arrangement whereby OCC will facilitate the settlement of fees and 
commissions between such Clearing Members, subject to certain 
conditions. OCC amended its Rules in 2010 to provide for this 
service.\6\ The service has not been used by Clearing Members since 
2016, and Clearing Members have not expressed an interest in using the 
settlement of commissions and fees service provided by OCC in the 
future. As a result of the lack of Clearing Member interest in this 
service, OCC proposes to decommission it such that it will also not 
need to be supported in OCC's successor clearing system. All other 
aspects of OCC's Rules related to CMTA arrangements would remain 
unchanged.
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    \6\ See Securities Exchange Act Release No. 63120 (Oct. 15, 
2010), 75 FR 65538 (Oct. 25, 2010) (File No. SR-OCC-2010-017).
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    Accordingly, OCC proposes to renumber paragraph (a)(1) to (a) and 
to delete paragraph (a)(2) from Rule 407, which provides that Clearing 
Members that are parties to a CMTA arrangement may elect to authorize 
OCC to settle fees and commissions owed by the Carrying Clearing Member 
to the Executing Clearing Member in respect of transfers effected 
pursuant to that arrangement.\7\ OCC also proposes to delete paragraph 
(e) of Rule 504, which corresponds to current Rule 407(a)(2), generally

[[Page 79980]]

providing that OCC, as agent, is authorized to effect non-guaranteed 
settlement of fees and commissions owed by a Carrying Clearing Member 
to an Executing Clearing Member for transfers effected pursuant to 
their registered CMTA arrangement, provided that the CMTA registration 
authorizes OCC to effect such settlements.\8\ OCC proposes to mark 
paragraph (e) of Rule 504 as reserved. In addition, OCC proposes to 
delete the final sentence of Rule 504(g), which provides that OCC shall 
have no obligation to effect settlement of fees and commissions as 
provided in Rule 407 if either the Executing Clearing Member or the 
Carrying Clearing Member has been suspended by OCC.
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    \7\ Rule 407(a)(2) further provides, among other things, that 
Clearing Members making such election shall specifically register 
that aspect of their CMTA arrangement with OCC, sets forth the 
authority granted to OCC for Clearing Members making such an 
election, and specifies that any such election becomes effective 
once accepted by OCC's systems.
    \8\ Rule 504(e) further provides, among other things, that 
aggregate amounts to be settled are calculated based on entries made 
by the Executing Clearing Member, that settlements of the fees/
commissions will be effected on the business days first succeeding 
the business day on which the Executing Clearing Member entered the 
information into OCC's systems.
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Over-the-Counter (``OTC'') Options Provisions To Be Removed
    OCC's By-Laws and Rules currently permit it to clear and settle 
certain OTC options products, specifically OTC index options on the S&P 
500 index.\9\ In connection with this service, OCC's By-Laws and Rules 
were modified in various places to provide for the clearance and 
settlement of such OTC index options. Although OCC has only ever 
cleared OTC index options on the S&P 500 index, OCC's By-Laws and Rules 
were designed to support the clearance and settlement of additional OTC 
options using the same legal and operational framework. However, OCC 
has not cleared and settled an OTC option since 2014 and there is no 
open interest in OTC options. Clearing Members have also not expressed 
interest in the OTC option clearance settlement services.
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    \9\ See Securities Exchange Act Release No. 68434 (December 14, 
2012), 77 FR 75243 (December 19, 2012) (SR-OCC-2012-14).
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    As a result, OCC proposes to remove all provisions from its By-Laws 
and Rules \10\ related to the clearance and settlement of OTC options. 
These changes include the deletion of the entire definitions and 
references to the terms ``OTC options,'' ``OTC index option,'' ``OTC 
Trade Source,'' ``OTC Trade Source Rules'', ``Backloaded OTC option,'' 
and ``OTC Option Auction,'' as well as text accompanying these terms 
that describe OCC's role in the clearance and settlement of OTC options 
in the following By-Law and Rule provisions: (i) Article I of the By-
Laws (Definitions); \11\ (ii) Article VI of the By-Laws, Section 1, 
Interpretation and Policies .01(a), the entirety of Section 3, 
Interpretations and Policies .09, Section 10(b) and (g), and Section 
27(a) and (b); (iii) Article XVII of the By-Laws, Introduction, Section 
1 (Definitions),\12\ Section 3(h) and Interpretation and Policies .01 
(deleted entirely), Section 4(a)(2), Section 5(a), and the entirety of 
Section 6 (relating to OTC Index options); (iv) Rule 201(b)(6) (deleted 
entirely); (v) Rules 401(a), (a)(1)(i), (b), (d), (e), (f) and (g); 
(vi) Rule 405; (vii) Rule 406; (viii) Rule 407(l) (deleted entirely); 
(ix) Rule 408(a); (x) Rule 611(a), (b), and (d) (deleted entirely); 
(xi) Rule 801(b); (xii) Rule 803 Interpretation and Policy .01; (xiii) 
Rule 804; (xiv) Rule 1003 Interpretation and Policy .02 (deleted 
entirely); (xv) Rule 1104 Interpretation and Policy .03 (deleted 
entirely); (xvi) Rule 1105; (xvii) Rule 1106(e)(2) (deleted entirely), 
and Interpretation and Policy .01; (xviii) Chapter XVIII of the Rules, 
Introduction; (xix) Rule 1804(b), (c),\13\ and Interpretation and 
Policy .03 (deleted entirely). OCC is not proposing changes to these 
provisions (unless otherwise described in this proposed rule change) 
other than the removal of provisions that relate to OTC options. For 
example, OCC proposes to modify the definition of the term ``confirmed 
trade'' in the By-Laws only to delete the provision relating to OTC 
options.\14\
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    \10\ OCC notes that it is not proposing in this proposed rule 
change to eliminate the reference to OTC options in Rule 805 
(Expiration Exercise Procedure) because it is proposing to delete 
such reference in another rule filing with the Commission.
    \11\ OCC proposes to delete references to OTC options and 
related terms throughout the definitions in Article I of the By-
Laws, including ``Backloaded OTC option,'' ``OTC Index Option 
Clearing Member,'' ``origination date,'' ``OTC index option,'' ``OTC 
option,'' ``OTC Trade Source,'' ``OTC Trade Source Rules.'' OCC also 
proposes to delete text from the definitions of the terms ``Class'', 
``Clearing Member'', ``Index Multiplier'', ``Index Value 
Determinant'', ``Trade Date'', and ``Variable Terms'' that define 
what those terms mean with respect to OTC options. In addition, OCC 
proposes to delete text from Interpretation and Policies .01 to 
Section C of Article I of the By-Laws providing that the term `` 
`Exchange transaction' was removed from the By-Laws and Rules and 
replaced with the term `confirmed trade' to reflect the expansion of 
the Corporation's clearing activities into OTC options'' because 
such sentence is no longer necessary given the removal of provisions 
related to OTC options. OCC is not proposing to revert back to the 
use of ``Exchange transaction'' in its By-Laws and Rules because OCC 
believes that Clearing Members are familiar with the term 
``confirmed trade.''
    \12\ OCC proposes to delete OTC option related provisions in the 
following definitions in Article XVII, Section 1: (i) ``class of 
options,'' (ii) ``current underlying interest value,'' (iii) 
``expiration date,'' (iv) ``expiration time'' (deleted entirely), 
(v) ``reporting authority,'' and (vi) ``series of options.''
    \13\ OCC proposes to delete Rule 1804(c)(1) in its entirety 
because it relates solely to OTC options. OCC proposes to renumber 
current Rule 1804(c)(2) and (3) as (c)(1) and (2).
    \14\ Specifically, OCC proposes that the definition of 
``confirmed trade'' would no longer include a cleared contract 
affirmed through the facilities of an OTC Trade Source and submitted 
to the OCC for clearance.
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    To the extent OCC may plan to support the clearance and settlement 
of OTC options again in the future based on Clearing Member demand for 
such services, OCC would submit a proposed rule change with the 
Commission pursuant to Section 19(b) of the Exchange Act to 
reincorporate changes to its By-Laws or Rules as may be necessary for 
that purpose.\15\
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    \15\ 15 U.S.C. 78s(b).
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Records of Both Parties to a Transaction to No Longer Be Required
    Rule 208 currently requires, among other things, that every 
Clearing Member must keep records showing all confirmed trade data 
required pursuant to the OCC's By-Laws and Rules, including confirmed 
trade information reported to OCC under Rule 401. Rule 401(a)(1)(i) 
requires that confirmed trade details include ``the identity of the 
Purchasing Clearing Member and the Writing Clearing Member to the 
transaction.'' As a result, Clearing Members are currently required to 
maintain records of the identity of the Clearing Members who are 
parties to a confirmed trade. Prior to the adoption of electronic 
trading, these records were maintained to facilitate the efficient 
clearing and settlement of confirmed trades and reconcile counterparty 
settlement obligations to avoid settlement delays and disputes. OCC 
currently provides such information through Encore for purposes of 
compliance with this Rule.
    However, with the widespread adoption of electronic trading and the 
development of supporting market infrastructure, OCC's clearing 
processes and capabilities have evolved to no longer require the 
identities of the counterparty Clearing Members for the purposes of 
clearing and settlement. Therefore, OCC would no longer require that 
Clearing Members maintain such records in Ovation.\16\ Implementing 
this non-clearing data element and developing this functionality would 
require OCC to invest significant resources that could have an impact 
on Ovation's release timeline. As a result, OCC proposes to modify Rule 
208 to

[[Page 79981]]

provide, with respect to parties to a transaction, that a Clearing 
Member must keep records showing all confirmed trade data required 
pursuant to OCC's By-Laws and Rules, including confirmed trade 
information reported to OCC under Rule 401 ``except for the identity of 
the counterparty Clearing Member.'' This change would require Clearing 
Members to only record trade information relevant for clearing and 
settlement purposes. OCC notes that because all confirmed trades in 
option contracts that are accepted by OCC are novated such that OCC 
becomes the buyer to the seller and the seller to the buyer, it is not 
necessary or relevant for clearance and settlement purposes to require 
a Clearing Member to record the identity of another Clearing Member who 
was originally counterparty to the transaction.
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    \16\ OCC notes that Clearing Members continue to debate whether 
the counterparty information should be maintained given past trading 
precedent when this information was required. Today, the trade 
counterparty information is no longer required for clearing 
purposes. However, OCC may reconsider providing this information in 
the future.
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Discontinue the Requirement To Identify Designated Accounts of Given-Up 
Clearing Members
    Rule 408 provides that one or more positions in cleared contracts 
may be allocated from the designated account of a Giving-Up Clearing 
Member to the designated account of a Given-Up Clearing Member. 
Currently, this system for allocation of positions is only available in 
connection with positions in futures contracts and options on futures 
contracts that are cleared and settled by OCC. These allocations are 
post-trade instructions to OCC that are entered by one Clearing Member, 
called the Giving-Up Clearing Member, to direct OCC that a position in 
a cleared contract in one of the OCC accounts of that Giving-Up 
Clearing Member should be moved to the designated account of the Given-
Up Clearing Member. Currently, the Rules allow the Giving-Up Clearing 
Member to designate the account of the Given-Up Clearing Member to 
which the position should be allocated.
    OCC proposes to add rule text to the header for Rule 408 and 
elsewhere in Rule 408(a) to make clear that this allocation of 
positions functionality is only available for futures and options on 
futures. Currently, Rule 408 states that the allocation functionality 
is available for ``cleared contracts,'' which could be read to include 
securities options contracts notwithstanding that the allocation 
functionality is currently only available for futures and options on 
futures, and OCC plans for the same to be true in connection with the 
successor Ovation system.\17\
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    \17\ OCC also proposes to make similar changes to Rule 408(e) to 
make clear that the Rule only applies to futures and options on 
futures contracts. This would be done by inserting the word 
``futures'' before references to the word ``options'' in Rule 
408(e).
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    OCC also proposes to remove reference to the term ``designated 
account'' within the provisions of Rule 408 (a) and (b) from certain 
instances that refer to the Given-Up Clearing Member to clarify that 
the Giving-Up Clearing Member would no longer be required to specify 
the designated account of the Given-Up Clearing Member to which the 
cleared contract position should be moved. OCC proposes to then add a 
sentence in Rule 408(b) that would require the Given-Up Clearing Member 
to designate an account to which the allocation will be made. OCC will 
then process allocation instructions for Cleared contract positions 
once the Given-Up Clearing Member has designated an account in which to 
accept the allocations.
    OCC proposes to also remove the last sentence of Rule 408(b) that 
generally describes OCC's posture in the absence of an allocation 
agreement,\18\ which OCC believes is already addressed as part of 
paragraphs (b), and (d) of the Rule, and including the text would be 
duplicative and unnecessary. An allocation instruction, whether direct 
or provided through a confirmed trade, is a request by the Giving-Up 
Clearing Members to allocate positions to a Given-Up Clearing Member. 
Positions would remain in pending status awaiting the designation of an 
allocation account by the Given-Up Clearing Member to complete 
processing. Positions would move automatically if an account was 
designated, and an allocation agreement existed between the Giving-Up 
Clearing Member and the Given-Up Clearing Member. In all cases Rule 408 
would provide that the Giving-Up Clearing Member would be required to 
allocate the cleared futures or options on futures contract position to 
a Given-Up Clearing Member. In turn, the Given-Up Clearing Member would 
be responsible for affirmatively confirming the account to which the 
cleared contract position should be transferred by OCC before the 
position would be moved by OCC from the designated account of the 
Giving-Up Clearing Member to the designated account of the Given-Up 
Clearing Member.
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    \18\ The last sentence of Rule 408(b) currently provides that If 
the Giving-Up Clearing Member and the Given-Up Clearing Member are 
not parties to an allocation agreement registered with the 
Corporation, then the Corporation shall adjust the positions in the 
respective designated accounts of the Giving-Up and Given-Up 
Clearing Member in accordance with the allocation instruction only 
upon receipt of notice from the Given-Up Clearing Member of its 
affirmative acceptance of the allocation.
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    OCC proposes to also remove all references to ``allocation 
agreement'' in the text of Rule 408(b), and (d). OCC believes removing 
this text adds clarity to the rule because the text of Rule 408(c) 
addresses the registration of allocation agreements with OCC and 
declares that an allocation agreement would constitute notice of a pre-
agreed instruction to OCC by the Given-Up and the Giving-Up Clearing 
Members for OCC to allocate positions to an account of the Given-Up 
Clearing Member without further action. If the Given-Up Clearing Member 
rejects the allocation or if it does not provide affirmative acceptance 
by the cut-off time, Rule 408 would continue to provide, as it 
currently does, that the positions will remain in the account of the 
Giving-Up Clearing Member. This proposed approach puts each Clearing 
Member, as applicable, in control of the account from which or to which 
the position in the cleared futures or futures option contract should 
be moved. OCC believes that this would help reduce the risk of 
positions being transferred to an account of the Given-Up Clearing 
Member that the Given-Up Clearing Member does not want to receive them.
Clarify the Default Treatment of Confirmed Trades in Options as Opening 
Transactions
    Rule 401 addresses information that is required to be or that may 
be reported to OCC in connection with new confirmed trades in options, 
futures and BOUNDs.\19\ For confirmed transactions in options that are 
transmitted to OCC by an options exchange, OCC does not require as a 
condition to OCC's acceptance and novation an indication of whether the 
transaction is an opening or closing transaction. Such information may 
be included in the confirmed trade information from the exchange, but 
if it is not included OCC treats the confirmed trade as an opening 
transaction--which has the effect of increasing the number of option 
contracts in the option series in the relevant account of the Clearing 
Member. To clarify this default treatment in Rule 401, OCC is proposing 
to amend current Interpretation and Policy .01 to Rule 401, which 
already states that this is the default treatment for confirmed trades 
that OCC receives in futures for all Clearing Member accounts other 
than market-maker

[[Page 79982]]

accounts. In revising Interpretation and Policy .01 to be applicable to 
confirmed trades in both options and futures, OCC is also proposing to 
delete the part of the provision that states that it applies the 
opening transaction default treatment to all accounts other than 
market-maker accounts. OCC believes that this revision is appropriate 
in respect of options and futures in Clearing Member market-maker 
accounts in addition to all other types of Clearing Member accounts 
because defaulting a trade without an open or close indicator to 
``open'' is operationally safer and more prudent and prevents such 
trades from unintentionally closing an existing position. OCC believes 
that defaulting to open when there is no open or close indicator should 
also be consistent across all account types, including Market Makers.
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    \19\ The term ``BOUND'' means a security issued by the 
Corporation pursuant to Article XXIV of the By-Laws and Chapter XXV 
of the Rules. See OCC By-Laws, Article 1.
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Discharge of Settlement Obligations Under Broker-to-Broker Settlement
    Consistent with OCC Rule 901, settlement of exercise and assignment 
activity in stock options is typically made through the facilities of a 
correspondent clearing corporation, currently the National Securities 
Clearing Corporation (``NSCC''). However, in certain situations, 
including when a particular underlying security becomes ineligible at 
NSCC, OCC directs that settlement will occur on a broker-to-broker 
basis under Rule 903. Rule 909 then provides for the notices that the 
Delivering Clearing Member and Receiving Member must submit to advise 
OCC of the discharge of the settlement obligation.
    Currently, Rule 909 provides that if one of the Clearing Members 
submits a notice of delivery, payment, or receipt of delivery or 
payment, and the contraparty fails to respond to such notice within two 
business days, that failure to respond constitutes the contraparty's 
acknowledgement that the obligation has been settled as indicated in 
the submitting Clearing Member's notice, ``provided that the designated 
delivery date has occurred.'' \20\ However, in practice, when OCC 
directs broker-to-broker settlement, it also directs that if it is not 
possible for the Delivering Clearing Member to effect delivery of the 
underlying shares on the designated settlement date, then the 
settlement obligations of both the Delivering and Receiving Clearing 
Member will be delayed until such time as OCC designates a new exercise 
settlement date, settlement method or settlement value,\21\ pursuant to 
OCC's authority under Section 19 of Article VI of the By-Laws (Shortage 
of Underlying Securities).\22\ This directive allows Delivering 
Clearing Members the opportunity to effect settlement if they have the 
underlying securities and are able to effect delivery, but delays the 
settlement obligation when this is not possible. Under Article VI, 
Section 19 of the By-Laws, such settlement obligation remains delayed 
until either (i) OCC determines that a sufficient supply of the 
underlying security has become available to warrant the termination of 
such action and fixes a new delivery date for the contracts effected by 
the suspension,\23\ or (ii) OCC determines that there is no reasonable 
likelihood that a sufficient supply of the underlying security will 
become available within the foreseeable future to permit the Clearing 
Members affected by such suspension to discharge their obligations by 
delivery or receipt of the underlying security. In this situation OCC 
will exercises its authority to fix a cash value to settle the 
obligation for exercised option contracts, and/or, in the event that 
the suspended security underlies matured, physically-settled stock 
futures, terminates all rights and obligations to deliver or receive 
underlying securities and instead require payment and receipt of the 
final variation payment to fully discharge the rights and obligation 
for such matured, physically-settled stock futures.\24\
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    \20\ OCC Rule 909(d).
    \21\ See, e.g., Information Memo #53517, available at https://infomemo.theocc.com/infomemos?number=53517 (exemplative OCC Info 
Memo directing broker-to-broker settlement).
    \22\ See By-Laws Article VI, Section 19(a)(2)-(3) (providing 
that OCC may suspend the settlement obligations of exercised options 
when Clearing Members are unable to deliver the underlying 
security).
    \23\ See id. Section 19(b).
    \24\ See id. Section 19(c).
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    When such settlement obligation is delayed, the conditions under 
Rule 909(d) for considering a contraparty's failure to respond when the 
other Clearing Member marks an obligation settled is not satisfied. 
Accordingly, OCC proposes to amend Rule 909(d) to remove the provision 
directing that a contraparty's failure to respond to the other Clearing 
Member's settlement notice in OCC's system within two business days 
after such notice was made available to such Clearing Member may be 
treated as acknowledgement of settlement. In its place, OCC would 
provide that the contraparty's failure to respond would indicate that 
the obligation is unsettled and that OCC would maintain that status 
until such time as either (i) both Delivering and Receiving Clearing 
Members mutually agree to settle the obligation and notify OCC; or (ii) 
OCC settles the obligation on behalf of both Delivering and Receiving 
Clearing Members pursuant to OCC's policies and procedures. As amended, 
Rule 909(d) would clarify and better align Rule 909 with OCC's 
practices with respect to shortages of underlying securities under 
Article VI, Section 19 of the By-Laws.
    OCC also proposes to make an associated clarifying change by 
removing text from the first paragraph of Rule 909 related to the 
amount received or paid for the underlying security. Currently when OCC 
directs broker-to-broker settlement, the Delivering and Receiving 
Clearing Members inform OCC of settlement by submitting notices that 
specify the number of units of the underlying security delivered or 
received and equivalent cash amounts received or paid. In practice, 
however, the cash amounts received or paid are systematically 
determined and not specified by either Delivering or Receiving Clearing 
Members. The practice of systematically calculating the cash amounts 
received or paid allows OCC to reduce operational risk and avoid 
processing any inaccurate notices entered by Clearing Members. OCC 
believes that the proposed change would clarify and conform Rule 909 
with OCC's current practices.
Elimination of Associated Market Maker Sub-Account Type
    Article VI, Section 3(c), of OCC's By-Laws currently allows 
Clearing Members to use a combined market makers' account to carry the 
positions of multiple proprietary Market Makers or to carry the 
positions of multiple associated Market Makers,\25\ so long as such 
accounts are restricted to positions of proprietary Market Makers or 
associated Market Makers, respectively. Today, the associated Market 
Maker subaccount type is not used by Clearing Members. As a result, OCC 
proposes to eliminate the associated Market Maker sub-account type.
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    \25\ An ``associated Market Maker'' is currently defined in 
Article I of OCC's By-Laws as a person maintaining an account with a 
Clearing Member as a Market-Maker, specialist, stock market-maker, 
stock specialist or Registered Trader that is a Related Person of 
the Clearing Member and shall include any participant, as such, in 
an account of which 10% or more is owned by an associated Market-
Maker, or an aggregate of 10% or more of which is owned by one or 
more associated Market-Makers.
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    Accordingly, OCC proposes to delete the definition of an 
``associated Market Maker'' from Article I of the By-Laws and remove 
provisions in the By-Laws related to associated Market Makers and

[[Page 79983]]

the ability to establish a combined Market Maker account of associated 
Market Makers. Specifically, OCC proposes to delete references to an 
associated Market Maker and the ability to establish a combined Market 
Maker account from Article VI, Section 3(c) and Interpretation and 
Policies .03 and .06, and to revise the reference in the first sentence 
of Interpretations and Policies .06 to refer to Section 3(c). As 
amended, OCC's By-Laws would, in effect, provide for two, rather than 
three, combined Market Maker accounts: (i) a combined account limited 
to Market Makers that are not proprietary Market Makers; and (ii) a 
combined account limited to proprietary Market Makers.\26\
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    \26\ See proposed By-Law Article VI, Section 3(c), 
Interpretation and Policy .06.
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Implementation Timeframe
    OCC will release and implement the proposed change described above 
into production concurrently with the release of Ovation and the 
attendant retirement of ENCORE, which is planned to launch no earlier 
than July of 2025. 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 change 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
    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency must be designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, safeguard securities and funds in its custody or control 
or for which it is responsible, remove impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions, and, in general, to protect 
investors and the public interest; and are not designed to permit 
unfair discrimination among participants using the clearing agency.\27\ 
In addition, Rule 17Ad-22(e)(21) requires OCC, as a covered clearing 
agency, to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to be efficient and effective in 
meeting the requirements of its participants and the markets it serves, 
and have its management regularly review the efficiency and 
effectiveness of OCC's clearing and settlement arrangements, operating 
structure, and the scope of products cleared or settled.\28\
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(21).
---------------------------------------------------------------------------

    OCC believes that the proposed rule changes are consistent with 
these requirements because the proposed rule change is designed to 
decommission or render inoperative services that OCC no longer plans to 
provide based on the products and services demands of Clearing Members. 
For example, because OCC has not cleared any OTC options since 2014 and 
Clearing Members have not expressed an interest in using OCC to clear 
and settle OTC options going forward, OCC believes that removing all 
By-Law and Rule provisions related to OTC options promotes OCC being 
effective and efficient in meeting the requirements of Clearing Members 
with respect to the scope of products cleared and settled, consistent 
with Rule 17Ad-22(e)(21).\29\ Similarly, OCC believes that 
decommissioning OCC's voluntary service for Clearing Members that are 
party to a CMTA to facilitate the settlement of commissions and fees, 
which service has not been used by Clearing Members since 2016, also 
promotes the efficient and effective satisfaction of the requirements 
of Clearing Members consistent with Rule 17Ad-22(e)(21).\30\ As a third 
example, no Clearing Members currently use the associated Market Maker 
account subtype, so OCC proposes to eliminate such account type. By no 
longer supporting products or services that have not been used by 
Clearing Members, OCC can free up resources to focus on products and 
services for which there is demand from Clearing Members, thereby 
promoting a more efficient and effective OCC to meet the requirements 
of Clearing Members. OCC also believes that specifying in its By-Laws 
and Rules which products and services are no longer available or that 
are currently inoperative generally serves to protect investors and the 
public interest who benefit from clear and transparent rulebooks, 
consistent with Section 17A(b)(3)(F) of the Exchange Act.\31\
---------------------------------------------------------------------------

    \29\ Id.
    \30\ Id.
    \31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Several other proposed changes would similarly promote a clear and 
transparent rulebook consistent with Section 17A(b)(3)(F) of the 
Exchange Act.\32\ For example, the proposed change to Rule 408, which 
would make clear that the account allocation functionality is only 
available for futures and options on futures would eliminate any 
potential confusion that Clearing Members might have regarding the 
scope of this service. OCC's proposal to clarify that the default 
treatment of confirmed trades in futures and options as opening 
transactions in Rule 401 similarly promotes a clear and transparent 
rulebook and would reduce any potential concerns of a Clearing Member 
that a confirmed trade without having been marked as an opening 
position might inadvertently result in closing a Clearing Member's 
position.\33\ For the same reasons, the proposed change to Rule 909(d) 
would make clear OCC's practices with respect to the discharge of 
broker-to-broker obligations by specifying that OCC treats transactions 
as pending and would better align that Rule with By-Law Article VI, 
Section 19.\34\
---------------------------------------------------------------------------

    \32\ Id.
    \33\ This change would also make uniform such default treatment 
(as an opening transaction) across all account types (i.e., 
including market makers), which eliminates any potential unfair 
discrimination across different account types, consistent with the 
requirement under Section 17A(b)(3)(F) of the Exchange Act that 
OCC's rules not be designed to permit unfair discrimination in the 
use of OCC. 15 U.S.C. 78q-1(b)(3)(F).
    \34\ OCC also notes that all Clearing Members would continue to 
be treated the same under Rule 909(d) with respect to OCC's role in 
settling broker-to-broker transactions, which OCC believes promotes 
consistency with Section 17A(b)(3)(F) of the Exchange Act 
(prohibiting OCC's rules from being designed to permit unfair 
discrimination in the use of OCC).
---------------------------------------------------------------------------

    OCC believes that no longer requiring that Clearing Members must 
maintain records of both parties to a trade (pursuant to the proposed 
changes to Rule 208) is consistent with Section 17A(b)(3)(I) because 
OCC would no longer provide the counterparty information of trades to 
Clearing Members party to those trades. Such information is not 
required for clearing and settlement purposes, and providing this 
information would result in OCC developing and supporting functionality 
that would impact OCC's implementation of Ovation. In turn, by not 
providing counterparty information, OCC would help ensure that its 
Rules do not inappropriately burden competition among its participants 
by forcing Clearing Members to develop and support functionality not 
necessary for the clearing and settlement of trades.\35\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    OCC believes that the proposed changes to clarify that a Giving-Up 
Clearing Member is not required to provide instructions that identify 
the designated account of the Given-Up Clearing member serves the 
protection

[[Page 79984]]

of investors and the public interest consistent with Section 
17A(b)(3)(F) of the Exchange Act by providing more control to Clearing 
Members in allocating give-ups. For example, a Given-Up Clearing Member 
will have control to designate the account to which positions should be 
allocated and a Giving-Up Clearing Member will no longer be required to 
designate the specific account when it may or may not know the correct 
account. OCC believes that this would protect investors by reducing 
potential operational risk arising from a Giving-Up Clearing Member 
selecting the incorrect account of the Given-Up Clearing Member. This 
change would also provide a more efficient means for Giving-Up Clearing 
Members to ensure positions are allocated to the desired account, which 
efficiencies OCC believes helps removes impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions.\36\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Exchange Act \37\ 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. OCC does not believe that the proposed rule changes related to 
discontinuing OCC's settlement of fees and commissions for Clearing 
Member CMTA arrangements, elimination of the unused associated Market 
Maker account subtype, and rendering OTC option services inoperative 
would impact or impose any burden on competition. Neither of these 
services have been used by Clearing Members for at least six years, and 
the proposed changes would apply equally to all Clearing Members. 
Regarding the proposed rule change to no longer require a Clearing 
Member to keep records of its counterparties to confirmed trades, OCC 
believes that this change will remove any burden on competition that 
could arise from Clearing Members developing solutions to support 
functionality not required for clearing and settlement purposes. In 
that regard, OCC believes that this proposed rule change promotes 
greater consistency with Section 17A(b)(3)(I) of the Exchange Act.\38\
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78q-1(b)(3)(I).
    \38\ Id.
---------------------------------------------------------------------------

    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 clearing agencies, and 
either would not impact or impose a burden on competition or would help 
alleviate potential burdens on competition.
(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

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking); 
or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#146661787139777b7979717a6067546771773a737b62"><span class="__cf_email__" data-cfemail="a6d4d3cac38bc5c9cbcbc3c8d2d5e6d5c3c588c1c9d0">[email protected]</span></a>. Please include 
file number SR-OCC-2024-013 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-OCC-2024-013. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules-regulations/self-regulatory-organization-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/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection.
    All submissions should refer to file number SR-OCC-2024-013 and 
should be submitted on or before October 22, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Vanessa Countryman,
Secretary.
[FR Doc. 2024-22412 Filed 9-30-24; 8:45 am]
BILLING CODE 8011-01-P


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