[Federal Register Volume 89, Number 211 (Thursday, October 31, 2024)]
[Notices]
[Pages 86868-86879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25322]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101444; File No. SR-OCC-2024-015]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning Modifications to 
Its Governance Documents To Align With Recently Adopted SEC Governance 
Rules

October 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 October 21, 2024, The Options Clearing 
Corporation (``OCC'' or ``Corporation'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared primarily by OCC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would make modifications to its 
governance documents, including OCC's charters, Fitness Standards, and 
Third-Party Risk Management Framework, as part of an effort to achieve 
compliance with the recently adopted governance requirements \3\ by the 
Commission for clearing agencies registered with the Commission 
(``registered clearing agencies'') that became effective on February 5, 
2024. Registered clearing agencies, like OCC, must comply with most of 
the governance requirements by December 5, 2024. However, the 
governance requirement for independent directors, as described in 
further detail below, has a compliance date of December 5, 2025.
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    \3\ See Securities Exchange Act Release No. 98959 (Dec. 5, 
2023), 88 FR 84454 (Dec. 5, 2023) (File No. S7-21-22) (``SEC 
Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf.
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    In addition to the proposed modifications that OCC believes are 
necessary to comply with the recently adopted governance requirements, 
OCC is also including proposed modifications to its governance 
documents that reflect changes identified during OCC's annual review 
process. The proposed changes related to the governance requirements 
and the proposed changes related to OCC's annual review process are 
differentiated throughout this filing and described in further detail 
below. For clarification, OCC's Board of Directors Charter and 
Corporate Governance Principles (``Board Charter''), Governance and 
Nominating Committee (``GNC'') Charter, Risk Committee Charter, 
Technology Committee Charter, Compensation and Performance Committee 
(``CPC'') Charter, Regulatory Committee Charter, Audit Committee 
Charter, Fitness Standards, Third-Party Risk Management Framework, and 
Article III of OCC's By-Laws are collectively referred to in this 
proposed rule change as OCC's ``governance documents.''
    The proposed changes to OCC's governance documents are contained in 
Exhibits 5A through 5J, respectively, to File No. SR-OCC-2024-015. 
Material proposed to be added is marked by underlining and material 
proposed to be deleted is marked with strikethrough text.
    All terms with initial capitalization that are not otherwise 
defined herein have the same meaning as set forth in the OCC By-Laws 
and Rules.\4\
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    \4\ 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 registered with the Commission for 
standardized equity options listed on national securities exchanges. 
OCC operates under the jurisdiction of both the Commission and the 
Commodity Futures Trading Commission (``CFTC''). OCC also clears and 
settles certain stock loan transactions and transactions in futures and 
options on futures. In connection with its clearance and settlement of 
transactions in securities, OCC is a ``covered clearing agency'' \5\ 
regulated by the Commission. In connection with its clearance and 
settlement activities for transactions in futures and options on 
futures, OCC is a derivatives clearing organization (``DCO'') regulated 
by the CFTC. OCC is also designated as a systemically important 
financial market utility (``SIFMU'') by the Financial Stability 
Oversight Council pursuant to Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'').
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    \5\ The term ``covered clearing agency'' is defined in Exchange 
Act Rule 17Ad-22(a)(5) to mean ``a registered clearing agency that 
provides the services of a central counterparty or central 
securities depository.'' 17 CFR 240.17Ad-22(a)(5).
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    As an SEC registered clearing agency and a CFTC registered DCO, OCC 
is already subject to regulations that impose requirements on its 
governance structure. For example, the Exchange Act requires OCC's 
rules to assure a fair representation of its shareholders and Clearing 
Members in the selection of its directors and the administration of its 
affairs.\6\ In addition, SEC rules, among other things, require OCC to 
have governance arrangements that are clear and transparent and that 
provide risk management and internal audit personnel with a direct 
reporting line to, and oversight by, a risk management committee and an 
independent audit committee of the Board.\7\ In July of 2023, the CFTC 
also finalized new governance requirements for DCOs.\8\ Those 
requirements, among other

[[Page 86869]]

things, require the establishment of one or more market participant 
risk advisory working groups as a forum to seek risk-based input from a 
broad array of market participants. OCC previously filed a proposed 
rule change with the SEC to implement changes to address these 
requirements.\9\
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    \6\ 17 U.S.C. 78q-1(b)(3)(C).
    \7\ 17 CFR 240.17Ad-(22)(e)(2)(i) and (3)(iv).
    \8\ See 88 FR 44675 (July 13, 2023) (``CFTC Adopting Release''), 
https://www.govinfo.gov/content/pkg/FR-2023-07-13/pdf/2023-14361.pdf.
    \9\ See Securities Exchange Act Release No. 100194 (May 21, 
2024), 89 FR 46205 (May 28, 2024) (SR-OCC-2024-005).
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    OCC currently maintains a robust governance structure that is 
designed to comply with existing requirements of the Commission and 
CFTC. Recently, the Commission adopted new regulations regarding 
governance requirements for registered clearing agencies (``SEC 
Governance Rules'') that supplement the existing governance 
requirements applicable to OCC as a registered clearing agency.\10\ The 
SEC Governance Rules require, among other things, that registered 
clearing agencies:
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    \10\ See SEC Adopting Release, 88 FR 84454.
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    (i) Establish requirements that a majority of the members of the 
board of directors of the registered clearing agency be independent 
directors, as defined in 17Ad-25(a), and that each registered clearing 
agency consider all the relevant facts and circumstances to 
affirmatively determine that a director does not have a material 
relationship with the registered clearing agency or an affiliate of the 
registered clearing agency that would preclude services as an 
independent director.\11\
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    \11\ 17 CFR 240.17Ad-25(b)(1), (2).
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    (ii) Establish a nominating committee and a written evaluation 
process whereby such committee evaluates nominees for service as 
directors and evaluating the independence of nominees and 
directors,\12\ and require that a majority of the directors on the 
nominating committee be independent directors, including the chair of 
the nominating committee.\13\ The fitness standards for service as a 
director must be specified by the nominating committee, documented in 
writing and approved by the board of directors.\14\ The nominating 
committee must also document the outcome of the written evaluation 
process consistent with the fitness standards required in 17Ad-
25(c)(3).\15\
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    \12\ 17 CFR 240.17Ad-25(c)(1).
    \13\ 17 CFR 240.17Ad-25(c)(2).
    \14\ 17 CFR 240.17Ad-25(c)(3).
    \15\ 17 CFR 240.17Ad-25(c)(4).
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    (iii) Establish a risk management committee or committees of the 
board to assist the board of directors in overseeing the risk 
management of the registered clearing agency, and the membership of 
each risk management committee must be re-evaluated annually and at all 
times include representatives from the owners and participants of the 
registered clearing agency.\16\ The risk management committee must be 
able to provide a risk-based, independent, and informed opinion on all 
matters presented to the committee for consideration in a manner that 
supports the overall risk management, safety and efficiency of the 
registered clearing agency.\17\
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    \16\ 17 CFR 240.17Ad-25(d)(1).
    \17\ 17 CFR 240.17Ad-25(d)(2).
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    (iv) Establish composition requirements for committees that have 
authority to act on behalf of the board of directors, such that the 
composition of that committee must have at least the same percentage of 
independent directors as is required for the board of directors.\18\
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    \18\ 17 CFR 240.17Ad-25(e).
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    (v) Maintain policies and procedures to identify and document 
existing or potential conflicts of interest in the decision-making 
process of the clearing agency involving directors or senior managers 
of the registered clearing agency and mitigate or eliminate and 
document the mitigation or elimination of such conflicts of 
interest.\19\
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    \19\ 17 CFR 240.17Ad-25(g)(1)(2).
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    (vi) Maintain policies and procedures reasonably designed to 
require a director to document and inform the registered clearing 
agency promptly of the existence of any relationship or interest that 
reasonably could affect the independent judgment or decision-making of 
the director.\20\
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    \20\ 17 CFR 240.17Ad-25(h).
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    (vii) Maintain policies and procedures reasonably designed to: (1) 
require senior management to evaluate and document the risks related to 
an agreement with a service provider for core services, including under 
changes to circumstances and potential disruptions, and whether the 
risks can be managed in a manner consistent with the clearing agency's 
risk management framework; (2) require senior management to submit to 
the board of directors for review and approval any agreement that would 
establish a relationship with a service provider for core services, 
along with the risk evaluation; (3) require senior management to be 
responsible for establishing the policies and procedures that govern 
relationships and manage risks related to such agreements with service 
providers for core services and require the board of directors to be 
responsible for reviewing and approving such policies and procedures; 
and (4) require senior management to perform ongoing monitoring of the 
relationship, and report to the board of directors for its evaluation 
of any action taken by senior management to remedy significant 
deterioration in performance or address changing risks or material 
issues identified through such monitoring; or if the risks or issues 
cannot be remedied, require senior management to assess and document 
weaknesses or deficiencies in the relationship with the service 
provider for submission to the board of directors.\21\
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    \21\ 17 CFR 240.17Ad-25(i)(1)-(4).
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    (viii) Maintain policies and procedures for the board to solicit, 
consider, and document its consideration of the views of participants 
and other relevant stakeholders of the registered clearing agency 
regarding material developments in the registered clearing agency's 
risk management and operations.\22\
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    \22\ 17 CFR 240.17Ad-25(j).
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    OCC already maintains risk and nominating committees of the Board, 
fitness standards for directors, and written procedures for directors 
to identify and disclose conflicts of interest. However, to implement a 
compliant approach with those requirements for which OCC believes 
changes will be necessary, OCC is proposing to revise its governance 
documents such that the documents set clear and transparent governance 
standards and provide a framework for compliance. OCC's proposed 
changes to its governance documents establish requirements that 
provide: (i) OCC's Board be comprised of a majority of independent 
directors; (ii) each Board-level committee that has delegated authority 
from the Board be comprised of a majority of independent directors; 
(iii) OCC's existing Risk Committee and GNC align with the related 
requirements in the SEC Governance Rules regarding the responsibilities 
and composition of the committees; (iv) OCC's Fitness Standards align 
with the related requirements in the SEC Governance Rules for 
directors; and (v) OCC's Board Charter and Third-Party Risk Management 
Framework incorporate the requirements in the SEC Governance Rules 
regarding review, approval, and monitoring of agreements with service 
providers for core services. OCC also plans to revise other internal 
policies and procedures to align with the remaining requirements in the 
SEC Governance Rules that include, among other things, the 
identification and analysis of directors for independence, and the 
management of risks from relationships with service providers for

[[Page 86870]]

core services.\23\ OCC believes that the proposed changes will allow 
OCC to appropriately comply with the SEC Governance Rules by including 
the proposed provisions in OCC's governance documents.
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    \23\ OCC has included as confidential Exhibits 3A through 3E to 
File No SR-OCC-2024-015 the other internal policies and procedures 
referenced here.
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1. Purpose
    The purpose of this proposed rule change by OCC is to modify its 
governance documents to implement changes that are designed to comply 
with requirements in the SEC Governance Rules, which are found in 17 
CFR 240.17Ad-25 (``Rule 17Ad-25'').\24\ In the Commission's adopting 
release, the Commission clarifies that it is adopting new rules to 
improve the governance of registered clearing agencies by reducing the 
likelihood that conflicts of interest may influence a board of 
directors or equivalent governing body of a registered clearing 
agency.\25\ In addition, the SEC Governance Rules identify certain 
responsibilities of a clearing agency board, increase transparency into 
board governance, and, more generally, improve the alignment of 
incentives among owners and participants of a registered clearing 
agency.\26\
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    \24\ 17 CFR 240.17Ad-25.
    \25\ See SEC Adopting Release at 84454.
    \26\ Id.
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    In addition to the proposed rule changes necessary to comply with 
the SEC Governance Rules, OCC proposes a series of rule changes 
identified during OCC's annual review process. While these proposed 
changes to OCC's governance documents are described in further detail 
below, thematically, they consist of the following:
    i. Proposed changes in effort to achieve compliance with the SEC 
Governance Rules:
    <bullet> Revisions to OCC's Board Charter to specify: (i) a 
majority of OCC's Board be comprised of independent directors (ii) that 
each Board-level committee established by the Board and that has 
delegated authority from the Board be comprised of a majority of 
independent directors, and (iii) the Board's oversight role of senior 
management as it relates to management of risks from relationships with 
service providers for core services.
    <bullet> Revisions to the charters for OCC's six Board-level 
committees that have delegated authority from the Board of Directors, 
including the GNC Charter, Risk Committee Charter, Technology Committee 
Charter, CPC Charter, Regulatory Committee Charter, and Audit Committee 
Charter, to specify that each committee be comprised of a majority of 
directors who are independent.
    <bullet> Revisions to OCC's GNC Charter to specify the 
responsibilities of the GNC, including that: (i) the GNC specify 
fitness standards for serving as a director that are documented in 
writing and approved by the Board; (ii) the GNC maintain a written 
evaluation process to evaluate all nominees for potential service as 
directors and evaluate the independence of nominees and directors for 
consistency with regulatory requirements; and (iii) the outcome of that 
evaluation process be documented consistent with regulatory 
requirements.
    <bullet> Revisions to OCC's Risk Committee Charter to specify that 
in making their nominations for the Risk Committee, the GNC and the 
Board will take into consideration the ability of the Risk Committee to 
provide a risk-based, independent, and informed opinion on all matters 
presented to the Risk Committee for consideration.
    <bullet> Revisions to OCC's Fitness Standards to include the 
consideration of: (i) whether the nominee would help demonstrate that 
the Board, taken as a whole, has a diversity of skills, knowledge, 
experience, and perspectives, and (ii) the views of other stakeholders, 
aside from owners and participants, who may be affected by decisions of 
OCC's Board.
    <bullet> Revisions to OCC's Third-Party Risk Management Framework 
to incorporate the requirements in the SEC Governance Rules related to 
management of risks from relationships with service providers for core 
services. This includes requiring senior management to: (i) evaluate 
and document risks related to an agreement with a service provider for 
core services; (ii) submit to the Board for review and approval any 
agreement establishing a relationship with a service provider for core 
services along with a risk evaluation; and (iii) perform ongoing 
monitoring of service providers for core services and report to the 
Board any action taken by senior management to remedy significant 
deterioration in performance, address material issues, and assess and 
document weaknesses or deficiencies that cannot be remedied.
    ii. Proposed changes identified during OCC's annual review process:
    <bullet> Revisions to OCC's Board Charter to provide specific 
requirements used to determine what constitutes a Public Director.
    <bullet> Revisions to Article III, Section 6A of OCC's By-Laws to 
incorporate the proposed changes to OCC's definition of a Public 
Director.
    <bullet> Revisions to OCC's Fitness Standards to incorporate the 
proposed changes to OCC's definition of a Public Director.
    <bullet> Revisions to OCC's CPC Charter to expand the description 
of the role of the CPC as it relates to oversight of the development 
and administration of OCC's Human Resources programs.
    <bullet> Revisions to OCC's Regulatory Charter to incorporate minor 
grammatical updates.
    <bullet> Revisions to OCC's Third-Party Risk Management Framework 
to: (i) define ``Exchange Relationship'' as it relates to risks arising 
from third-party relationships; (ii) update the description of 
``Information Technology and Security risks and ``Legal and Regulatory 
risks'' to align with current practice; (iii) update the name and 
abbreviation of OCC's working group to reflect the combination of two 
pre-existing working groups; and (iv) provide additional clarifying 
information on how OCC engages and manages vendor relationships.
OCC's Existing Governance Structure
    Currently, OCC's Board of Directors is composed of Public 
Directors,\27\ Exchange Directors,\28\ Member Directors,\29\ and a 
Management Director.\30\ OCC's current Board is comprised of up to 
twenty-one directors total, including nine Member Directors, up to six 
Public Directors, five Exchange Directors, and one Management Director. 
In this way, the directors that serve on the Board represent a range of 
different stakeholders from the markets that OCC serves. OCC's Board 
already reviews the independence of each director through its Director 
Questionnaire, which is used to facilitate the analysis of whether a 
director appropriately can be considered independent, as defined by the 
Board, and to identify and document any potential conflicts of 
interest. OCC's current processes require, among other

[[Page 86871]]

things, an annual attestation of the information included in the 
Director Questionnaire. OCC also maintains a Code of Conduct for OCC 
Directors that requires that directors update the necessary documents 
and information if there are any changes.
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    \27\ Terms regarding service by Public Directors are set forth 
in OCC's By-Laws and in OCC's Fitness Standards. See e.g., OCC By-
Laws Article III, Section 6A; Fitness Standards at ``Additional 
Criteria for the Public Directors,'' See supra note 4.
    \28\ Terms regarding service by Exchange Directors are set forth 
in OCC's By-Laws and in OCC's Fitness Standards. See e.g., OCC By-
Laws Article III, Section 6; Fitness Standards at ``Additional 
Criteria for Exchange Directors'' Id.
    \29\ Terms regarding service by Member Directors are set forth 
in OCC's By-Laws and in OCC's Fitness Standards. See e.g., OCC By-
Laws Article III, Section 2; Fitness Standards at ``Additional 
Criteria for Member Directors'' Id.
    \30\ Terms regarding service by the Management Director are set 
forth in OCC's By-Laws. For example, the Management Director must be 
an OCC employee. See e.g., OCC By-Laws Article III, Section 7 Id.
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    OCC also already maintains a Board-level Risk Committee and GNC, as 
required by the SEC Governance Rules. In addition to the Risk Committee 
and GNC, OCC's Board oversees four other Board-level committees that 
are comprised of certain Board directors and that assist the Board in 
carrying out its supervisory role. The other committees include the 
Regulatory Committee, the Technology Committee, the Audit Committee, 
and the CPC. In connection with OCC's existing Board and Board 
committee structure, OCC maintains charters for the Board and all 
Board-level committees, and Fitness Standards for Directors, Clearing 
Members and Others (``Fitness Standards''). The charters, Fitness 
Standards, and Code of Conduct are all publicly available on OCC's 
website.\31\
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    \31\ See Board Charters, Board Committee Charters and Other 
Governance Documents, available at https://www.theocc.com/company-information/documents-and-archives/board-charters.
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    In addition to maintaining a Board-level Risk Committee, OCC also 
maintains a non-Board-level risk management committee. This non-Board-
level risk management committee is a subset of OCC's existing Financial 
Risk Advisory Counsil (``FRAC'') and is comprised of clearing members 
and customers of clearing members. As required by the recently adopted 
CFTC governance rules,\32\ OCC consults with this non-Board-level risk 
committee on all matters that could materially affect the risk profile 
of OCC.\33\ As such, OCC believes this also satisfies the SEC 
Governance Rules requirement for the board of directors to solicit and 
consider viewpoints of participants and other relevant stakeholders 
regarding material developments in its risk management and 
operations.\34\
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    \32\ See 88 FR 44675 (July 13, 2023) (``CFTC Adopting 
Release''), https://www.govinfo.gov/content/pkg/FR-2023-07-13/pdf/2023-14361.pdf.
    \33\ OCC's FRAC Guiding Principles is included as confidential 
Exhibit 3F to File No. SR-OCC-2024-015, and provides more 
information on the responsibilities and composition of the non-
Board-level risk management committee.
    \34\ 17 CFR 240.17Ad-25(j).
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    Lastly, OCC already maintains a Third-Party Risk Management 
Framework that is reviewed and approved at least annually by OCC's Risk 
Committee and Board. OCC's Third-Party Risk Management Framework 
outlines OCC's approach to identify, measure, monitor, and manage risks 
arising from third-party relationships, consistent with certain 
requirements in the SEC Governance Rules that require senior management 
to be responsible for establishing policies and procedures that govern 
relationships and manage risks related to agreements with service 
providers for core services, and that require the board of directors to 
review and approve such policies and procedures.\35\
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    \35\ 17 CFR 240.17Ad-25(i)(3).
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Proposed Changes to OCC's Board Charter
The Mission of the Board
    The SEC Governance Rules require the Board to be comprised of a 
majority of ``independent directors'' as that term is defined in the 
SEC Governance Rules.\36\ To align with this requirement, OCC proposes 
to modify its Board Charter to clarify that a majority of directors, 
rather than a substantial portion of directors, be independent 
directors, as defined by the SEC Governance Rules \37\ and the 
judgement of the Board. Specifically, OCC's proposed changes to the 
Board Charter would provide that as part of the Board's mission, the 
Board fulfills its oversight role by ensuring that at least a majority 
of the directors on the Board are independent as determined by the 
Board and in accordance with Securities and Exchange Commission Rule 
17Ad-25(b) adopted on December 5, 2023.\38\ OCC's proposed changes 
expand the requirement that all Board-level committees, not just the 
Audit Committee, be comprised of independent directors. Specifically, 
OCC's proposed changes eliminate the reference that only the Audit 
Committee of the Board be comprised of independent directors and 
provide that at least a majority of the directors on each Board-level 
committee be comprised of independent directors.
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    \36\ 17 CFR 240.17Ad-25(a).
    \37\ 17 CFR 240.17Ad-25(b).
    \38\ Id.
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    The SEC Governance Rules also require OCC to have written policies 
and procedures designed to address certain aspects of risk management 
in connection with relationships with service providers for core 
clearing agency services, and require senior management to be 
responsible for establishing the policies and procedures and the Board 
to be responsible for reviewing and approving such policies and 
procedures.\39\ The SEC Governance Rules also require senior management 
to perform ongoing monitoring of the relationship with a service 
provider for core services and report to the Board for its evaluation 
of any action taken by senior management to remedy significant 
deterioration in performance or address changing risks or material 
issues identified through such monitoring.\40\ If the risks or issues 
cannot be remedied, the SEC Governance Rules require that senior 
management assess and document weaknesses or deficiencies in the 
relationship with the service provider for submission to the Board.\41\ 
To align with these requirements, OCC's proposed changes to the Board 
Charter would provide that as part of the Board's mission, the Board 
fulfills its oversight role by overseeing service providers that 
provide core services for OCC, including reviews of risk assessments 
for current vendors and approving terms for new vendors that will 
provide core services for OCC. OCC's proposed changes would also 
provide that the Board fulfills its oversight role by overseeing senior 
management's review and approval of an agreement that establishes a 
relationship with a service provider for core services, and overseeing 
senior management's risk assessment for such agreements. In addition, 
OCC's proposed changes provide that the Board review and approve 
policies and procedures established by senior management that govern 
relationships and manage risks related to agreements with service 
providers for core services. Lastly, OCC's proposed changes provide 
that the Board evaluate any action taken by senior management to remedy 
significant deterioration in performance or address changing risks or 
material issues identified through senior management's monitoring of 
relationships with a service provider for core services, and oversee 
senior management's assessment and document of weaknesses or 
deficiencies with the service provider if such risks or issues cannot 
be remedied.
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    \39\ 17 CFR 240.17Ad-25(i)(2),(3).
    \40\ 17 CFR 240.17Ad-25(i)(4).
    \41\ Id.
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Board Issues--Size of Board; Composition
    The SEC Governance Rules define independent director as ``a 
director of the registered clearing agency who has no material 
relationship with the registered clearing agency or any affiliate 
thereof.'' \42\ The SEC Governance Rules require that the Committee 
affirmatively determine and document whether a nominee or director is 
appropriately categorized as an independent director, as defined in

[[Page 86872]]

the SEC Governance Rules.\43\ To align with this requirement, OCC 
proposes to modify its Director Questionnaire to align OCC's analysis 
of potential conflicts with the applicable regulatory requirements in 
the SEC Governance Rules and facilitate the analysis of whether a 
nominee or director appropriately can be considered independent.
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    \42\ 17 CFR 240.17Ad-25(a).
    \43\ 17 CFR 240.17Ad-25(b)(2).
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    Furthermore, to reflect the definition of independent director as 
defined by the SEC Governance Rules,\44\ OCC's proposed changes to the 
Board Charter would also state that it is the policy of the Board that 
the Board at all times reflect that a majority, rather than a 
substantial portion, of directors be ``independent'' as defined by the 
SEC Governance Rules and the judgment of the Board. OCC's proposed 
changes remove the reference that a substantial portion of directors 
must be independent ``of OCC and OCC's management.'' OCC believes these 
proposed changes to the Board composition section of the Board Charter 
will satisfy the independent director requirement, as defined in the 
SEC Governance Rules.
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    \44\ 17 CFR 240.17Ad-25(a).
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Board Issues--Selection of Exchange Directors
    As described in more detail below, the SEC Governance Rules contain 
several requirements related to the responsibilities of a nominating 
committee.\45\ Currently, all OCC directors are subject to a standard 
criterion outlined in OCC's existing Fitness Standards that is 
applicable to all directors and used when determining the nomination of 
a director. The SEC Governance Rules require that the nominating 
committee must have a written evaluation process whereby the nominating 
committee shall evaluate nominees under consideration for a 
directorship and evaluate the independence of nominees and directors. 
OCC's proposed changes to the Board Charter clarify this requirement 
and the role of the GNC when describing the selection of Exchange 
Directors. OCC's proposed changes state that as provided in the By-
Laws, each Exchange Director shall, after evaluation by the Governance 
and Nominating Committee, be elected by the Equity Exchange entitled to 
vote for such Exchange Director at each annual meeting of stockholders.
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    \45\ 17 CFR 240.17Ad-25(c).
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Committees--Board Committees
    As noted above, OCC maintains six Board-level committees including 
the GNC, the Risk Committee, Technology Committee, CPC, Regulatory 
Committee and Audit Committee. Subject to the direction of the Board, 
all six committees are empowered to act on behalf of the Board with 
respect to any matter necessary or appropriate to the accomplishment of 
the purpose and responsibilities set forth in the committee charters. 
The SEC Governance Rules specify that any Board committee that has the 
authority to act on behalf of the Board must have at least the same 
percentage of independent directors as the Board itself as identified 
in paragraph (b)(1) of Rule 17Ad-25.\46\ To reflect this requirement, 
OCC's proposed changes to its Board Charter provide that each committee 
established by the Board must be comprised of a majority of directors 
who are deemed independent by the Board and in accordance with the SEC 
Governance Rules.
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    \46\ 17 CFR 240.17Ad-25(e).
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Committees--Independence for Audit Committee Service
    For clarity and consistency, OCC also proposes to add the word 
``additional'' prior to the word ``independence'' when describing the 
independence criteria for the Audit Committee service. This helps to 
clarify that OCC maintains separate independence requirements for the 
Audit Committee, which are also consistent with listed company Audit 
Committee standards \47\ and are in addition to the requirements 
outlined in the SEC Governance Rules.
---------------------------------------------------------------------------

    \47\ See Nasdaq Listing Rule 5605(c)(2) and Section 303A.06 of 
NYSE Listed Company Manual.
---------------------------------------------------------------------------

Proposed Changes to OCC's Board Charter and By-Laws Identified During 
OCC's Annual Review Process
    As part of OCC's annual review of its Board Charter, OCC is 
proposing changes to its Board Charter and Article III of the By-Laws 
to provide specific requirements used to determine whether an 
individual director meets the definition of a Public Director. As 
outlined in Article III of OCC's current By-Laws, OCC's existing Board 
of Directors must be composed of nine Member Directors, up to five 
Exchange directors, no less than five Public Directors, and may include 
one Management Director.\48\ To account for changes in regulatory 
requirements, OCC's proposed changes to the Board Charter provide that 
OCC's Board must be comprised of no less than five directors who are 
not an associated person or employee of (i) an entity that is 
registered or exempt from registration with the Securities and Exchange 
Commission or Commodity Futures Trading Commission or (ii) affiliate of 
such an entity described in (i). OCC proposes to remove reference to 
the language that the director must not be affiliated with any national 
securities exchange, national securities association, designated 
contract market, futures commission merchant, or broker or dealer in 
securities.
---------------------------------------------------------------------------

    \48\ See supra note 4, Article III, Section I of the By-Laws.
---------------------------------------------------------------------------

    To incorporate these proposed changes in the definition of a Public 
Director as described in OCC's Board Charter, OCC also proposes to 
modify Article III, Section 6A of the By-Laws.\49\ OCC's proposed 
changes to Article III, Section 6A of the By-Laws provide that prior to 
each annual meeting of stockholders at which one or more Public 
Directors are to be elected, the GNC shall, for each directorship among 
the Public Directors to be filled at such annual meeting, nominate one 
person who is not an associated person or employee of an: (i) entity 
that is registered or exempt from registration with the Commission or 
CFTC; or (ii) affiliate of such an entity described in (i) and submit a 
list of its nominations in writing to the Board of Directors. To remain 
consistent with the proposed changes in OCC's Board Charter and provide 
specific requirements for Public Directors, OCC proposes to eliminate 
reference to the language that the person must not be affiliated with 
any national securities exchange, national securities association, 
designated contract market, futures commission merchant, or broker or 
dealer in securities.
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

    OCC believes these proposed changes to its Board Charter and By-
Laws identified during the annual review process provide specific 
requirements for how OCC determines whether a director is affiliated in 
the industry and the requirements applicable to a Public Director.
Proposed Changes to OCC's GNC Charter
Purpose
    The SEC Governance Rules require, among other things, that 
registered clearing agencies establish a nominating committee and a 
written evaluation process for evaluating board nominees and the 
independence of nominees and directors and specify requirements with 
respect to its composition, director fitness standards, and 
documentation of

[[Page 86873]]

the outcome of the written evaluation process.\50\ As noted above, OCC 
already maintains a GNC, and maintenance of OCC's existing GNC is 
consistent with the requirement in the SEC Governance Rules that OCC 
must have a nominating committee. OCC's existing GNC Charter provides 
that the purpose of the GNC is to assist the Board in overseeing OCC's 
corporate governance processes, including assessing that OCC's 
governance arrangements are clear and transparent, establishing the 
qualifications necessary for Board service to ensure that the Board is 
able to discharge its duties and responsibilities, identifying and 
recommending to the Board candidates eligible for service as Public 
Directors and Member Directors, and resolving certain conflicts of 
interest. To clarify the role of the GNC and more closely align with 
the language in the SEC Governance Rules requirement that the 
nominating committee evaluate board nominees, OCC's proposed changes to 
the GNC Charter provide that the GNC is to assist the Board in 
overseeing OCC's corporate governance processes, including evaluating 
candidates for Board service.
---------------------------------------------------------------------------

    \50\ 17 CFR 240.17Ad-25(c).
---------------------------------------------------------------------------

Membership and Organization
    The SEC Governance Rules require a majority of directors serving on 
the nominating committee be independent directors, and the chair of the 
nominating committee be an independent director.\51\ To reflect this 
requirement, OCC's proposed changes to the GNC Charter provide that at 
least a majority of the Committee must be comprised of directors who 
are independent directors, consistent with the Securities and Exchange 
Commission Rule 17Ad-25(c)(2) and the judgment of the Board. OCC's 
proposed changes also specify that the Chair must be a Public Director, 
who is also an independent director as defined in accordance with 
Securities and Exchange Commission Rule 17Ad-25(c)(2).\52\ OCC believes 
these proposed changes align with the SEC Governance Rules requirements 
related to composition requirements for a nominating committee.
---------------------------------------------------------------------------

    \51\ 17 CFR 240.17Ad-25(c)(2).
    \52\ Id.
---------------------------------------------------------------------------

Functions and Responsibilities
    The SEC Governance Rules also contain several other requirements 
related to the responsibilities of a nominating committee. These 
requirements provide that: (i) the nominating committee must have a 
written evaluation process that includes the evaluation of all 
nominees, no matter the source of nomination, and an evaluation of all 
nominees and directors regarding status as independent directors; \53\ 
and (ii) the nominating committee must document the outcome of its 
written evaluation processes, including identification of whether each 
nominee or director meets the definition of independent director, as 
defined in the SEC Governance Rules.\54\ To align with these 
responsibilities, OCC's proposed changes to the GNC Charter provide 
that the GNC must maintain a written evaluation process, which will be 
documented in meeting materials and minutes, to evaluate all nominees 
for potential service as directors and evaluate the independence of 
nominees and directors for consistency with regulatory requirements. As 
part of OCC's written evaluation process that will be documented in 
meeting materials and minutes, the GNC will review a packet of 
materials that contains background information for all Board candidates 
as well as any other documentation that describes other relevant 
information and criteria for Board candidates. Additionally, OCC 
maintains various written documents that would guide the GNC's 
evaluation of director candidates (e.g., Fitness Standards, director 
questionnaire). These documents provide the requirements for director 
candidates and articulate what the GNC must consider when evaluating 
prospective Board members. OCC's proposed changes also specify that the 
outcome of the written evaluation process must be documented consistent 
with applicable regulatory requirements. OCC's existing GNC Charter 
provides that the GNC identifies, screens and reviews individuals 
qualified to be elected or appointed as Member Directors or Public 
Directors. The nomination of Exchange Directors is separately the 
responsibility, under the By-Laws, of each OCC stockholder 
exchange.\55\ To reflect the requirements outlined in the SEC 
Governance Rules, OCC's proposed changes provide that the GNC must 
identify, screen, and review individuals qualified to be elected or 
appointed, as the case may be, to serve as Directors. Here, OCC's 
proposed changes eliminate the specific terms ``Member Directors'' and 
``Public Directors'' and generally use the term ``Directors'' because 
the SEC Governance Rules require that the GNC perform the same 
evaluation process for all nominees for potential service as directors.
---------------------------------------------------------------------------

    \53\ 17 CFR 240.17Ad-25(c)(1).
    \54\ 17 CFR 240.17Ad-25(c)(4)(iv).
    \55\ See supra note 4.
---------------------------------------------------------------------------

    An additional requirement of the nominating committee that is 
outlined in the SEC Governance Rules is that the fitness standards for 
serving as a director must be specified by the nominating committee, 
documented in writing, and approved by the Board.\56\ Although OCC 
already maintains fitness standards for directors, OCC's proposed 
changes to the GNC Charter state that the GNC must specify fitness 
standards for serving as a director that are documented in writing and 
approved by the Board in order to comply with Rule 17Ad-25(c)(3).
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17Ad-25(c)(3).
---------------------------------------------------------------------------

    The SEC Governance Rules also require that the nominating committee 
document the outcome of the written evaluation process consistent with 
the fitness standards such that the process demonstrate that the 
nominating committee considered the views of other stakeholders who may 
be affected by the decisions of the registered clearing agency.\57\ To 
align with this requirement, OCC's proposed changes in the GNC Charter 
provide that the Committee shall, in its evaluation of nominees for 
serving as directors, consider the views of other stakeholders who may 
be affected by the decisions of the Board of Directors, other than 
owners of the Corporation and Clearing Members.
---------------------------------------------------------------------------

    \57\ 17 CFR 240.17Ad-25(c)(4)(iii).
---------------------------------------------------------------------------

    To align with the process of evaluation for determining an 
independent director as described by the SEC Governance Rules and the 
requirement for the nominating committee to evaluate the independence 
of nominees and directors,\58\ OCC's proposed changes provide that the 
GNC must review and advise the Board with regard to whether directors 
are independent directors in accordance with Securities and Exchange 
Commission Rule 17Ad-25(c)(1).
---------------------------------------------------------------------------

    \58\ 17 CFR 240.17Ad-25(c)(1).
---------------------------------------------------------------------------

    OCC's GNC Charter provides that the GNC advises the Board with 
respect to committee structure, operations and charters, including 
recommending to the Board for its approval the appointment of directors 
to Board committees and assignment of committee Chairs, in each case 
after consultation with the Chairman. To incorporate the requirement 
that the membership of each risk management committee be re-evaluated 
annually as defined by 17Ad-25(d)(1),\59\ OCC's proposed changes to the 
GNC Charter include the requirement that each

[[Page 86874]]

calendar year, the GNC must recommend to the Board for its approval the 
appointment of directors to Board committees and assignment of 
committee Chairs, in each case after consultation with the Chairman.
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17Ad-25(d)(1).
---------------------------------------------------------------------------

Proposed Changes to OCC's Risk Committee Charter
Membership and Organization
    The SEC Governance Rules require, among other things, the 
establishment of a risk management committee of the Board to assist the 
Board in overseeing the risk management of the clearing agency.\60\ As 
noted above, OCC already satisfies this requirement through the 
maintenance of its Risk Committee of the Board. In the performance of 
its duties, the SEC Governance Rules require the Risk Committee to be 
able to provide a risk-based, independent, and informed opinion on all 
matters presented to the committee for consideration in a manner that 
supports the overall risk management, safety, and efficiency of the 
registered clearing agency.\61\ To promote clear consistency with these 
requirements, OCC's proposed changes to the Risk Committee Charter 
provide that in making their nominations, the GNC and the Board take 
into consideration the desire to obtain input from a broad array of 
market participants on risk management issues and the ability of the 
Committee to provide a risk-based, independent, and informed opinion on 
all matters presented to it for consideration.
---------------------------------------------------------------------------

    \60\ 17 CFR 240.17Ad-25(d)(1).
    \61\ 17 CFR 240.17Ad-25(d)(2).
---------------------------------------------------------------------------

    The SEC Governance Rules also require that any Board committee with 
the authority to act on behalf of the Board must have at least the same 
percentage of independent directors as the Board itself.\62\ Because 
the Risk Committee, subject to the direction of the Board, is empowered 
to act on behalf of the Board, with respect to any matter necessary or 
appropriate to the accomplishment of the purpose and responsibilities 
set forth in the Risk Committee Charter, OCC's proposed changes to the 
Risk Committee Charter provide that at least a majority of the 
Committee must be composed of directors who are independent directors, 
consistent with Securities and Exchange Commission Rule 17Ad-25(e) and 
the judgment of the Board.
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-25(e).
---------------------------------------------------------------------------

Functions and Responsibilities
    The SEC Governance Rules require, among other things, that a 
clearing agency address the management of risks from relationships with 
service providers for core services, as defined by the SEC Governance 
Rules.\63\ These requirements include that each registered clearing 
agency must establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to require senior 
management to evaluate and document the risks related to an agreement 
with a service provider for core services.\64\ OCC's existing Risk 
Committee Charter provides that the Committee shall receive a quarterly 
report from management that provides information on the effectiveness 
of OCC's management of third-party risks, including key linked and 
vendor relationships. To incorporate the SEC Governance Rules 
requirements that senior management must evaluate and document the 
risks related to an agreement with a service provider for core 
services, OCC's proposed changes to the Risk Committee Charter provide 
that the Committee shall also provide risk assessments to the Board for 
any service providers providing core services to OCC, consistent with 
the SEC Governance Rules.\65\
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17Ad-25(i).
    \64\ 17 CFR 240.17Ad-25(i)(1).
    \65\ Id.
---------------------------------------------------------------------------

Proposed Changes to OCC's Technology Committee Charter
Membership and Organization
    The SEC Governance Rules require that any Board committee with the 
authority to act on behalf of the Board must have at least the same 
percentage of independent directors as the Board itself.\66\ Because 
the Technology Committee, subject to the direction of the Board, is 
empowered to act on behalf of the Board, with respect to any matter 
necessary or appropriate to the accomplishment of the purpose and 
responsibilities set forth in the Technology Committee Charter, OCC's 
proposed changes to the Technology Committee Charter provide that at 
least a majority of the Committee must be composed of directors who are 
independent directors, consistent with the Securities and Exchange 
Commission Rule 17Ad-25(e) and the judgment of the Board.
---------------------------------------------------------------------------

    \66\ 17 CFR 240.17Ad-25(e).
---------------------------------------------------------------------------

Proposed Changes to OCC's CPC Charter
Membership and Organization
    The SEC Governance Rules require that any Board committee with the 
authority to act on behalf of the Board must have at least the same 
percentage of independent directors as the Board itself.\67\ Because 
the CPC, subject to the direction of the Board, is empowered to act on 
behalf of the Board with respect to any matter necessary or appropriate 
to the accomplishment of the purpose and responsibilities set forth in 
the CPC Charter, OCC's proposed changes to the CPC Charter provide that 
at least a majority of the Committee must be composed of directors who 
are independent directors, consistent with Securities and Exchange 
Commission Rule 17Ad-25(e) and the judgment of the Board.
---------------------------------------------------------------------------

    \67\ Id.
---------------------------------------------------------------------------

Proposed Changes to OCC's CPC Charter Identified During OCC's Annual 
Review Process
    As part of OCC's annual review of the CPC Charter, OCC also 
proposes to make updates to the CPC Charter to expand the description 
of the role of the CPC as it relates to oversight of the development 
and administration of OCC's Human Resources programs. OCC's proposed 
changes provide that the CPC must oversee the development and 
administration of OCC's Human Resources programs and policies, 
including talent acquisition, compensation performance management, 
diversity, equity, and inclusion programs, training and development, 
benefits, and succession planning for critical roles. The purpose of 
these proposed changes to the CPC Charter is to more closely align with 
OCC's existing Human Resources programs and policies.
Proposed Changes to OCC's Regulatory Committee Charter
Membership and Organization
    The SEC Governance Rules require that any Board committee with the 
authority to act on behalf of the Board must have at least the same 
percentage of independent directors as the Board itself.\68\ Because 
the Regulatory Committee, subject to the direction of the Board, is 
empowered to act on behalf of the Board, with respect to any matter 
necessary or appropriate to the accomplishment of the purpose and 
responsibilities set forth in the Regulatory Committee Charter, OCC's 
proposed changes to the Regulatory Charter provide that at least a 
majority of the Committee must be composed of directors who are 
independent directors, consistent with Securities and Exchange 
Commission Rule 17Ad-25(e) and the judgment of the Board.
---------------------------------------------------------------------------

    \68\ 17 CFR 240.17Ad-25(e).

---------------------------------------------------------------------------

[[Page 86875]]

Proposed Changes to OCC's Regulatory Committee Charter Identified 
During OCC's Annual Review Process
    As part of OCC's annual review process, OCC also proposes to make 
one minor grammatical update to the Regulatory Committee Charter by 
replacing the word ``in'' with the word ``is'' where needed in a 
sentence under section II subpart B of the document.
Proposed Changes to OCC's Audit Committee Charter
Membership and Organization
    The SEC Governance Rules require that any Board committee with the 
authority to act on behalf of the Board must have at least the same 
percentage of independent directors as the Board itself.\69\ Because 
the Audit Committee, subject to the direction of the Board, is 
empowered to act on behalf of the Board, with respect to any matter 
necessary or appropriate to the accomplishment of the purpose and 
responsibilities set forth in the Audit Committee Charter, OCC's 
proposed changes to the Audit Committee Charter provide that at least a 
majority of the Committee must be composed of directors who are 
independent directors, consistent with Securities and Exchange 
Commission Rule 17Ad-25(e) and the judgment of the Board.
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

Proposed Changes to OCC's Fitness Standards
Criteria Applicable to all Directors
    As described above, OCC already maintains Fitness Standards for 
directors. In addition to the requirement that the GNC specify the 
Fitness Standards and that the Fitness Standards be approved by the 
Board, the SEC Governance Rules also require that the GNC's written 
evaluation process in regards to the Fitness Standards consider: (i) 
the nominee's expertise, availability, and integrity, and demonstrate 
that the Board, taken as a whole, has a diversity of skills, knowledge 
experience and perspectives; (ii) the views of other stakeholders who 
may be affected by OCC's decisions; and (iii) whether each nominee or 
director would meet the definition of independent director in the SEC 
Governance Rules and whether each nominee or director has a known 
material relationship with OCC or other specified persons.\70\ To align 
with these requirements more closely, OCC's proposed changes to the 
Fitness Standards provide that in considering nominees for election or 
appointment to the Board, the GNC must consider whether the individual 
would help demonstrate that the Board, taken as a whole, has a 
diversity of skills, knowledge, experience, and perspectives and 
whether the individual understands and is able to consider the general 
position and views of other stakeholders who may be affected by the 
decisions of the Board of Directors, other than the owners of OCC and 
Clearing Members.
---------------------------------------------------------------------------

    \70\ 17 CFR 240.17Ad-25(c)(4)(i), (iii), (iv).
---------------------------------------------------------------------------

Proposed Changes to OCC's Fitness Standards Identified During OCC's 
Annual Review Process
    To incorporate the proposed changes identified during OCC's annual 
review process as it relates to the description of a Public Director, 
OCC also proposes changes to the criteria for Public Directors as 
outlined in the Fitness Standards. To align with the proposed changes 
in OCC's Board Charter and By-Laws, OCC's proposed changes to the 
Fitness Standards remove language that states the director must not 
have an affiliation with any national securities exchange, national 
securities association, designated contract market, futures commission 
merchant, or broker-dealer in securities, and replaces that with the 
additional criterion that the director must not be an associated person 
or employee of an: (i) entity that is registered or exempt from 
registration with the Securities and Exchange Commission or Commodity 
Futures Trading Commission; or (ii) affiliate of such an entity 
described in (i). OCC's proposed changes also provide that for the 
avoidance of doubt, this criterion will not preclude a person from 
service as a Public Director solely based on some other relationship 
with an entity described in (i) or (ii) above that does not involve 
being an associated person or employee of the entity, such as might be 
the case, depending on the circumstances, in connection with serving as 
a director. OCC believes these proposed changes more closely align with 
the requirements under the SEC Governance Rules.
Proposed Changes to OCC's Third-Party Risk Management Framework
    The SEC Governance Rules require OCC to have written policies and 
procedures designed to address certain aspects of risk management in 
connection with relationships with service providers for core clearing 
agency services and require senior management to be responsible for 
establishing and the Board to be responsible for reviewing and 
approving such policies and procedures.\71\ More specifically, the SEC 
Governance Rules require, among other things, that senior management: 
(i) evaluate and document risks related to an agreement with a service 
provider for core services, as defined by the SEC Governance Rules; 
(ii) submit to the Board for review and approval any agreement 
establishing a relationship with a service provider for core services 
along with a risk evaluation; (iii) be responsible for establishing the 
policies and procedures that govern relationships and manage risks 
related to such agreements with service providers for cores service and 
require the Board to be responsible for review and approving such 
policies and procedures; and (iv) perform ongoing monitoring of service 
providers for core services and to report to the Board any action taken 
by senior management to remedy significant deterioration in 
performance, to address material issues, or to assess and document 
deficiencies that cannot be remedied.\72\
---------------------------------------------------------------------------

    \71\ 17 CFR 240.17Ad-25(i).
    \72\ 17 CFR 240.17Ad-25(i)(1)-(4).
---------------------------------------------------------------------------

    OCC's existing Third-Party Risk Management Framework already meets 
certain requirements in the SEC Governance Rules.\73\ OCC's Third-Party 
Risk Management Framework outlines OCC's approach to identify, measure, 
monitor, and manage risks arising from third-party relationships 
including, but not limited to, those relationships with Clearing 
Members, Clearing Banks, custodians, liquidity providers, financial 
institutions, financial market utilities, exchanges, and vendors. In 
addition, OCC's Third-Party Risk Management Framework is reviewed and 
approved by OCC's Risk Committee and Board pursuant to OCC's internal 
policies and procedures.\74\
---------------------------------------------------------------------------

    \73\ 17 CFR 240.17Ad-25(i)(3).
    \74\ OCC has included its Policy Governance Policy, which 
requires Board review and approval of the Third-Party Risk 
Management Framework, as confidential Exhibit 3G to File No SR-OCC-
2024-015.
---------------------------------------------------------------------------

    To incorporate the remaining requirements of the SEC Governance 
Rules regarding review, approval, and monitoring of agreements with 
service providers for core services, OCC proposes several updates to 
section III of the Third-Party Risk Management Framework.\75\ First, 
OCC's proposed changes revise the header in section III to include the 
words ``Third-Party'' before ``Relationship Lifecycle'' to provide 
further clarity and remain consistent with other headers throughout the 
document.
---------------------------------------------------------------------------

    \75\ 17 CFR 240.17Ad-25(i).
---------------------------------------------------------------------------

    In addition, OCC's proposed changes to the Third-Party Risk 
Management

[[Page 86876]]

Framework provide that certain third-parties may constitute service 
providers for core services and are subject to enhanced lifecycle 
management by OCC's management and Board. OCC's proposed changes 
specify that this enhanced management applies at the initial on-
boarding stage and on an ongoing basis. Consistent with the 
requirements in the SEC Governance Rules,\76\ OCC's proposed changes 
provide that during the on-boarding stage and prior to entering into an 
agreement with a service provider for core services, OCC's Management 
Committee will evaluate and document the risks related to the 
agreement, including under changes to circumstances and potential 
disruptions, and assess whether the risks can be managed in a manner 
consistent with the Third-Party Risk Management Framework (the ``Risk 
Analysis''). OCC's proposed changes also clarify that prior to entering 
agreements establishing a relationship with a service provider for core 
services, OCC's Management Committee will submit the agreement, as well 
as its Risk Analysis, to the Board for review and approval, in 
compliance with the requirements in the SEC Governance Rules.\77\
---------------------------------------------------------------------------

    \76\ 17 CFR 240.17Ad-25(i)(1).
    \77\ 17 CFR 240.17Ad-25(i)(2).
---------------------------------------------------------------------------

    Furthermore, OCC's proposed changes state that service providers 
for core services will be monitored on an ongoing basis. OCC's proposed 
changes provide that OCC's Management Committee evaluates performance 
of service providers for core services and either: (i) remedies 
significant deterioration in performance of the service provider for 
core services; (ii) addresses changing risks or material issues with 
the service provider for core services identified through such 
monitoring; or (iii) if such risks or material issues cannot be 
remedied, assesses and documents weaknesses or deficiencies with the 
service provider for core services. In addition, OCC's proposed changes 
provide that OCC's Management Committee will report to the Board for 
its evaluation any action taken by the Management Committee to remedy 
significant deterioration in performance of the service provider for 
core services or address changing risks or material issues with the 
service provider for core services. OCC's proposed changes will clarify 
that if the risks or issues with the service provider for core services 
cannot be remedied, OCC's Management Committee will assess and document 
the weaknesses and deficiencies and submit to the Board the documented 
weaknesses or deficiencies in the relationship with the service 
provider for core services.
    OCC's existing Third-Party Risk Management Framework states that 
risks identified throughout the relationship lifecycle are reported and 
escalated through associated working groups. OCC's proposed changes 
provide that each working group has a chair and designated Management 
Committee member who are responsible for identifying the matters to be 
escalated to the Management Committee, ``in accordance with this 
Framework.'' By including the reference ``in accordance with this 
Framework,'' OCC believes this language aligns more closely with the 
requirements in the SEC Governance Rules.\78\
---------------------------------------------------------------------------

    \78\ 17 CFR 240.17Ad-25(i)(1).
---------------------------------------------------------------------------

    To align with the defined terms in the SEC Governance Rules,\79\ 
OCC's proposed changes to the Third-Party Risk Management Framework 
include the definition of ``Service Provider for Core Services.'' OCC's 
proposed changes define service provider for core services as any 
person that, through a written services provider agreement for services 
provided to or on behalf of OCC, on an ongoing basis, directly supports 
the delivery of clearance or settlement functionality or any other 
purposes material to the business of OCC. OCC believes these proposed 
changes to the Third-Party Risk Management Framework satisfy the 
requirements outlined in the SEC Governance Rules.\80\
---------------------------------------------------------------------------

    \79\ 17 CFR 240.17Ad-25(a).
    \80\ 17 CFR 240.17Ad-25(i).
---------------------------------------------------------------------------

Proposed Changes to OCC's Third Party-Risk Management Framework 
Identified During OCC's Annual Review Process
    OCC also proposes to incorporate additional edits to the Third-
Party Risk Management Framework, as outlined below, to reflect the 
proposed changes determined through OCC's annual review process.
    Under section I, Executive Summary, OCC proposes to expand the 
description of risks arising from ``Exchanges'' to risks arising from 
``Exchange Relationships.'' This proposed change, which is also 
reflected in section IV, Third-Party Relationship Management, and 
throughout the remainder of the document, encompasses risks arising 
from third-party relationships including options exchanges, futures 
markets, OTC trade sources or loan markets. OCC believes this proposed 
change more clearly describes the current risk management activities 
related to third-party relationships including exchanges and those 
relationships that are not registered exchanges. OCC's proposed changes 
also relocate the definition of Exchange Relationships from footnote 2 
to section V, Definitions, to promote clarity and consistency 
throughout the document.
    Under section II, Risk Identification, OCC proposes to expand the 
description of (i) Information Technology and Security risks and (ii) 
Legal and Regulatory risks. For Information Technology and Security 
risks, the current description acknowledges that risks arise when 
third-parties are unable to safeguard OCC data or maintain capabilities 
to support OCC's operations. While the current description is accurate, 
it does not encompass the full scope of the current third-parties' 
obligations required by OCC. OCC proposes to include that Information 
Technology and Security risks also arise when third-parties are unable 
to safeguard OCC's systems, in addition to OCC data. OCC also proposes 
to incorporate the language ``in accordance with OCC's service 
standards'' into the description to clearly outline the enforcement of 
responsibilities. OCC believes this change will better define 
Information Technology and Security risks from relationships with 
third-parties related to OCC. For Legal and Regulatory risks, OCC's 
proposed changes provide that Legal and Regulatory risks arise when a 
third-party fails to fulfill its obligations to OCC or when OCC fails 
to fulfill its obligations to a third-party. OCC's proposed changes 
provide that Legal and Regulatory risks also arise when a third-party 
fails to comply with regulatory standards and protocols agreed to with 
OCC. OCC believes these proposed changes more clearly define Legal and 
Regulatory risks that arise from relationships with third-parties. OCC 
also proposes to make minor, non-substantive changes to section II, 
such as decapitalizing the words ``clearing fund'' when needed.
    Under section III, Relationship Lifecycle, OCC proposes to revise 
specific language related to off-boarding of third-parties. The off-
boarding section currently provides that OCC finalizes its third-party 
relationship lifecycle by completing ``any operational tasks necessary 
to off-board the relationship.'' OCC proposes to include the language 
``in compliance with agreement terms'' to clarify current risk 
management expectations and responsibilities relating to third-party 
off-boarding. This revision would be consistent with OCC's current 
operations and off-boarding processes. OCC also proposes to make 
several minor, non-substantive changes to this section, including

[[Page 86877]]

changing language from ``determination to terminate'' to ``termination 
of,'' and replacing the word ``relationship'' with ``engagement'' when 
describing third-party arrangements with OCC to promote additional 
clarity. In addition, to provide additional clarity, OCC proposes to 
replace the word ``defined'' with ``specified'' when explaining the 
decision-making authority, functions and responsibilities in the 
working group procedure.
    Under section IV, Third-Party Relationship Management, OCC proposes 
to revise the header from ``Exchanges'' to ``Exchange Relationships'' 
to reflect the proposed changes in section I. OCC's proposed changes 
update the On-Boarding section under ``Exchange Relationships'' by 
revising the distribution methods of the summary activities of exchange 
relationship. The current description states that summaries of due 
diligence and on-boarding activities are presented to the Board of 
Directors for approval to launch. OCC proposes to clarify the reporting 
requirements by specifying where they should be reported. OCC's 
proposed changes would direct the reporting of due diligence and on-
boarding activities to the Management Committee. Further, the proposed 
revisions would direct summaries of legal documents and requirements to 
the Board of Directors. These proposed revisions would update and 
clarify the description of OCC's current approach to on-boarding third-
parties without impacting current OCC operations. Also under section 
IV, Third-Party Relationship Management, OCC proposes to make changes 
to the Ongoing Monitoring sub-section by removing reference of legal 
risk related to Exchange Relationships, and including the language 
``and escalate identified legal risks to OCC's Legal Department.'' This 
proposed change clarifies the responsibilities of OCC's business 
operations and TPRM teams. Legal risks related to Exchange 
Relationships are monitored by OCC legal, but if legal risks are 
identified by business operations or TPRM during the ongoing monitoring 
process, these legal risks should be escalated. OCC believes the 
proposed change will better describe current risk management activities 
related to ongoing monitoring of third-party relationships with 
exchanges. OCC also proposes to update language in the Off-Boarding 
sub-section by eliminating the specific language that states ``such as 
limiting connectivity with the Exchange'' when referencing the 
immediate actions OCC can take upon the termination of an Exchange 
Relationship. OCC proposes to remove this language to provide further 
clarification that limiting connectivity with an Exchange is not 
specific only to off-boarding situations; OCC's action of limiting 
connectivity with an Exchange can occur in other situations as well. 
OCC believes the elimination of this language better aligns with OCC's 
overall responsibility related to off-boarding and provides for greater 
flexibility related to OCC's immediate actions. Finally, OCC proposes 
several non-substantive, grammatical changes to the Ongoing Monitoring 
sub-section such as replacing the word ``communicate'' with 
``communication of'' and ``seek'' with ``solicitation of.''
    Also under section IV, Third-Party Relationship Management, OCC 
proposes to make changes to the Vendors sub-section of the document. 
OCC's proposed changes provide that prior to commencing on-boarding of 
a new technology vendor, implementing new capabilities, or services to 
existing technology, Information Technology reviews the request to 
identify solutions and analyze requirements to verify that they are in 
line with enterprise strategic requirements. OCC believes these 
proposed changes more clearly assign ownership and accountability for 
expectations around risk management for new vendors throughout OCC. In 
addition, in the On-Boarding section under Vendors, OCC's proposed 
changes state that an agreement that addresses control and business 
requirements is then negotiated with the vendor and executed by 
authorized signatories designated through the process outlined in the 
Legal Services Policy. OCC's proposed changes revise the language that 
``authorized signatories'' rather than an ``OCC officer'' will be 
responsible for executing agreements that address control and business 
requirements. OCC believes the revised text more closely aligns with 
current practices. Furthermore, this revision would encourage OCC's 
longstanding practices to update internal policies, directing staff 
towards correct procedures and personnel requirements.
    OCC's Third-Party Risk Management Framework also states that vendor 
relationship managers (``VRMs'') and Third-Party Risk Management 
(``TPRM'') monitor vendors to assess whether they are delivering 
services as required by applicable agreements. To align with current 
OCC business practice and promote clear accountability, OCC's proposed 
changes eliminate reference to ``TPRM'' because it is the VRMs who are 
responsible for monitoring vendors, while TPRM gathers information and 
escalates if necessary.
    Under section V, Definitions, OCC's proposed changes in the Watch 
Level section include the addition of ``risk management'' in its list 
of deteriorations which signal a risk response. OCC believes this 
revision would better describe the current risk management methods 
related to watch level monitoring and would not substantively alter 
existing processes.
    Lastly, OCC's proposed changes to the Third-Party Risk Management 
Framework reflect the name change as a result of the combination of two 
working groups. OCC's Exchange Working Group and Vendor Risk Working 
Group will be combined to form the Exchange and Vendor Working Group, 
therefore OCC's proposed changes throughout the Third-Party Risk 
Management Framework reflect the merger of these two groups. OCC's 
proposed changes also reflect the change in the acronym of the new 
combined working group's name.
2. Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Exchange Act.\81\ Section 17A(b)(3)(F) of the Act \82\ 
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, and to foster 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions.\83\ OCC believes that the 
proposed rule changes are consistent with these requirements because 
the proposed changes are designed to, among other things, modify OCC's 
governance documents such that: (i) OCC's Board and Board-level 
committees are composed of independent directors, as defined by the SEC 
Governance Rules, (ii) OCC's policies and procedures identify, mitigate 
or eliminate and document the identification, mitigation, or 
elimination of conflicts of interest, and (iii) OCC's policies and 
procedures address certain aspects of risk management in connection 
with relationships with service providers for core clearing agency 
services.
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78q-1.
    \82\ 15 U.S.C. 78q-1(b)(3)(F).
    \83\ Id.
---------------------------------------------------------------------------

    OCC believes the proposed changes to incorporate the independent 
director requirement help to promote the ability of the Board to 
perform its oversight of

[[Page 86878]]

management function, support a plurality of viewpoints voiced at the 
Board level, ensure a balance between stakeholders with divergent 
views, and reduce the likelihood that conflicts of interest may 
influence the Board. OCC believes that establishing requirements that 
the Board be comprised of a majority of directors who do not have a 
material relationship with the registered clearing agency or affiliate 
thereof helps to promote the integrity of OCC's risk management 
function, and therefore helps to promote prompt and accurate clearance 
and settlement of securities transactions and safeguard the securities 
and funds which are in the custody or control of OCC or for which OCC 
is responsible, consistent with Section 17A(b)(3)(F).
    OCC believes the proposed changes regarding the Board's oversight 
role of senior management as it relates to management of risks from 
relationships with service providers for core services also help to 
promote the prompt and accurate clearance and settlement of securities 
transactions and safeguard securities and funds in its custody or 
control or for which OCC is responsible, consistent with Section 
17A(b)(3)(F). The potential failure of a service provider for core 
services to perform its obligations could pose a significant 
operational risk to OCC and impact the ability for OCC to facilitate 
prompt and accurate clearance and settlement. Therefore, by requiring 
that senior management establish policies and procedures that govern 
relationships with service providers for core services, manage risks 
related to those relationships, and perform ongoing monitoring of those 
relationships, OCC believes these proposed changes help to promote the 
prompt and accurate clearance and settlement of securities transactions 
and safeguard securities and funds which are in the custody or control 
of OCC or for which OCC is responsible, consistent with Section 
17A(b)(3)(F).
    OCC's proposed changes to its governance documents establish 
policies and procedures to identify, mitigate or eliminate and document 
the identification, mitigation, or elimination of conflicts of interest 
in the decision-making process involving directors or senior managers 
of OCC. OCC believes these proposed changes assist in promoting the 
integrity of OCC's governance arrangements by helping to ensure that 
potential conflicts of interests are identified when they arise, and 
that such conflicts are subject to a transparent and uniform process of 
review, mitigation or elimination and documentation. By incorporating 
the proposed changes intended to address conflicts of interest related 
to directors and senior managers, OCC believes this will help to reduce 
conflicts that could undermine the decision-making process or interfere 
with fair representation and equitable treatment of clearing members or 
market participants. Therefore, OCC believes the proposed changes help 
to foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F).
    Finally, OCC also believes the proposed changes are consistent with 
Rule 17Ad-22(e)(2). Rule 17Ad-22(e)(2) requires OCC to, among other 
things, provide for governance arrangements that are clear and 
transparent, establish that the board of directors and senior 
management have appropriate experience and skills to discharge their 
duties and responsibilities, and specify clear and direct lines of 
responsibility.\84\ Modifying OCC's governance documents through the 
proposed changes described in Item III above would be consistent with 
these requirements because the changes would document in a clear, 
direct, and transparent way the independent director composition of the 
Board and Board-level committees, the responsibilities of the Board and 
Board-level committees as it relates to management of conflicts of 
interest, Board oversight, and management of risks for service 
providers for core services. In addition, OCC's proposed changes 
clearly specify the Fitness Standards for serving as a director and the 
criteria applicable to all directors, which includes the consideration 
of whether the director nominee would help demonstrate that the Board, 
taken as a whole, has a diversity of skills, knowledge, experience and 
perspectives consistent with Rule 17Ad-22(e)(2)(iv).
---------------------------------------------------------------------------

    \84\ 17 CFR 240.17Ad-22(e)(2)(i),(iv),(v).
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Act \85\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule changes to modify OCC's governance 
documents would impact or impose any burden on competition. The 
proposed changes would promote OCC's compliance with the SEC Governance 
Rules that OCC must comply with by December 5, 2024 and December 5, 
2025. The proposed changes to OCC's governance documents are designed 
to clearly articulate the newly established requirements of the SEC 
Governance Rules including, but not limited to, the Board and committee 
composition, independent directors, management of conflicts of 
interest, board oversight, and management of risks from relationships 
with service providers for core services. The proposed changes to OCC's 
governance documents also aim to, among other things, increase 
transparency into board governance and improve the alignment of 
incentives among owners and participants of OCC by ensuring that a 
majority of Board members and Board-level committee members be 
independent directors, as defined by the SEC Governance Rules, and that 
functions and responsibilities of the Board and Board-level committees 
are clearly outlined. In addition, the proposed changes to OCC's 
governance documents help to reduce the likelihood that conflicts of 
interest may influence the Board. These changes to OCC's governance 
documents would apply to all Equity Exchanges and Clearing Members 
equally and would not disadvantage or favor any particular user in 
relation to another user. Therefore, OCC believes that the proposed 
changes would not impose any burden on competition.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78q-(b)(3)(I).
---------------------------------------------------------------------------

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

    Written comments were not and are not intended to be solicited with 
respect to the proposed 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 selfregulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

[[Page 86879]]

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#dfadaab3baf2bcb0b2b2bab1abac9facbabcf1b8b0a9"><span class="__cf_email__" data-cfemail="2052554c450d434f4d4d454e5453605345430e474f56">[email protected]</span></a>. Please include 
file number SR-OCC-2024-015 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-2024-015. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of 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-2024-015 and should 
be submitted on or before November 21, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\86\
---------------------------------------------------------------------------

    \86\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-25322 Filed 10-30-24; 8:45 am]
BILLING CODE 8011-01-P


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