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[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Notices]
[Pages 91825-91831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27012]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101621; File No. SR-OCC-2024-013]

Self-Regulatory Organizations; Options Clearing Corporation; 
Order Approving 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

November 14, 2024.

I. Introduction

    On September 13, 2024, The Options Clearing Corporation (``OCC''), 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
make modifications to its By-Laws and Rules primarily to discontinue 
certain outmoded or unused products and services (``Proposed Rule 
Change''). The Proposed Rule Change was published for comment in the 
Federal Register on October 1, 2024.\3\ The Commission has not received 
any comments on the Proposed Rule Change. For the reasons discussed 
below, the Commission is approving the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 101189 (Sept. 25, 2024), 
89 FR 79978 (Oct. 1, 2024) (File No. SR-OCC-2024-013) (``Notice'').
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II. Description of the Proposed Rule Change

    OCC is a clearing agency that clears a number of transactions 
including standardized equity options listed on national securities 
exchanges and registered with the Commission, stock loans, and 
futures.\4\ Since 2000, for its core clearing, risk management, and 
data management applications, OCC has relied on a platform it calls 
``ENCORE.'' ENCORE operates in on-premises data

[[Page 91826]]

centers.\5\ Among other things, ENCORE is OCC's system for receiving 
trade and post-trade data on a transaction by transaction basis, 
maintaining clearing member positions, calculating margin and clearing 
fund requirements, and providing reporting to OCC staff, regulators and 
clearing members.\6\ OCC plans to discontinue ENCORE and migrate its 
functions to a cloud-based successor clearing system that it calls 
Ovation.\7\
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    \4\ All capitalized terms not defined herein have the same 
meaning as set forth in the OCC By-Laws and Rules, available at 
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    \5\ Securities Exchange Act Release No. 96113 (October 20, 
2022), 87 FR 64824, 64825 (Oct. 26, 2022) (File No. SR-OCC-2021-
802).
    \6\ Notice, 89 FR at 79978-79.
    \7\ Id.; Notice, 89 FR at 79979.
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    As part of the transition to Ovation, OCC is determining which 
features of ENCORE will migrate to Ovation.\8\ The Proposed Rule Change 
describes certain functions that OCC proposes discontinuing because 
they are outmoded, unused,\9\ or no longer support OCC's ability to 
clear and settle transactions. In this category, under the Proposed 
Rule Change, OCC would (i) no longer facilitate the settlement of 
commissions and fees owed between Clearing Members that are party to a 
Clearing Member Trade Assignment (``CMTA'') arrangement; (ii) delete 
rule provisions related to over-the-counter (``OTC'') option products; 
\10\ (iii) delete from its rules the ``associated Market Maker'' 
account subtype; and (iv) no longer require that Clearing Members 
maintain records of both parties to a trade.
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    \8\ Id. at 79978-79.
    \9\ Id. at 79979.
    \10\ An OTC option is an option contract with variable terms 
that are negotiated bilaterally between the parties to such 
transaction (subject to any specific requirements applicable to such 
products as set forth in the By-Laws and Rules), and that is 
affirmed through the facilities of an OTC Trade Source and submitted 
to OCC for clearing as a confirmed trade. OCC By-Laws, Article I.
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    The Proposed Rule Change also includes three sets of additional 
changes that OCC proposed to make in connection with the transition to 
Ovation. In this category, OCC proposes to (i) allow Clearing Members 
to ``give-up'' one or more positions in cleared contracts that are 
futures or futures options to another Clearing Member without 
designating the specific account of the Given-Up Clearing Member to 
which such positions must be allocated; (ii) categorize a trade as an 
opening transaction when an opening or closing indicator is not 
included on a trade; and (iii) conform rules related to the discharge 
of broker-to-broker settlement obligations to current practice.

A. Discontinuing Existing Functions

i. Discontinuing the Facilitation of Commissions and Fees Between CMTA 
Clearing Members
    CMTA arrangements allow a Clearing Member that executed a 
securities options trade (Executing Clearing Member), to send the trade 
directly through OCC to another Clearing Member (Carrying Clearing 
Member) for clearance and settlement.\11\ Clearing Members generally 
use CMTA arrangements when they execute transactions for correspondent 
brokers that custody their assets with separate Carrying Clearing 
Members or execute transactions for an institutional customer that has 
a prime brokerage arrangement with a separate Clearing Member.\12\
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    \11\ Securities Exchange Act Release No. 88974 (May 29, 2020), 
85 FR 34468, 34469 (June 4, 2020) (File No. SR-OCC-2020-005).
    \12\ Securities Exchange Act Release No. 49841 (June 9, 2004), 
69 FR 34207, 34207 (June 18, 2004) (File No. SR-OCC-2003-011).
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    Currently, subject to certain conditions, Clearing Members that are 
parties to a CMTA arrangement may opt to have OCC facilitate the 
settlement of fees and commissions for transactions pursuant to the 
CMTA arrangement. However, no Clearing Member has used the service 
since 2016, nor have any expressed interest in using it in the 
future.\13\ Accordingly, OCC proposes to eliminate it.
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    \13\ Notice, 89 FR at 79979.
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    To effect the discontinuation of the service, OCC proposes a number 
of changes to its Rules. Specifically, OCC proposes deleting Rules 
407(a)(2) and 504(e), as well as certain text in Rule 504(g).\14\
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    \14\ OCC proposes to replace the deleted text in Rule 504(e) 
with the word Reserved.
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    Rule 407(a)(2) allows Clearing Members that are parties to a CMTA 
arrangement 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 the CMTA arrangement. It also discusses 
Clearing Members' requirements \15\ and restrictions \16\ for electing 
to have OCC settle the applicable fees and commissions for transactions 
under the CMTA as well as guidance as to when the Clearing Members' 
election to have OCC settle applicable fees and commissions under the 
CMTA arrangement is effective.
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    \15\ Specifically, OCC requires Clearing Members making such an 
election to specifically register that aspect of their CMTA 
arrangement with OCC. Clearing Members making such election 
authorize (1) the Executing Clearing Member to enter into OCC's 
systems fee and commission information with respect to transfers 
effected pursuant to the CMTA arrangement between the Clearing 
members, subject to such system checks as may be established by OCC 
from time to time and (2) OCC to calculate and settle, in accordance 
with the applicable provisions of Rule 504, the aggregate of such 
entered amounts on the next following business day without any 
further authorization or consent of the Carrying Clearing Member.
    \16\ Rule 407 notes that any entries of commission and fee 
information under Rule 407(a)(2) shall be solely fees and 
commissions related to transfers effected pursuant to the Clearing 
Members' CMTA arrangement and for no other purposes.
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    Rule 504(e) provides 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 their CMTA 
registration authorizes OCC to effect such settlements.\17\
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    \17\ Further, Rule 504(e) also indicates how OCC determines the 
aggregate amounts to be settled, warns that OCC is not obligated to 
validate the accuracy of information input into OCC's systems to 
determine settlement amounts, indicates when OCC effects settlement, 
and confirms that OCC settlement facilitation under the CMTA 
arrangement does not require the Carrying Clearing Member to give 
any additional authorization or consent and that OCC does not have 
any role in resolving disputes between the Carrying Clearing Member 
and the Executing Clearing Member regarding these settlements. OCC 
would replace the text of Rule 504(e) with the word ``Reserved.''
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    Finally, certain text in Rule 504(g) indicates that OCC has 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. The Proposed Rule Change 
would delete this text but leave the remainder of Rule 504(g) 
untouched.
ii. Deleting Provisions Related to Clearing and Settling OTC Options
    OCC's current Rules and By-Laws are designed to support the 
clearing and settling of OTC options.\18\ However, OCC has only ever 
cleared OTC options based on the S&P 500 index,\19\ and has not cleared 
and settled an OTC option since 2014. OCC does not currently have any 
open interest in OTC options and OCC's Clearing Members have not 
expressed interest in clearing OTC options with OCC in the future.\20\ 
As such, OCC proposes removing all provisions from its By-Laws and 
Rules related to clearing and settling OTC options.\21\
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    \18\ Securities Exchange Act Release No. 68434 (Dec. 14, 2012), 
77 FR 75243 (Dec. 19, 2012) (File No. SR-OCC-2012-14).
    \19\ Notice, 89 FR at 79980.
    \20\ Id.
    \21\ Id. OCC indicates that it would submit a proposed rule 
change to the Commission as necessary in the event that it decides 
to support the clearance and settlement of OTC Options in the 
future. Id.

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[[Page 91827]]

    To effect this change, OCC proposes deleting from the By-Laws the 
definitions for ``OTC option,'' ``OTC index option,'' ``OTC Trade 
Source,'' ``OTC Trade Source Rules,'' and ``Backloaded OTC Option.'' 
The Proposed Rule Change would also delete text in provisions of the 
By-Laws and Rules that reference the above terms or that are otherwise 
related to OCC's clearance and settlement of OTC options. As a result, 
the following provisions in the By-Laws would have relevant OTC-related 
terms deleted from them (or, where indicated, be deleted in their 
entirety): Article I; \22\ Article VI, Section 1, Interpretation and 
Policies .01(a); Article VI, Section 3, Interpretations and Policies 
.09 (deleted in its entirety); Article VI, Sections 10(b) and (g); 
Article VI, Sections 27(a) and (b); Article XVII, Introduction; Article 
XVII, Definitions, Section 1; \23\ Article XVII, Section 3(h); Article 
XVII, Section 3, Interpretation and Policies .01 (deleted in its 
entirety); Article XVII, Section 4(a)(2); Article XVII, Section 5(a); 
and Article XVII, Section 6 (deleted in its entirety).
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    \22\ OCC proposes deleting definitions for ``OTC Index Option 
Clearing Member'' and ``Origination Date.'' Additionally, OCC 
proposes deleting text from the definitions for ``Class,'' 
``Clearing Member,'' ``Confirmed Trade,'' ``Index Multiplier,'' 
``Index Value Determinant,'' ``Trade Date,'' and ``Variable Terms'' 
that discusses the definitions in the context of OTC Options or that 
is related to OTC Options. As a result of the removal of provisions 
related to OTC Options, the Proposed Rule change would also delete 
text from Interpretation and Policy .01 to Section C of Article I 
that indicates 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 OCC's clearing activities into 
OTC options. Id. at 79980 n.11.
    \23\ OCC proposes deleting text related to OTC options in the 
definitions for ``Class of Options,'' ``Current Underlying Interest 
Value; Current Index Value,'' ``Expiration Date,'' ``Expiration Time 
(deleted entirely),'' ``Reporting Authority,'' and ``Series of 
Options.''
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    Likewise, the following provisions in the Rules would have relevant 
OTC-related terms deleted from them (or, where indicated, be deleted in 
their entirety): Rule 201(b)(6) (deleted in its entirety); Rules 
401(a), (a)(1)(i), (b), (d), (e), (f), and (g); Rule 405; Rule 406; 
Rule 407(l) (deleted in its entirety); Rule 408(a); Rules 611(a), (b), 
and (d) (deleted in its entirety); Rule 801(b); Rule 803 Interpretation 
and Policy .01; Rule 804; Rule 1003 Interpretation and Policy .02 
(deleted in its entirety); Rule 1104 Interpretation and Policy .03 
(deleted in its entirety); Rule 1105; Rule 1106(e)(2) (deleted in its 
entirety); Rule 1106 Interpretation and Policy .01; Chapter XVIII of 
the Rules, Introduction; Rules 1804(b) and (c); and Rule 1804 
Interpretation and Policy .03 (deleted in its entirety).
iii. Eliminating the Associated Market Maker Sub-Account Type
    OCC currently allows its Clearing Members to use combined market 
maker accounts. OCC's rules provide for three types of combined market 
maker accounts: a combined account limited to Market-Makers that are 
neither Proprietary Market-Makers \24\ nor Associated Market-Makers; 
\25\ a combined account limited to Proprietary Market-Makers; and a 
combined account limited to Associated Market-Makers.\26\
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    \24\ A Proprietary Market-Maker is a Market-Maker that is (A) a 
non-customer of such Clearing Member or (B) a Related Person of such 
Clearing Member that (i) is not a customer of such Clearing Member 
for purposes of Rule 15c3-3 of the Securities and Exchange 
Commission, (ii) does not carry the accounts of persons who are 
customers of such Market-Maker for purposes of Rule 15c3-3, and 
(iii) has consented to be treated as a proprietary Market-Maker for 
purposes of the By-Laws and Rules. This term includes any 
participant, as such, in an account that is not required to be 
segregated under Section 4d of the Commodity Exchange Act of which 
10% or more is owned by a proprietary Market-Maker.
    \25\ An Associated Market-Maker is 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.
    \26\ OCC By-Laws, Article VI, Section 3, Interpretation and 
Policy .06. The Commission has previously acknowledged that Clearing 
Members may find these accounts attractive because positions in 
these accounts can offset one another in a manner that may lead to 
lower margin requirements. Securities Exchange Act Release No. 33492 
(Jan. 19, 1994), 59 FR 3896, 3897 n.11 (Jan. 27, 1994) (File No. SR-
OCC-90-11).
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    Currently, Clearing Members do not use the Associated Market-Maker 
sub-account type. Thus, OCC proposes deleting references to this sub-
account type from its By-Laws.\27\ To effect this change, the Proposed 
Rule Change would delete the definition for Associated Market-Maker 
from Article I of the By-Laws. It would also remove from the By-Laws 
language related to Associated Market-Makers and the accounts their 
trades may be included in from Article VI, Section 3(c), Interpretation 
and Policy .03, and Interpretation and Policy .06. Finally, the 
Proposed Rule Change would replace a reference to Section 3(i) with a 
reference to Section 3(c) in the first sentence of Interpretation and 
Policy .06. As a result of the changes, OCC's By-Laws would provide for 
only two combined market-maker accounts going forward--one limited to 
Market-Makers that are not proprietary Market-Makers and one limited to 
Proprietary Market-Makers.
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    \27\ Notice, 89 FR at 79982.
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iv. Recordkeeping Requirements
    OCC's rules currently require Clearing Members to maintain a record 
of the Purchasing Clearing Member and the Writing Clearing Member to 
each confirmed trade.\28\ Before electronic trading was adopted, this 
requirement helped OCC reconcile counterparty settlement obligations 
and efficiently clear and settle confirmed trades, which aided OCC in 
avoiding settlement delays and disputes.\29\
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    \28\ Under Rule 208, Clearing Members must keep records showing 
all confirmed trade data required by OCC's By-Laws and Rules 
including confirmed trade information reported to OCC under Rule 
401. OCC Rules, Rule 208. Rule 401 requires that confirmed trades 
include the identity of the Purchasing Clearing Member and the 
Writing Clearing Member to the transaction. OCC Rules, Rule 
401(a)(1)(i).
    \29\ Notice, 89 FR at 79980.
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    With the adoption of electronic trading, OCC no longer needs 
Clearing Members to keep a record of the Purchasing Clearing Member and 
the Writing Clearing Member to each transaction.\30\ OCC's role as a 
CCP further diminishes the need for this requirement because OCC 
novates all confirmed trades in options contracts so that it becomes 
the buyer to every seller and the seller to every buyer. As such, the 
original counterparty information in transactions is not relevant or 
necessary in respect of OCC's clearance and settlement process.\31\
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    \30\ Id.
    \31\ Id. at 79981. Additionally, OCC asserts that configuring 
Ovation to maintain such records would require OCC to invest 
significant resources that could impact Ovation's release timeline. 
Id. at 79980.
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    OCC proposes no longer requiring that Clearing Members keep records 
of the Purchasing Clearing Member and the Writing Clearing Member to 
transactions. To accomplish this, OCC proposes adding an exception to 
its Rule 208 so that it would require only that Clearing Members 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.

B. Miscellaneous Changes

    As noted above, OCC also proposes three miscellaneous changes to 
its By-Laws and Rules. First, the Proposed Rule Change would allow 
Clearing Members to ``give up'' one or more positions in cleared 
contracts that are futures or futures options to another

[[Page 91828]]

Clearing Member without designating the specific account of the Given-
Up Clearing Member to which such positions must be allocated in order 
to better facilitate give-up allocations to the appropriate account. 
Second, OCC's amendments would categorize a trade as an opening 
transaction when an opening or closing indicator is not included on a 
trade for an options or futures contract to ensure that an existing 
position is not inadvertently closed out. Third, OCC proposes changes 
related to the discharge of broker-to-broker settlement obligations to 
better reflect its current practice.\32\
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    \32\ Id. at 79979.
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i. Designating the Appropriate Given-Up Clearing Member Account
    Similar to the CMTA arrangements described above, a second way that 
OCC provides flexibility with respect to which broker executes a 
transaction is through give-up transactions.\33\ Rule 408 allows for 
one or more positions in cleared contracts to be allocated from a 
designated account of a Giving-Up Clearing Member to a designated 
account of a Given-Up Clearing Member. Mechanically, these transactions 
are initiated post-trade by the Giving-Up Clearing Member by 
instructing OCC to move a position in one of its accounts to the 
designated account of the Given-Up Clearing Member. The Giving-Up 
Clearing Member may designate the Given-Up Clearing Member's account to 
which it would like to allocate positions. Currently, this allocation 
process is only available for positions in futures and options on 
futures cleared and settled by OCC.\34\
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    \33\ Securities Exchange Act Release No. 85779 (May 6, 2019), 84 
FR 20689 (May 10, 2019) (File No. SR-OCC-2019-003).
    \34\ Notice, 89 FR at 79981.
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    OCC proposes changing which Clearing Member must designate the 
account to which OCC should allocate given-up positions from the 
Giving-Up Clearing Member to the Given-Up Clearing Member. OCC believes 
this change will help reduce the risk of positions being transferred to 
an incorrect account because it would provide the Given-Up Clearing 
Member with more control over where positions it executes ultimately 
are transferred.\35\ To do this, OCC would delete certain references to 
designated accounts in Rules 408(a) and (b). Currently, Rule 408(a) 
provides that positions may be allocated to a designated account of a 
Given-Up Clearing Member. OCC proposes deleting the reference to a 
designated account so that Rule 408(a) provides that positions may be 
allocated to a Given-Up Clearing Member. Rule 408(b) contemplates 
instructions to allocate positions from a designated account of the 
Giving-Up Clearing Member to a designated account of the Given-Up 
Clearing Member. Under OCC's proposal, the revised rule text would 
instead contemplate instructions to allocate positions from a 
designated account of the Giving-Up Clearing Member to a Given-Up 
Clearing Member. OCC also proposed to add text to Rule 408(b) 
indicating that, if certain conditions are met, the Given-Up Clearing 
Member may designate an account to which the allocation will be made. 
Once the Given-Up Clearing Member designates an account, OCC will 
adjust the positions in the respective designated accounts of the 
Giving-Up and Given-Up Clearing Members in accordance with the 
allocation instruction.
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    \35\ Id.
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    In line with current practice, the Proposed Rule Change would also 
clarify that this allocation process is only available for futures and 
options on futures. OCC would amend the title of Rule 408 to be 
``Allocations of Positions for Futures and Futures Options'' rather 
than just ``Allocations of Positions.'' Currently, Rule 408(a) provides 
that give up allocations are available for cleared contracts. OCC's 
proposal would clarify that one or more positions in cleared contracts 
that are futures or futures options may be allocated in a give up 
allocation. Similarly, in Rule 408(e), OCC proposes replacing the word 
``options'' with ``futures options'' in multiple locations to clarify 
that give-up allocations are only available for futures and options on 
futures contracts.\36\
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    \36\ Id.
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    To remove duplicative text from Rule 408, OCC proposes deleting the 
last sentence from Rule 408(b), which currently provides that if the 
Giving-Up Clearing Member and the Given-Up Clearing Member are not 
parties to an allocation agreement registered with OCC, then OCC 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.\37\ 
OCC believes this rule text is already covered elsewhere in Rule 
408.\38\
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    \37\ Id.
    \38\ Id. As discussed above, proposed Rule 408(b) would indicate 
that OCC will adjust positions in the respective designated accounts 
of the Giving-Up and Given-Up Clearing Members in accordance with an 
allocation instruction only after the Given-Up Clearing Member 
designates the account to which the allocation instruction will be 
made. Moreover, Rule 408(d) would provide that if the Given-Up 
Clearing Member has rejected or not provided OCC with notice of its 
affirmative acceptance of an allocation at or before the deadline 
prescribed by OCC, the position(s) that is (are) the subject of such 
allocation instruction shall remain in the account of the Giving-Up 
Clearing Member, which shall be responsible for all settlement and 
other obligations in respect thereof, unless the position is 
transferred or adjusted pursuant to other provisions of the By-Laws 
and Rules.
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    Similarly, OCC proposes removing a reference to allocation 
agreements in Rule 408(b) because that reference is duplicative of Rule 
408(d).\39\ Rule 408(b) requires the Giving-Up Clearing Member and the 
Given-Up clearing Member to be parties to an allocation agreement 
registered with OCC before OCC is required to allocate positions 
pursuant to a give-up transaction. OCC Rule 408(d), however, provides 
that the Given-Up Clearing Member is responsible for all settlement and 
other obligations in respect of each position that has been allocated 
to one of its accounts pursuant to a its acceptance of an allocation 
instruction. Further, under Rule 408(c) registration of an allocation 
agreement functionally is notice of affirmative acceptance of an 
allocation.\40\ In OCC's view, because of Rule 408(c), there is no need 
for this separate requirement in Rule 408(b).
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    \39\ Notice, 89 FR at 79981.
    \40\ Rule 408(c) provides that the registration of an allocation 
agreement constitutes notice to OCC that the Giving-Up Clearing 
Member has been authorized by the Given-Up clearing Member to 
allocate positions to an account of the Given-Up Clearing Member 
without further action by the Given-Up Clearing Member.
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    OCC also proposes removing duplicative text from Rule 408(d) to 
clarify Rule 408.\41\ Currently, Rule 408(d) contains references to 
registered allocation agreements alongside references to acceptances of 
allocation instructions. For instance, 408(d) indicates that the Given-
Up Clearing Member shall be responsible for all settlement and other 
obligations in respect of each position that has been allocated to one 
of its accounts pursuant to a registered allocation agreement or 
pursuant to its acceptance of an allocation instruction. Rule 408(d) 
also provides that, if there is not a registered allocation agreement 
on file with OCC or the Given-Up Clearing Member has rejected or not 
timely provided OCC with notice of its affirmative acceptance of an 
allocation, the relevant position will remain in the account of the 
Giving-Up Clearing Member. As noted above, registration of an 
allocation agreement is functionally the same as notice of affirmative 
acceptance of an allocation. Thus, referring to allocation

[[Page 91829]]

agreements in addition to acceptance of allocation instructions is 
duplicative. As such, OCC proposes removing references to allocation 
agreements in Rule 408(d).\42\
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    \41\ Notice, 89 FR at 79981.
    \42\ Notice, 89 FR at 79981.
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ii. Default Treatment for Certain Confirmed Transactions
    OCC currently accepts and novates confirmed transactions in 
options, sent to OCC by an options exchange, irrespective of whether 
there is an indication that the transaction is either an opening or 
closing transaction. In practice, if the transaction is not identified 
as either an opening or closing transaction, then OCC treats it as an 
opening transaction.
    OCC proposes to reflect this current practice in its rules.\43\ 
Rule 401, Interpretation and Policy .01 already provides that, in the 
case of futures, trade information submitted by an Exchange need not 
identify a transaction as opening or closing. It also indicates that if 
trade information submitted by an Exchange for a futures trade does not 
identify a transaction as opening or closing, OCC will treat all 
purchase and sale transactions in futures in accounts other than Market 
Maker accounts as opening transactions. OCC proposes to broaden the 
application of Rule 401, Interpretation and Policy .01 to encompass 
options as well as futures.
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    \43\ Id.
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    OCC also proposes to broaden the scope of Rule 401, Interpretation 
and Policy .01 to apply to Market-Maker accounts. Currently, Rule 401, 
Interpretation and Policy .01 does not apply to purchase and sale 
transactions in futures and options in Market Maker accounts. OCC 
proposes removing this limitation because it believes that the practice 
of treating unidentified trades as opening transactions is 
operationally safer because it helps avoid the unintentional closure of 
existing positions, irrespective of whether the specific unidentified 
trade is in a Market Maker account or not.\44\
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    \44\ Id. at 79982.
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iii. Broker-Broker Settlement Obligations
    OCC proposes two changes related to its broker-to-broker settlement 
obligations to align its rules with its practices. Ordinarily, 
settlement of exercise and assignment activity occurs through OCC's 
correspondent clearing corporation, the National Securities Clearing 
Corporation (``NSCC'') pursuant to OCC's Rule 901.\45\ In certain 
circumstances, such as when an underlying security is not CCC-
eligible,\46\ OCC directs that settlement will occur on a broker-to-
broker basis pursuant to Rules 903-912. Under OCC Rule 909, when 
settlement is not made through the correspondent clearing corporation, 
for example when broker-broker settlement is directed, the Delivering 
Clearing Member and the Receiving Clearing Member must send notices to 
OCC as to the number of units of the underlying security delivered and 
the amount received. Under OCC Rule 909(d), when a Delivering or 
Receiving Clearing Member submits to OCC notice of a delivery, payment, 
or receipt of delivery or payment, and the contra Clearing Member does 
not respond to such notice within two business days, the contraparty's 
failure to respond constitutes acknowledgement to OCC that the 
obligation has been settled as indicated in the submitting Clearing 
Member's notice, provided that the designated delivery date has 
occurred. However, OCC's current practice differs from this provision 
in Rule 909. Rather, when OCC directs broker-broker settlement it also 
indicates 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 Delivering and 
Receiving Clearing Members will be delayed until OCC designates a new 
exercise settlement date, settlement method, and/or settlement 
value.\47\
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    \45\ See Interpretation and Policy .02 to OCC Rule 901.
    \46\ Id. The term CCC-eligible means that securities contracts 
in the underlying security arising from the exercise or maturity of 
a cleared security are eligible for settlement through the 
Continuous Net Settlement Accounting Operation of NSCC. OCC By-Laws, 
Article I, Section C.6.
    \47\ Taking such action is allowed under Article VI, Section 19 
of the By-Laws.
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    The Proposed Rule Change would amend Rule 909 to align the Rule 
with current practice. Specifically, OCC would amend Rule 909(d) to 
provide that OCC will construe a contraparty's failure to respond to 
indicate that the obligation is unsettled 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.
    Separately, OCC Rule 909 currently requires Clearing Members to 
submit notices indicating the number of units of the underlying 
security delivered (received) and the amount received (paid) therefor 
for transactions not settled via NSCC. In practice, however, the amount 
received or paid is systematically determined at OCC rather than being 
specified by the Clearing Members.\48\ Therefore, OCC proposes removing 
``and the amount received (paid)'' from the text of Rule 909.
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    \48\ OCC states that the practice of systematically calculating 
cash amounts helps OCC avoid processing notices entered by Clearing 
Members that may be inaccurate. See Notice, 89 FR at 79982.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act requires the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\49\ Under the Commission's Rules of Practice, the 
``burden to demonstrate that a proposed rule change is consistent with 
the [Act] and the rules and regulations issued thereunder . . . is on 
the self-regulatory organization [`SRO'] that proposed the rule 
change.'' \50\ The description of a proposed rule change, its purpose 
and operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\51\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Act and the applicable rules and 
regulations.\52\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\53\
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    \49\ 15 U.S.C. 78s(b)(2)(C).
    \50\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \51\ Id.
    \52\ Id.
    \53\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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    After carefully considering the Proposed Rule Change, the 
Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act \54\ and Rule 17Ad-22(e)(21).\55\
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    \54\ 15 U.S.C. 78q-1(b)(3)(F).
    \55\ 17 CFR 240Ad-22(e)(21).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Under Section 17A(b)(3)(F) of the Act, OCC's rules, among other 
things, must be ``designed to promote the prompt and accurate clearance 
and settlement of securities transactions and, to the extent 
applicable, derivative agreements,

[[Page 91830]]

contracts, and transactions.'' \56\ Based on the Commission's review of 
the record, and for the reasons discussed below, OCC's proposed rule 
change is consistent with Section 17A(b)(3)(F).
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    \56\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC proposes amending its rules to discontinue a number of existing 
functions that are outmoded or unused. As described above, OCC would no 
longer offer services through which it facilitates the settlement of 
commissions and fees owed between Clearing Members that are party to a 
CMTA arrangement because Clearing Members have neither expressed 
interest in using this service nor, since 2016, have they used it.\57\ 
OCC would cease clearing and settlement services with respect to OTC 
options because it has not cleared or settled an OTC option since 2014, 
its Clearing Members have not expressed interest in OCC doing so in the 
future, and it does not currently have any open interest in OTC 
options.\58\ OCC's amendments would also discontinue the Associated 
Market-Maker account subtype because its Clearing Members do not use 
it.\59\ OCC also proposes to eliminate the requirement that Clearing 
Members maintain records of both parties to a trade because the 
original counterparty information in transactions is not relevant or 
necessary in respect of OCC's clearance and settlement process.
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    \57\ Notice, 89 FR at 79979.
    \58\ Id. at 79980.
    \59\ Id. at 79982.
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    Discontinuing services no longer in use, and the rules related to 
such services, removes unnecessary complexity from OCC's rules without 
impeding the clearance or settlement of securities transactions. 
Similarly, removing from its rules obligations on Clearing Members that 
are no longer necessary to support OCC's ability to clear and settle 
transactions, such as the obligation for Clearing Members to maintain 
unnecessary records, reduces complexity without impeding OCC's 
clearance and settlement activities. Reducing complexity would also 
improve the clarity of OCC's rules.
    As described above, OCC also proposes changes to improve the 
accuracy of its clearance and settlement of transactions. Specifically, 
OCC proposes requiring the Given-Up Clearing Member, rather than the 
Giving-Up Clearing Member, to designate an account to which the 
allocation in a give up transaction will be made. This proposed change 
would provide a Given-Up Clearing Member with more control over its own 
account and could help reduce the risk that such a Clearing Member 
would receive positions it does not want.\60\ Separately, OCC proposes 
to treat confirmed transactions in options and futures as opening 
transactions where the trade information provided to OCC does not 
indicate whether the transaction is an opening or closing transaction. 
This would reduce the risk of an unintentional closure of existing 
positions. By avoiding mistakenly closing existing positions and 
reducing the risk that a transaction will be transferred to the wrong 
account, OCC's proposed changes promote the accurate clearance and 
settlement of securities transactions.
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    \60\ As noted above, OCC also proposes to remove duplicative 
provisions in the rules governing such transactions.
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    Finally, OCC proposes to amend its rules to no longer construe a 
Clearing Member's failure to act as acknowledgement of settlement in 
broker-to-broker transactions. Rather, OCC would not construe such a 
transaction to have settled until either it receives notice from both 
Clearing Members of their mutual agreement to settle the obligation or 
OCC settles the positions pursuant to its policies and procedures. This 
could reduce potential inaccuracies in OCC's settlement of the 
contracts it clears, and would also be consistent with current 
practice.\61\
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    \61\ As discussed above, other proposed changes that align the 
rules with current practice include clarifying that give-up 
transactions are only available for futures and options on futures; 
removing the requirement to include certain information in notices; 
and defaulting to an opening transaction when certain trade 
information do not indicate that a transaction is either an opening 
or closing transaction.
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    By removing the duplicative portions of Rule 408, OCC would improve 
the clarity of its Rules,\62\ which in turn increases the likelihood 
that its participants understand the methods available to clear and 
settle transactions and how those methods function. Similarly, ensuring 
that the rules align with current practice, in the ways discussed 
above, helps prevent confusion by OCC's Clearing Members as to the 
methods available to clear and settle transactions and how those 
methods function. By preventing such confusion, OCC makes it more 
likely that participants are able to efficiently and accurately execute 
their transactions. As such, the Proposed Rule Change promotes the 
prompt and accurate clearance and settlement of securities 
transactions.
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    \62\ OCC also proposes correcting an inaccurate reference to 
Section 3 of its By-Laws, Paragraph I. This too increases the 
clarity of its rules.
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    The Proposed Rule Change is, therefore, consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\63\
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    \63\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(21)

    Rule 17Ad-22(e)(21) requires OCC 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 . . . .'' 
\64\ Based on its review of the record, and for the reasons discussed 
below, OCC's Proposed Rule Change is consistent with Rule 17Ad-
22(e)(21). When clearing agencies establish policies and procedures 
that address Rule 17Ad-22(e)(21), the Commission has indicated that 
they should ask whether their policies' and procedures' design meets 
the needs of its participants and the markets it serves, particularly 
with respect to choice of a clearance and settlement arrangement, 
operating structure, scope of products cleared, settled, or recorded, 
and use of technology and procedures.\65\
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    \64\ 17 CFR 240.17Ad-22(e)(21).
    \65\ Securities Exchange Act Release No. 78961, 81 FR 70786, 
70841 (Oct. 13, 2016) (File No. S7-03-14).
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    OCC's policies and procedures would meet the needs of its 
participants and the markets it serves after its proposed 
discontinuation of products and services its Clearing Members no longer 
use. OCC proposes discontinuing its facilitation of the settlement of 
commissions and fees owed between Clearing Members that are party to a 
CMTA arrangement because Clearing Members have neither expressed 
interest in using this service nor, since 2016, have they used it.\66\ 
OCC plans on no longer offering clearing and settlement services with 
respect to OTC options because it has not cleared and settled an OTC 
option since 2014, its Clearing Members have not expressed interest in 
OCC doing so in the future, and it does not currently have any open 
interest in OTC options.\67\ OCC also would discontinue the Associated 
Market-Maker account subtype because its Clearing Members do not use 
it.\68\ OCC is not obligated to offer these products and services. 
Further, its Clearing Members' lack of interest in these products and 
services suggests that they do not need them. As such, OCC's proposed 
discontinuation of these products and services is consistent with the 
requirements of Rule 17Ad-22(e)(21).\69\
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    \66\ Notice, 89 FR at 79979.
    \67\ Id. at 79980.
    \68\ Id. at 79982.
    \69\ 17 CFR 240.17Ad-22(e)(21).

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[[Page 91831]]

    The Proposed Rule Change is, therefore, consistent with the 
requirements of Rule 17Ad-22(e)(21).\70\
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    \70\ 17 CFR 240.17Ad-22(e)(21).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, Section 17A(b)(3)(F) of the Act \71\ and Rule 17Ad-
22(e)(21).\72\
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    \71\ 15 U.S.C. 78q-1(b)(3)(F).
    \72\ 17 CFR 240.17Ad-22(e)(21).
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    It is therefore Oodered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-OCC-2024-013) be, and hereby is, 
approved.\73\
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    \73\ In approving the proposed rule change, the Commission 
considered the proposal's impacts on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\74\
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    \74\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-27012 Filed 11-19-24; 8:45 am]
BILLING CODE 8011-01-P
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