Federal Register / Vol. 80, No. 20 / Friday, January 30, 2015 / Notices 5171 

12 15 U.S.C. 78q–1. 

13 15 U.S.C. 78s(b)(2). 

14 In approving the proposed rule change, the 

Commission considered the proposal’s impact on 

efficiency, competition and capital formation. 15 

U.S.C. 78c(f). 

15 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3OCC also filed proposals in this proposed rule 

change as an advance notice under Section 

806(e)(1) of the Payment, Clearing, and Settlement 

Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See 

File No. SR–OCC–2014–813. In Items I and II 

below, OCC states that the purpose of this proposal 

is in part to facilitate compliance with the SEC 

Proposed Rules (as defined below) and address 

Principle 15 of the Principles for Financial Market 

Infrastructures. The Commission notes that the SEC 

Proposed Rules are pending. The Commission will 

evaluate the proposed rule change under the Act 

and the rules currently in force thereunder. 

4The Capital Plan has also been filed with the 

Commission as an advance notice (SR–OCC–2014– 

813), which was amended and restated on January 

14, 2015. 

5The material features of the Capital Plan are 

summarized in the Term Sheet that is included as 

Exhibit 3 to this filing. Certain details of the Term 

Sheet may change as a result of negotiations 

between OCC and the Stockholder Exchanges or 

changes in financial figures, but OCC does not 

anticipate any material changes to the Capital Plan. 

6See Securities Exchange Act Release No. 71699 

(March 12, 2014), 79 FR 29507 (May 22, 2014) 

(‘‘SEC Proposed Rules’’). 

Act 12 and the rules and regulations 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,13 that the 

proposed rule change (SR–ICEEU–2015– 

003) be, and hereby is, approved on an 

accelerated basis.14

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–01752 Filed 1–29–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74136; File No. SR–OCC– 

2015–02] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of a Proposed Rule Change 

Concerning a Proposed Capital Plan 

for Raising Additional Capital That 

Would Support the Options Clearing 

Corporation’s Function as a 

Systemically Important Financial 

Market Utility 

January 26, 2015. 

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

Securities Exchange Act of 1934 

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

notice is hereby given that on January 

14, 2015, The Options Clearing 

Corporation (‘‘OCC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

OCC.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

This proposed rule change is filed by 

OCC in order to set forth a proposed 

Capital Plan for raising additional 

capital that would support OCC’s 

function as a systemically important 

financial market utility and facilitate 

OCC’s compliance with new regulatory 

requirements applicable to systemically 

important financial market utilities that 

have been proposed by the Commission 

but have not yet been adopted. 

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 such statements. 

(A) Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

1. Purpose 

OCC is proposing to amend its ByLaws and other governing documents, 

and to adopt certain policies, for the 

purpose of implementing a plan for 

raising additional capital (‘‘Capital 

Plan’’) under which the options 

exchanges that own equity in OCC 

(‘‘Stockholder Exchanges’’ or 

‘‘Stockholders’’) would make an 

additional capital contribution and 

commit to replenishment capital 

(‘‘Replenishment Capital’’) in 

circumstances discussed below, and 

would receive, among other things, the 

right to receive dividends from OCC.4 In 

addition to the additional capital 

contribution and Replenishment 

Capital, the main features of the Capital 

Plan are: (i) A policy establishing OCC’s 

fees at a level that would be sufficient 

to cover OCC’s estimated operating 

expenses plus a ‘‘Business Risk Buffer’’ 

as described below (‘‘Fee Policy’’), (ii) a 

policy establishing the amount of the 

annual refund to clearing members of 

OCC’s fees (‘‘Refund Policy’’), and (iii) 

a policy for calculating the amount of 

dividends to be paid to the Stockholder 

Exchanges (‘‘Dividend Policy’’). The 

Capital Plan is proposed to be 

implemented on or about February 27, 

2015, subject to all necessary regulatory 

approvals.5

The Capital Plan would significantly 

increase OCC’s capital in connection 

with its increased responsibilities as a 

systemically important financial market 

utility, and OCC believes that it would 

facilitate OCC’s compliance with new 

regulatory requirements applicable to 

such systemically important financial 

market utilities that have been proposed 

by the Commission but have not yet 

been adopted.6 For purposes of its 

capital planning, OCC has used the 

working assumption that the new 

requirements contained in the 

Commission’s proposed amendments to 

Rule 17Ad–22 of the SEC Proposed 

Rules will be adopted substantially as 

proposed, and the Capital Plan is 

intended to ensure OCC’s ability to 

comply with Rule 17Ad–22, specifically 

paragraph (e)(15) thereof, when the SEC 

Proposed Rules become effective. In 

addition, it is intended to address 

Principle 15 of the Principles for 

Financial Market Infrastructures 

published by the Bank for International 

Settlements and the International 

Organization of Securities Commissions, 

which provides, among other things, 

that a financial market utility should 

identify, monitor and manage its general 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

it can continue to operate as a going 

concern. The Capital Plan calls for an 

infusion of substantial additional equity 

capital by the Stockholder Exchanges to 

be made prior to February 27, 2015, 

subject to regulatory approval, that 

when added to retained earnings 

accumulated by OCC in 2014 will 

significantly increase OCC’s capital 

levels as compared to historical levels. 

Additionally, the Capital Plan includes 

the Replenishment Capital commitment, 

which would provide OCC access to 

additional equity contributed by the 

Stockholder Exchanges should OCC’s 

equity fall close to or below the amount 

that OCC determines to be appropriate 

to support its business and manage 

business risk in compliance with Rule 

17Ad–22, as discussed more fully 

below. 


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7The Stockholder Exchanges are: Chicago Board 

Options Exchange, Incorporated; International 

Securities Exchange, LLC; NASDAQ OMX PHLX 

LLC; NYSE MKT LLC; and NYSE Arca, Inc. 

8SEC Proposed Rules at 32–33, FR 29507, 29515 

(May 22, 2014). 

9SEC Proposed Rules at 417–418, FR 29507, 

29616 (May 22, 2014). 

10SEC Proposed Rules at 222–223, FR 29507, 

29547–29548 (May 22, 2014). 

11See OCC 2013 Annual Report, Financial 

Statements, Statements of Financial Condition, 

available on OCC’s Web site, http://

optionsclearing.com/components/docs/about/

annual-reports/occ_2013_annual_report.pdf. 

12SEC Proposed Rules at 418, FR 29507, 29616 

(May 22, 2014). 

13SEC Proposed Rules at 417, FR 29507, 29616 

(May 22, 2014). 

14The obligation to provide Replenishment 

Capital will be capped at $200 million, which OCC 

projects will sufficiently account for increases in its 

capital requirements for the foreseeable future. 

Background 

OCC is a clearing agency registered 

with the Commission and is also a 

derivatives clearing organization 

(‘‘DCO’’) regulated in its capacity as 

such by the Commodity Futures Trading 

Commission (‘‘CFTC’’). OCC is a 

Delaware business corporation and is 

owned equally by the Stockholder 

Exchanges, five national securities 

exchanges for which OCC provides 

clearing services.7 In addition, OCC 

provides clearing services for seven 

other national securities exchanges that 

trade options (‘‘Non-Stockholder 

Exchanges’’). In its capacity as a DCO, 

OCC also provides clearing services to 

four futures exchanges. 

OCC has been designated systemically 

important by the Financial Stability 

Oversight Council pursuant to the 

Payment, Clearing and Settlement 

Supervision Act, and the Commission is 

OCC’s ‘‘Supervisory Agency’’ under 

Section 803(8) of the Payment, Clearing 

and Settlement Supervision Act. OCC is 

therefore a ‘‘covered clearing agency’’ 

(‘‘CCA’’) as defined in proposed 

amendments to the Commission’s Rule 

17Ad–22(a)(7) and would be required to 

comply with the provisions of proposed 

Rule 17Ad–22 applicable to CCA’s, 

including paragraph (e)(15) thereof.8

Proposed Rule 17Ad–22(e)(15) 

provides: 

Each covered clearing agency shall 

establish, implement, maintain and enforce 

written policies and procedures reasonably 

designed to, as applicable: . . . Identify, 

monitor, and manage the covered clearing 

agency’s general business risk and hold 

sufficient liquid net assets funded by equity 

to cover potential general business losses so 

that the covered clearing agency can continue 

operations and services as a going concern if 

those losses materialize, including by: 

(i) Determining the amount of liquid net 

assets funded by equity based upon its 

general business risk profile and the length 

of time required to achieve recovery or 

orderly wind-down, as appropriate, of its 

critical operations and services if such action 

is taken; 

(ii) Holding liquid net assets funded by 

equity equal to the greater of either (x) six 

months of the covered clearing agency’s 

current operating expenses, or (y) the amount 

determined by the board of directors to be 

sufficient to ensure a recovery or orderly 

wind-down of critical operations and 

services of the covered clearing agency, as 

contemplated by the plans established under 

paragraph (e)(3)(ii) of this section, and 

which: 

(A) shall be in addition to resources held 

to cover participant defaults or other risks 

covered under the credit risk standard in 

paragraph (b)(3) or paragraph (e)(4)(i)–(iii) of 

this section, as applicable, and the liquidity 

risk standard in paragraph (e)(7)(i) and (ii) of 

this section; and 

(B) Shall be of high quality and sufficiently 

liquid to allow the covered clearing agency 

to meet its current and projected operating 

expenses under a range of scenarios, 

including adverse market conditions; and 

(iii) Maintaining a viable plan, approved by 

the board of directors and updated at least 

annually, for raising additional equity should 

its equity fall close to or below the amount 

required under paragraph (e)(15)(ii) of this 

section.9

Over the last nine months, OCC has 

devoted substantial efforts to: (1) 

Develop a 5-year forward looking model 

of expenses; (2) quantify maximum 

recovery and wind-down costs under 

OCC’s Recovery and Wind-Down Plan; 

(3) assess and quantify OCC’s 

operational and business risks; (4) 

model projected capital accumulation 

taking into account varying assumptions 

concerning business conditions, fee 

levels, buffer margin levels and refunds; 

and (5) develop an effective mechanism 

that provides OCC access to 

replenishment capital in the event of 

losses that could cause OCC to be noncompliant with the SEC Proposed Rules. 

Incorporating the results of those efforts, 

the proposed amendments are intended 

to allow OCC to implement the Capital 

Plan and thereby provide OCC with the 

means to increase its shareholders’ 

equity and, in particular, to obtain 

timely compliance with Rule 17Ad– 

22(e)(15) 10 as proposed by the 

Commission. A more detailed 

discussion of the manner in which the 

Capital Plan would allow OCC to 

comply with Rule 17Ad–22(e)(15) 

appears below. 

OCC’s Projected Capital Requirement 

Using the methods described in detail 

below, OCC will annually determine a 

‘‘Target Capital Requirement’’ consisting 

of (i) a ‘‘Baseline Capital Requirement’’ 

equal to the greatest of (x) six months 

operating expenses for the following 

year, (y) the maximum cost of the 

recovery scenario from OCC’s Recovery 

and Wind-Down Plan, and (z) the cost 

to OCC of winding down operations as 

set forth in the Recovery and WindDown Plan, plus (ii) a ‘‘Target Capital 

Buffer’’ linked to plausible loss 

scenarios from operational risk, 

business risk and pension risk. OCC has 

determined that its currently 

appropriate ‘‘Target Capital 

Requirement’’ is $247 million, reflecting 

a Baseline Capital Requirement of $117 

million, which is equal to six months of 

projected operating expenses, plus a 

Target Capital Buffer of $130 million. 

This Target Capital Buffer would 

provide a significant capital cushion to 

offset potential business losses. 

As of December 31, 2013, OCC had 

total shareholders’ equity of 

approximately $25 million,11 meaning 

that OCC proposes to add additional 

capital of $222 million to meet its 2015 

Target Capital Requirement. In addition, 

OCC would be obligated under 

paragraph (e)(15)(iii) 12 of proposed Rule 

17Ad–22 to maintain ‘‘a viable plan’’ for 

raising additional equity should its 

equity fall close to or below the amount 

required under paragraph (e)(15)(ii) of 

the Rule; 13 i.e., the Baseline Capital 

Requirement. OCC has determined that 

its viable plan for Replenishment 

Capital should provide for a 

‘‘Replenishment Capital Amount’’ 

which would give OCC access to 

additional capital as needed up to a 

maximum of the Baseline Capital 

Requirement, which is currently $117 

million.14 Therefore, OCC’s proposed 

Capital Plan would provide OCC in 

2015 with ready access to 

approximately $364 million in equity 

capital as follows: 

Baseline Capital Requirement .................................. $117,000,000 

Target Capital Buffer ............ 130,000,000 

Target Capital Requirement 247,000,000 

Replenishment Capital 

Amount .............................. 117,000,000 

Total OCC Capital Resources ...................... 364,000,000 

Procedures Followed in Order to 

Determine Capital Requirement 

Various measures were used in 

determining the appropriate level of 

capital necessary to comply with the 

SEC Proposed Rules. An outside 

consultant conducted a ‘‘bottom-up’’ 

analysis of OCC’s risks and quantified 

the appropriate amount of capital to be 

held against each risk. The analysis was 


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15SEC Proposed Rules at 417, FR 29507, 29616 

(May 22, 2014). 

16See Proposed Rule Change by The Options 

Clearing Corporation to Reflect the Elimination of 

a Discount to the Clearing Fee Schedule, Securities 

Exchange Act Release No. 71769 (March 21, 2014), 

79 FR 17214 (March 27, 2014) (SR–OCC–2014–05) 

(Filing for immediate effectiveness of a proposed 

rule change with the Commission to reinstate OCC’s 

permanent clearing fee schedule for securities 

options and securities futures that became effective 

May 1, 2007 (‘‘Permanent Schedule Reinstatement 

Filing’’)). The $72 million is after giving effect to 

the approximately $40 million refund referred to 

below. 

17 If OCC’s fee schedule needs to be changed in 

order to achieve the 25% Business Risk Buffer, OCC 

would file a proposed rule change seeking approval 

of the revised fee schedule. 

comprehensive across risk types, 

including credit, market, pension, 

operational, and business risk. Based on 

internal operational risk scenarios and 

loss modeling at or above the 99% 

confidence level, OCC’s operational risk 

was quantified at $226 million and 

pension risk at $21 million, resulting in 

the total Target Capital Requirement of 

$247 million. Business risk was 

addressed by taking into consideration 

that OCC has the ability to fully offset 

potential revenue volatility and manage 

business risk to zero by adjusting the 

levels at which fees and refunds are set 

and by adopting a ‘‘Business Risk 

Buffer’’ of 25% when setting fees. Other 

risks, such as counterparty risk and onbalance sheet credit and market risk, 

were considered to be immaterial for 

purposes of requiring additional capital 

based on means available to OCC to 

address those risks that did not require 

use of OCC’s capital. As discussed in 

more detail below in the context of 

OCC’s Fee Policy, the Business Risk 

Buffer of 25% is achieved by setting 

OCC’s fees at a level intended to achieve 

target annual revenue that will result in 

a 25% buffer for the year after paying all 

operating expenses. 

An analysis was also performed to 

identify OCC’s risk in terms of the 

regulatory requirements set forth in 

proposed Rule 17Ad-22(e)(15)(ii).15 This 

analysis estimated that, currently, OCC’s 

maximum recovery costs would be $100 

million and projected wind-down costs 

would be $73 million. OCC’s projected 

expenses for 2015 are $234 million, so 

that six months projected expenses are 

$234 million/2 = $117 million. The 

greater of recovery or wind-down costs 

and six months of operating expenses is 

therefore $117 million, and OCC’s 

Baseline Capital Requirement 

(minimum regulatory requirement) is 

therefore $117 million. OCC then 

computed the appropriate amount of a 

Target Capital Buffer from operational 

risk, business risk, and pension risk. 

This resulted in a determination that the 

current Target Capital Buffer should be 

$130 million. Thus, the Target Capital 

Requirement is $117 million + $130 

million = $247 million. 

Overview of, and Basis for, OCC’s 

Proposal to Acquire Additional Equity 

Capital 

In order to meet its Target Capital 

Requirement, and after consideration of 

available alternatives, OCC’s Board 

approved a proposal from OCC’s 

Stockholder Exchanges under which 

OCC would meet its Target Capital 

Requirement of $247 million in early 

2015 as follows: 

Shareholders’ Equity as of 1/1/2014 ........................................................................................................................................... $25,000,000 

Shareholders Equity Accumulated Through Retained Earnings 16 ............................................................................................. 72,000,000 

Additional Contribution from Stockholder Exchanges ................................................................................................................. 150,000,000 

Target Capital Requirement ................................................................................................................................................. 247,000,000 

Replenishment Capital Amount ............................................................................................................................................ 117,000,000 

Total OCC Capital Resources ....................................................................................................................................... 364,000,000 

The additional contribution of the 

Stockholder Exchanges would be made 

in respect of their Class B Common 

Stock on a pro rata basis. The 

Stockholder Exchanges will also commit 

to provide additional equity capital up 

to the Replenishment Capital Amount, 

which is currently $117 million, in the 

event Replenishment Capital is needed. 

While the Replenishment Capital 

Amount will increase as the Baseline 

Capital Requirement increases, it would 

be capped at a total of $200 million that 

could be outstanding at any point in 

time. OCC has estimated that the 

Baseline Capital Requirement would not 

exceed this amount before 2022. When 

the limit is being approached, OCC 

would revise the Capital Plan as needed 

to address future needs. In 

consideration for their capital 

contributions and replenishment 

commitments, the Stockholder 

Exchanges will receive dividends as 

described in the Dividend Policy 

discussed below for so long as they 

remain stockholders and maintain their 

contributed capital and commitment to 

replenish capital up to the 

Replenishment Capital Amount, subject 

to the $200 million cap. 

Fee, Refund, and Dividend Policies 

Upon reaching the Target Capital 

Requirement, the Capital Plan and the 

proposed Fee Policy require OCC to set 

its fees at a level that utilizes a Business 

Risk Buffer of 25%. The purpose of this 

Business Risk Buffer is to ensure that 

OCC accumulates sufficient capital to 

cover unexpected fluctuations in 

operating expenses, business capital 

needs, and regulatory capital 

requirements. Furthermore, the Capital 

Plan requires OCC to maintain Fee, 

Refund, and Dividend Policies, 

described in more detail below, which 

are designed to ensure that OCC’s 

shareholders’ equity remains well above 

the Baseline Capital Requirement. The 

proposed Fee, Refund, and Dividend 

Policies are attached to this filing as 

Exhibits 5A, 5B, and 5C respectively. 

The required Business Risk Buffer of 

25% is below OCC’s 10-year historical 

pre-refund average buffer of 31%. The 

target will remain 25% so long as OCC’s 

shareholders’ equity remains above the 

Target Capital Requirement amount. 

The reduction in buffer margin from 

OCC’s 10-year average of 31% to 25% 

reflects OCC’s commitment to continue 

to operate as an industry utility and 

ensuring that market participants 

benefit as much as possible from OCC’s 

operational efficiencies in the future. 

This reduction will permit OCC to 

charge lower fees to market participants 

rather than maximizing refunds to 

clearing members and dividend 

distributions to Stockholder Exchanges. 

OCC will review its fee schedule on a 

quarterly basis to manage revenue as 

closely to this target as possible.17 For 

example, if the Business Risk Buffer is 

materially above 25% after the first 

quarter of a particular year, OCC may 

decrease fees for the remainder of the 

year, and conversely if the Business 

Risk Buffer is materially below 25% 

after the first quarter, OCC may increase 

fees for the remainder of the year. 


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18See, e.g., the Permanent Schedule 

Reinstatement Filing, supra n. 13; Proposed Rule 

Change by The Options Clearing Corporation to 

Reduce the Per Contract Clearing Fee for Routing 

Trades Executed in Accordance with the Options 

Order Protection and Locked/Crossed Market Plan 

to $.01 per Contract, Securities Exchange Act 

Release No. 68025 (October 12, 2012), 77 FR 63398 

(October 16, 2012) (SR–OCC–2012–18). 

The Capital Plan would allow OCC to 

refund approximately $40 million from 

2014 fees to clearing members in 2015 

and to reduce fees in an amount to be 

determined by the Board, effective in 

the second quarter 2015. OCC will 

announce new fee levels early in 2015 

and will make them effective following 

notification to clearing members and 

any necessary approval by the 

Commission. OCC will endeavor to 

provide clearing members with no less 

than 60-day advance notice of the 

effectiveness of changes to fee levels, 

particularly those that result in 

increases to fee levels. No dividends 

will be declared until December 2015 

and no dividends will be paid until 

2016. 

Changes to the Fee, Refund, or 

Dividend Policies will require the 

affirmative vote of two-thirds of the 

directors then in office and approval of 

the holders of all of OCC’s outstanding 

Class B Common Stock. The formulas 

for determining the amount of refunds 

and dividends under the Refund and 

Dividend Policies, respectively, which 

are described in more detail below, 

assume that refunds are tax-deductible 

but that dividends are not. The Refund 

and Dividend Policies would each 

provide that in the event that refunds 

payable under the Refund Policy are not 

tax deductible, the policies would be 

amended to restore the relative 

economic benefits between the 

recipients of the refunds and the 

Stockholder Exchanges. 

Fee Policy 

Under the Fee Policy, in setting fees 

each year, OCC would calculate an 

annual revenue target based on a 

forward twelve months expense forecast 

divided by the difference between one 

and the Business Risk Buffer of 25%, 

i.e., OCC will divide the expense 

forecast by .75. Establishing a Business 

Risk Buffer at 25% would allow OCC to 

manage the risk that fees would generate 

less revenue than expected due to 

lower-than-expected trading volume or 

other factors, or that expenses would be 

higher than projected. The Fee Policy 

also will include provisions from 

existing Article IX, Section 9 of the ByLaws to the effect that the fee schedule 

may also include additional amounts 

necessary to (i) maintain such reserves 

as are deemed reasonably necessary by 

the Board to provide facilities for the 

conduct of OCC’s business and to 

conduct development and capital 

planning activities in connection with 

OCC’s services to the options exchanges, 

Clearing Members and the general 

public, and (ii) accumulate such 

additional surplus as the Board may 

deem advisable to permit OCC to meet 

its obligations to Clearing Members and 

the general public; however, these 

provisions will be invoked only in 

extraordinary circumstances and to the 

extent that the Board has determined 

that the required amount of such 

additional reserves or additional surplus 

will exceed the full amount that is 

expected to be accumulated through the 

Business Risk Buffer (prior to payment 

of refunds or dividends) so OCC’s fees 

will ordinarily be based on its projected 

operating expenses and the Business 

Risk Buffer of 25%. 

Under the Capital Plan, OCC would 

calculate its annual revenue target as 

follows: 

Annual Revenue Target = Forward 12 

Months Expense Forecast/(1–.25). 

Because OCC’s clearing fee schedules 

typically reflect different rates for 

different categories of transactions, fee 

projections would include projections 

as to relative volume in each such 

category. The clearing fee schedule 

would therefore be set to achieve a 

blended or average rate per contract 

sufficient, when multiplied by total 

projected contract volume, to achieve 

the Annual Revenue Target. Under 

extraordinary circumstances, OCC 

would then add any amount determined 

to be necessary for additional reserves 

or surplus and divide the resulting 

number by the projected contract 

volume to determine the applicable 

average fee per cleared contract needed 

to achieve the additional amounts 

required. Consistent with past practice, 

OCC would notify clearing members of 

the fees that would be applicable for any 

particular period by describing the 

change in an information memorandum 

distributed to all clearing members. 

Consistent with past practice, OCC 

would also notify regulators of the fees 

that would be applicable for any 

particular period by filing an 

amendment to its Schedule of Fees as a 

proposed rule change for immediate 

effectiveness under Section 19(b)(3)(A) 

of the Act and Rule 19b–4(f)(2) 

thereunder.18

Refund Policy 

Under the Refund Policy, except at a 

time when Replenishment Capital is 

outstanding as described below, OCC 

would declare a refund to Clearing 

Members in December of each year, 

beginning in 2015, in an amount equal 

to 50% of the excess, if any, of (i) pretax income for the year in which the 

refund is declared over (ii) the sum of 

(x) the amount of pre-tax income after 

the refund necessary to produce aftertax income for such year sufficient to 

maintain shareholders’ equity at the 

Target Capital Requirement for the 

following year plus (y) the amount of 

pre-tax income after the refund 

necessary to fund any additional 

reserves or additional surplus not 

already included in the Target Capital 

Requirement. Such refund will be paid 

in the year following the declaration 

after the issuance of OCC’s audited 

financial statements, provided that (i) 

the payment does not result in total 

shareholders’ equity falling below the 

Target Capital Requirement, and (ii) 

such payment is otherwise permitted by 

applicable Delaware law and applicable 

federal laws and regulations. OCC 

would not be able to pay a refund on a 

particular date unless dividends were 

paid on the same date. If Replenishment 

Capital has been contributed and 

remains outstanding, OCC would not 

pay refunds until such time as the 

Target Capital Requirement is restored 

through the accumulation of retained 

earnings. Refunds in accordance with 

the Refund Policy would resume once 

the Target Capital Requirement is 

restored and all Replenishment Capital 

is repaid in full, provided that the 

restoration of the Target Capital 

Requirement and the repayment of 

Replenishment Capital occurred within 

24 months of the issuance date of the 

Replenishment Capital. If, within 24 

months of the issuance date of any 

Replenishment Capital, such 

Replenishment Capital has not been 

repaid in full or shareholders’ equity 

has not been restored to the Target 

Capital Requirement, OCC would no 

longer pay refunds to clearing members, 

even if the Target Capital Requirement 

is restored and all Replenishment 

Capital is repaid at a later date. 

Dividend Policy 

The Dividend Policy would provide 

that, except at a time when 

Replenishment Capital is outstanding as 

described below, OCC would declare a 

dividend on its Class B Common Stock 

in December of each year in an aggregate 

amount equal to the excess, if any, of (i) 

after-tax income for the year, after 

application of the Refund Policy (unless 

the Refund Policy has been eliminated, 

in which case the refunds shall be 

deemed to be $0) over (ii) the sum of (A) 

the amount required to be retained in 

order to maintain total shareholders’ 


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19OCC’s common stock and paid in capital total 

$2,659,999. See OCC 2013 Annual Report, Financial 

Statements, Statements of Financial Condition, 

available on OCC’s Web site, http://

optionsclearing.com/components/docs/about/

annual-reports/occ_2013_annual_report.pdf. 

20Non-Stockholder Exchanges contribute capital 

by purchasing a promissory note in the principal 

amount of $1,000,000. See Section 2 of Article VIIB 

of OCC’s By-Laws. The required capital 

contribution of Non-Stockholder exchanges will not 

change under the Capital Plan. 

equity at the Target Capital Requirement 

for the following year, plus (B) the 

amount of any additional reserves or 

additional surplus not already included 

in the Target Capital Requirement. Such 

dividend will be paid in the year 

following the declaration after the 

issuance of OCC’s audited financial 

statements, provided that (i) the 

payment does not result in total 

shareholders’ equity falling below the 

Target Capital Requirement, and (ii) 

such payment is otherwise permitted by 

applicable Delaware law and applicable 

federal laws and regulations. If 

Replenishment Capital has been 

contributed and remains outstanding, 

OCC would not pay dividends until 

such time as the Target Capital 

Requirement is restored. 

OCC’s Status as an Industry Utility 

OCC has always been operated on an 

‘‘industry utility’’ model. The 

Stockholder Exchanges have heretofore 

contributed only minimal capital to 

OCC.19 OCC’s By-Laws currently require 

that OCC set its clearing fees at a level 

that is designed to cover operating 

expenses and to maintain such reserves 

and accumulate such additional capital 

as are deemed reasonably necessary for 

OCC to meet its obligations to its 

clearing members and the public. 

Clearing fees that are collected in excess 

of these amounts are refunded annually 

on a pro rata basis to the clearing 

members who paid them. Under this 

model, OCC has never paid dividends to 

the Stockholder Exchanges. However, 

OCC has paid significant refunds to 

clearing members each year. OCC is 

aware that a portion—possibly a 

significant portion—of those refunds are 

not passed through by the clearing 

members to their end user customers. 

Accordingly, by adopting an approach 

that includes paying dividends to the 

Stockholder Exchanges that have 

invested a significant amount of 

additional capital ($150 million) but 

that also reduces the historical prerefund average buffer of 31% by 

adopting a Business Risk Buffer of 25%, 

OCC believes that the proposed 

approach maintains, and perhaps better 

aligns with, an industry utility model. 

Given the very large increase in 

capital that OCC has determined to be 

appropriate in order to assure 

compliance with regulatory 

requirements and meet the increased 

responsibilities imposed upon it as a 

systemically important financial market 

utility, OCC has determined that the 

best alternative available to it is to 

obtain a substantial further capital 

contribution from the Stockholder 

Exchanges. This cannot be 

accomplished without modification of 

the past practice of not providing 

dividends to stockholders. Accordingly, 

it is necessary for OCC to establish the 

new Fee Policy, Refund Policy, and 

Dividend Policy. Because of the 

Business Risk Buffer being set at 25%, 

the combination of the Fee, Refund, and 

Dividend Policies will effectively cap 

the dividends to be paid to the 

Stockholder Exchanges at a level that 

the Board (with the advice of outside 

financial experts) has determined 

results in a reasonable rate of return on 

contributed capital, particularly in 

comparison to the implied cost of 

capital to the clearing members and 

their customers of instead pursuing an 

approach which required the 

accumulation of retained earnings 

through higher fees and no refunds for 

several years. OCC will continue to 

refund a significant percentage of excess 

clearing fees to clearing members, 

thereby benefiting both clearing 

members and, to the extent that refunds 

are passed through by the clearing 

members to their end user customers, 

their customers. The Capital Plan 

therefore effectively preserves OCC’s 

industry utility model of providing its 

services in an efficient manner, but 

enhances the benefits to the end user 

customers by charging lower initial fees 

as a result of the decrease in the buffer 

margin from OCC’s 10-year average of 

31% to 25%. 

Clearing members and customers will 

benefit from the proposed Capital Plan 

because it will allow OCC to continue 

to provide clearing services at low cost. 

As noted, OCC expects that this capital 

infusion from stockholders will enable 

OCC to provide a significant refund of 

2014 fees. OCC further expects that its 

current clearing fees will be reduced 

significantly based on the Business Risk 

Buffer of 25% beginning in 2015 with 

refunds restored, and that these lower 

fees will continue for the foreseeable 

future. 

Stockholder Exchanges will benefit 

from the dividend return they receive 

and, perhaps more importantly, they 

will be assured that OCC will be in a 

position to provide clearing services for 

their markets on an on-going basis 

within the same basic structure that has 

served these markets well since their 

inception and without the need to 

radically change the structure to address 

potential demands of outside equity 

investors. Non-Stockholder Exchanges 

will also benefit by continuing to 

receive OCC’s clearing services for their 

products on the same basis as they 

presently do.20

OCC also believes that the Capital 

Plan will better align the interests of 

Stockholder Exchanges and clearing 

members with respect to expenses, since 

changes to the level of operating 

expenses directly affect the Target 

Capital Requirement. In sum, OCC 

believes that the present proposal 

represents a fair and reasonable 

balancing of the interests of the 

Stockholder Exchanges, the other 

exchanges for which OCC provides 

clearing services, clearing members, 

customers, and the general public while 

providing an immediate infusion of 

capital and a structure within which 

OCC can meet its obligations to the 

public as a systemically important 

financial market utility, as well as the 

requirements under the SEC Proposed 

Rules. 

Replenishment Capital Plan 

OCC proposes to put in place a 

Replenishment Capital Plan whereby 

OCC’s Stockholder Exchanges are 

obligated to provide on a pro rata basis 

a committed amount of Replenishment 

Capital should OCC’s total shareholders’ 

equity fall below the hard trigger (as 

defined below). The aggregate 

committed amount for all five 

Stockholder Exchanges in the form of 

Replenishment Capital that could be 

accessed at any time would be capped 

at the excess of (i) the lesser of (A) the 

Baseline Capital Requirement, which is 

currently $117 million, at the time of 

the relevant funding or (B) $200 million, 

over (ii) amounts of outstanding 

Replenishment Capital (‘‘Cap’’). The 

$200 million figure in the Cap formula 

takes into account projected growth in 

the Baseline Capital Requirement for the 

foreseeable future. The commitment to 

provide Replenishment Capital would 

not be limited by time, but only by the 

Cap. Replenishment Capital could be 

called in whole or in part after the 

occurrence of a ‘‘hard trigger’’ event 

described below, subject to the Cap. If 

the Baseline Capital Requirement 

approaches or exceeds $200 million, the 

Board can consider, as part of its annual 

review of the Replenishment Capital 

Plan that is required by the SEC 

Proposed Rules, alternative 

arrangements to obtain replenishment 

capital in excess of the $200 million 


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21Based on current federal rates, if the full 

amount of the payment is classified as a dividend 

and the recipient is entitled to a dividends received 

deduction, this gross up is estimated to be 

approximately 12% of the payment. 

committed under the Replenishment 

Capital Plan. In addition, the Refund 

Policy and the Dividend Policy will 

provide that, in the absence of obtaining 

any such alternative arrangements, the 

amount of the difference will be 

subtracted from amounts that would 

otherwise be available for the payment 

of refunds and dividends. 

Replenishment Capital contributed to 

OCC under the Replenishment Capital 

Plan would take the form of a new class 

of common stock (‘‘Class C Common 

Stock’’) of OCC to be issued to the 

Stockholder Exchanges solely in 

exchange for Replenishment Capital 

contributions. 

The Replenishment Capital Plan 

would be part of OCC’s overall Capital 

Plan. In implementing the 

Replenishment Capital Plan, OCC’s 

management would monitor OCC’s 

levels of shareholders’ equity to identify 

certain triggers, or reduced capital 

levels, that might require action. OCC 

has identified two key triggers—a soft 

trigger and a hard trigger—and proposes 

that OCC take certain steps upon the 

occurrence of either as described in 

more detail below. 

The ‘‘soft trigger’’ for re-evaluating 

OCC’s capital would occur if OCC’s 

shareholders’ equity falls below the sum 

of (i) the Baseline Capital Requirement 

and (ii) 75% of the Target Capital 

Buffer. The soft trigger would be a 

warning sign that OCC’s capital had 

fallen to a level that required attention 

and responsive action to prevent it from 

falling to unacceptable levels. Upon a 

breach of the soft trigger, OCC’s senior 

management and the Board would 

review alternatives to increasing capital, 

and take appropriate action as 

necessary, including increasing fees or 

decreasing expenses, to restore 

shareholders’ equity to the Target 

Capital Requirement. 

The ‘‘hard trigger’’ for making a 

mandatory Replenishment Capital call 

would occur if shareholders’ equity falls 

below 125% of the Baseline Capital 

Requirement (‘‘Hard Trigger 

Threshold’’). The hard trigger would be 

a sign that corrective action more 

significant and with a more immediate 

impact than increasing fees or 

decreasing expenses should be taken to 

increase OCC’s capital, either as part of 

a recovery plan or a wind down plan for 

OCC’s business. OCC’s shareholders’ 

equity would have to fall more than 

$100 million below the fully funded 

capital amount described above in order 

for the Hard Trigger Threshold to be 

breached. As a result, OCC views the 

breach of the Hard Trigger Threshold as 

unlikely and occurring only as a result 

of a significant, unexpected event. Upon 

a breach of the Hard Trigger Threshold, 

the Board would have to determine 

whether to attempt a recovery, a winddown of OCC’s operations or a sale or 

similar transaction, subject in each case 

to any necessary stockholder consent. If 

the Board decides to wind-down OCC’s 

operations, OCC would access the 

Replenishment Capital in an amount 

sufficient to fund the wind-down, as 

such amount would be determined by 

the Board, and subject to the Cap 

described above. If the Board decides to 

attempt a recovery of OCC’s capital and 

business, OCC would access the 

Replenishment Capital in an amount 

sufficient to return shareholders’ equity 

to an amount equal to $20 million above 

the Hard Trigger Threshold, subject to 

the Cap described above. 

While Replenishment Capital is 

outstanding, no refunds or dividends 

would be paid and, if any 

Replenishment Capital remains 

outstanding for more than 24 months or 

the Target Capital Requirement is not 

restored during that period, changes 

would be made to how OCC calculates 

refunds and dividends, as described in 

more detail above under Refund Policy 

and Dividend Policy. In addition, while 

Replenishment Capital is outstanding, 

OCC would first utilize the entire 

amount of Available Funds to 

repurchase, on a pro rata basis from 

each Stockholder, to the extent 

permitted by applicable Delaware and 

federal law and regulations, outstanding 

shares of Class C Common Stock as soon 

as practicable after completion of the 

financial statements following the end 

of each calendar quarter at a price equal 

to the original amount paid for such 

shares, plus an additional ‘‘gross up’’ 

amount to compensate the holders of 

the Class C Common Stock for taxes on 

dividend income (if any) that they may 

have to recognize as a result of such 

repurchase.21 For this purpose, 

‘‘Available Funds’’ would equal, as of 

the end of any calendar quarter, the 

excess, if any, of (x) shareholders’ equity 

over (y) the Minimum Replenishment 

Level. The ‘‘Minimum Replenishment 

Level’’ would mean $20 million above 

the Hard Trigger Threshold, so that 

OCC’s shareholders’ equity would 

remain at or above the Minimum 

Replenishment Level after giving effect 

to the repurchase. Furthermore, under 

the Dividend and Refund Policies, 

refunds and dividends would be 

suspended until such time as the Target 

Capital Requirement is restored. 

Amendments to Governing Documents 

In order to implement the Capital 

Plan, OCC proposes to make 

amendments to its By-Laws and 

Restated Certificate of Incorporation and 

amend and restate its Stockholders 

Agreement. 

Amendments to By-Laws 

OCC is proposing various 

amendments to the By-Laws in order to 

implement the Capital Plan. 

Specifically, OCC proposes to amend 

the definition of Equity Exchange in 

Article I, Section 1 to take into account 

the potential ownership of Class C 

Common Stock by the Stockholder 

Exchanges. 

Article II, Section 3 would be 

amended to change the definition of 

quorum such that a majority of 

outstanding common stock entitled to 

vote at a meeting of Stockholders either 

in person or by proxy would constitute 

a quorum for any such meeting of the 

Stockholders. In addition, OCC 

proposes to amend Article II, Section 5 

to allow for the potential issuance of 

Class C Common Stock, which will not 

have voting rights except as required by 

applicable law. 

Article VIIA, Section 2, would be 

amended to (i) provide for the potential 

issuance of Class C Common Stock in 

consideration for Replenishment Capital 

provided by Stockholder Exchanges, (ii) 

permit, consistent with the proposed 

amendments to the Stockholders 

Agreement, the transfer of shares of 

common stock to another Stockholder, 

and (iii) reflect the right of other 

Stockholders, consistent with the 

proposed amendments to the 

Stockholders Agreement, to purchase 

the shares of common stock of another 

Stockholder. Article VIIA, Section 3, 

would be amended to conform to the 

changes to Article VIIA, Section 2. 

OCC proposes amendments to Article 

VIII, Section 5(d), to require that a Board 

decision to utilize OCC’s retained 

earnings to compensate for a loss or 

deficiency to the Clearing Fund would 

require unanimous consent from the 

holders of Class A Common Stock and 

Class B Common Stock. This proposed 

amendment is intended to protect 

Stockholders from an action taken 

without their consent that could 

increase their likelihood of being 

required to provide Replenishment 

Capital. Similarly, Article XI, Section 1 

would also be amended to account for 

the possible issuance of the non-voting 

Class C Common Stock consistent with 

the Restated Certificate of Incorporation 


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as discussed below, and to require 

unanimous Stockholder approval for 

any future amendments to the new 

provision of Article VIII, Section 5(d) 

described above. 

Article IX, Section 9, would be 

amended in three ways. First, the 

concept of the Business Risk Buffer 

would be incorporated into Article IX, 

Section 9(a). Second, Article IX, Section 

9, would be amended to provide that 

OCC would only add amounts for 

reserves and surpluses in addition to the 

Business Risk Buffer in extraordinary 

circumstances and only to the extent 

that the Board has determined that the 

required amount of additional reserves 

and surplus is expected to exceed the 

full amount that is anticipated to be 

accumulated through the Business Risk 

Buffer prior to payment of refunds and 

dividends. Third, Article IX, Section 9, 

would be amended to expressly 

reference the potential payment of 

dividends in accordance with the 

Dividend Policy. 

Amendments to Restated Certificate of 

Incorporation 

OCC is proposing to amend its 

Restated Certificate of Incorporation in 

order to implement the Capital Plan. 

The proposed amendment to the 

restated Certificate of Incorporation is 

attached to this filing as Exhibit 5D. 

Article IV would be amended in 

multiple locations to (i) reduce the 

number of authorized shares of Class A 

Common Stock and Class B Common 

Stock to the number of shares currently 

outstanding, and the number of series of 

Class B Common Stock, to reflect the 

fact that there are only five Stockholder 

Exchanges, (ii) to eliminate a provision 

under which additional shares of Class 

A Common Stock and Class B Common 

Stock could be authorized in certain 

circumstances without a separate vote of 

each series of Class B Common Stock, 

(iii) create Class C Common Stock as 

non-voting stock, (iv) set a par value for 

Class C Common Stock of $1,000 per 

share, (v) provide for distribution upon 

a liquidation or dissolution of OCC to 

holders of Class A, Class B, and Class C 

Common Stock, pro rata on a pari passu 

basis, the amount of the par value of 

their shares, and (vi) remove restrictions 

on the transfer of shares of Class B 

Common Stock to more than one entity 

in order to address the possible exercise 

by another Stockholder of its right of 

first refusal under the Amended and 

Restated Stockholders Agreement. 

Additionally, Article IV would be 

amended to make clear that the 

prohibition on OCC’s creating or issuing 

rights or options to purchase OCC stock 

set forth in Article IV would not restrict 

the ability of OCC to enter into the 

Replenishment Capital Plan. Finally, 

technical changes would be made to 

Article VI in connection with the 

creation of Class C Common Stock as 

non-voting stock. 

Amendments to Stockholders 

Agreement 

OCC is proposing various 

amendments to the Stockholders 

Agreement to make technical changes 

relating to the additional contributions 

of capital to be made by the Stockholder 

Exchanges under the Capital Plan and 

the potential issuance of Class C 

Common Shares. The proposed 

Amended and Restated Stockholders 

Agreement is attached to this filing as 

Exhibit 5E. In part, the amendments to 

the Stockholders Agreement would 

provide Stockholders with a secondary 

right of refusal to be exercised if a 

Stockholder wished to sell its shares 

and OCC chose not to exercise its 

existing right of first refusal to purchase 

those shares. This change was 

considered necessary because after the 

additional contributions of capital by 

the Stockholder Exchanges under the 

Capital Plan, shares of Class B Common 

Stock will be significantly more 

valuable, making it less likely that OCC 

would be able to exercise its right of 

first refusal. Providing the non-selling 

Stockholder Exchanges with a 

secondary right of first refusal would 

increase the chances that a selling 

Stockholder Exchange would find a 

purchaser for its shares from among 

OCC’s existing owners. Because OCC’s 

Stockholders Agreement has already 

been amended several other times, for 

convenience OCC is also proposing to 

amend and restate the Stockholders 

Agreement to incorporate all previous 

amendments and the new amendments 

into a single comprehensive agreement. 

Each of the proposed new 

amendments to the Stockholders 

Agreement is described below, in the 

order they appear in the agreement. 

OCC proposes a technical amendment to 

Section 1 of the Stockholders 

Agreement to refer to the definitions of 

Class A Common Stock, Class B 

Common Stock, and Class C Common 

Stock in the Restated Certificate of 

Incorporation and By-Laws. OCC 

proposes an amendment to Section 3 

which would delete an obsolete 

reference to a plan relating to OCC’s 

original reorganization into a common 

clearing facility for all options 

exchanges. OCC proposes a technical 

amendment to Section 5(a) to add a 

reference to the procedures for 

Stockholder Exchanges to acquire shares 

pursuant to their secondary rights of 

first refusal in certain situations that 

will be set out in amended Section 

10(e). OCC is proposing an amendment 

to Section 5(b) providing that the 

Stockholder Exchanges may not sell or 

transfer less than all of their shares 

without the consent of OCC. OCC seeks 

to prevent a partial sale by a 

Stockholder Exchange of a portion of its 

shares of Class A Common Stock, Class 

B Common Stock, or Class C Common 

Stock to avoid difficulties that could 

arise for OCC if, as a result of a partial 

sale, voting rights, dividend rights, and 

replenishment capital were spread 

across Stockholder Exchanges on a non 

pro rata basis. Section 5(b) would 

further clarify that if OCC consented to 

a partial sale the Stockholder 

Exchanges’ right of first refusal would 

still apply, and that a Stockholder 

Exchange could sell shares of Class C 

Common Stock to OCC without selling 

its shares of Class A Common Stock and 

Class B Common Stock. OCC proposes 

to amend Section 6(a) to provide 

Stockholders, upon the non-exercise of 

OCC’s right of first refusal, a secondary 

right of first refusal to purchase shares 

of other Stockholders in certain 

circumstances discussed above, and to 

establish procedures governing the 

exercise of this right. Section 6(b) would 

be amended to explicitly state that OCC 

can assign its rights under the 

Stockholders Agreement to purchase 

shares of a Stockholder Exchange in the 

event of such Stockholder Exchange’s 

bankruptcy or insolvency, and to create 

an exception from the right of first 

refusal for transfers to certain affiliates 

of a Stockholder that meet the exchange 

eligibility requirements set forth in the 

By-Laws. Section 6(c) would be 

amended to make any transfer or 

encumbrance of shares in violation of 

the Stockholders Agreement, either 

voluntarily or by operation of law, void. 

Section 6(d) would be amended to 

explicitly state that OCC can assign its 

rights under the Stockholders 

Agreement to repurchase shares of any 

Stockholder that ceases to be qualified 

to participate in OCC pursuant to the 

By-Laws. The revised Section 6(c) 

would take the place of current Section 

6(e), which would be deleted. Section 

6(e) currently provides that such a 

pledge or transfer would automatically 

be deemed to create a transfer of the 

shares to OCC. OCC proposes 

conforming amendments to Section 6(f), 

Section 6(g), Section 7, and Section 8 to 

provide for the new Stockholder 

Exchange right of first refusal. OCC 

proposes deleting Section 9 to remove 

the right of Stockholders to require OCC 

to purchase their shares of stock. 


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22 15 U.S.C. 78q–1(b)(3)(F). 

23 17 CFR 240.17Ad–22(d)(6). 

24SEC Proposed Rules at 156, FR 29507, 29616 

(May 22, 2014). 

25 15 U.S.C. 78q–1(b)(3)(I). 

26OCC also filed proposals in this proposed rule 

change as an advance notice under Section 

806(e)(1) of the Payment, Clearing, and Settlement 

Supervision Act of 2010. 12 U.S.C. 5465(e)(1). See 

supra note 3. 

OCC proposes to amend Section 10(a) 

of the Stockholders Agreement to 

provide that the purchase price paid 

upon exercise of purchase rights by OCC 

or the Stockholder Exchanges would be 

equal to the lowest of (i) the book value 

of the shares to be purchased, (ii) the 

total capital contribution of the selling 

Stockholder and (iii) in the case of 

exercise of a right of first refusal, the 

price originally offered for such shares. 

OCC proposes other technical 

amendments to Sections 10(a), 10(b) and 

10)(c) of the Stockholders Agreement 

concerning the purchase price formula, 

procedures, and timing for OCC’s 

repurchase rights of shares (or, if 

applicable, the purchase of a 

Stockholder’s shares by another 

Stockholder) pursuant to the terms of 

the Stockholders Agreement. Section 

10(d) would be amended such that any 

consideration to be paid by OCC upon 

the exercise of a right of first refusal 

would be subordinated to all other 

claims of all other creditors of OCC, and 

to prohibit OCC from declaring or 

paying any dividends, acquiring for 

value any shares of stock or distributing 

assets to any Stockholder Exchange, 

except with regard to required 

purchases or redemptions of shares of 

Class C Common Stock or payments of 

dividends in accordance with the 

Dividend Policy. OCC proposes to 

amend current Section 10(e) by moving 

its provisions addressing the 

subordination of payments by OCC and 

non-payment of dividends under certain 

circumstances into the proposed Section 

10(d) as discussed above. OCC proposes 

technical amendments to current 

Section 10(g), proposed Section 10(e) 

concerning the process under which 

OCC would acquire shares upon 

exercise of its right of first refusal. OCC 

also proposes to move technical 

provisions of the current Section 10(f) 

concerning the payment of such shares 

into Section 10(e). Section 10(f) would 

then be amended to address procedures 

for Stockholders that exercise their right 

of first refusal. 

Section 11 of the Stockholders 

Agreement would be amended in order 

to make a Stockholder’s right to transfer 

shares dependent upon the non-exercise 

of OCC’s and other Stockholders’ right 

of first refusal to the purchase of such 

Stockholder’s shares. Additionally, 

Section 11 would be amended to 

provide that the transfer of a 

Stockholder’s shares under that section 

would not be effective without the 

transferee’s assuming the rights and 

obligations under the Stockholders 

Agreement, certain joinders to the 

Stockholders Agreement and other 

agreements between OCC and 

Stockholders. Section 14(a) would be 

amended to make reference to the 

Stockholders Agreement. Section 14(b) 

would be amended to make a technical 

change relating to the legend on OCC’s 

stock certificates. Section 15 would be 

amended to update the mailing 

addresses of the Stockholder Exchanges 

for written notices and formal 

communications. Section 16(c) would 

be amended to clarify that a Stockholder 

Exchange would be able to assign its 

rights under the Stockholders 

Agreement only to a party to whom it 

would be permitted to transfer its 

shares. In addition, Section 16(c) would 

be amended to provide that OCC may 

only assign its repurchase rights under 

Section 6(b) or Section 6(d) of the 

Stockholders Agreement. OCC would be 

able to assign such rights with respect 

to all or a portion of the shares of stock 

owned by a Stockholder Exchange, and 

would be required to provide the nonselling Stockholder Exchanges with a 

right of first refusal in connection with 

any such contemplated assignment 

comparable to the secondary right of 

first refusal applicable with respect to a 

voluntary sale by a Stockholder 

Exchange and described above. Sections 

16(f) and 16(g) would be amended to 

effectuate the amendment and 

restatement of the existing Stockholders 

Agreement. 

2. Statutory Basis 

OCC believes the proposed rule 

change is consistent with Section 

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

Act of 1934, as amended (‘‘Act’’),22 and 

the rules and regulations thereunder, 

because by implementing the Capital 

Plan, OCC would ensure that it could 

continue to promptly and accurately 

clear and settle securities transactions 

even if it suffered significant operational 

losses. By ensuring that it maintains 

sufficient capital and that it can 

replenish the capital in the event it falls 

below desirable levels, the Capital Plan 

would also enable OCC to maintain safe 

and secure obligations, in compliance 

with Rule 17Ad–22(d)(6).23 The 

proposed Capital Plan would also, as 

discussed in more detail above, ensure 

OCC’s compliance with new regulatory 

requirements proposed by the 

Commission seeking to promote the safe 

and reliable operation of registered 

clearing agencies, and in particular 

proposed subsection (e)(15) of Rule 

17Ad–22.24 The proposed rule change is 

not inconsistent with the existing rules 

of OCC, including any other rules 

proposed to be amended. 

(B) Clearing Agency’s Statement on 

Burden on Competition 

OCC does not believe that the 

proposed rule change would impose any 

burden on competition.25 OCC believes 

that the proposed rule change would not 

unfairly inhibit access to OCC’s services 

or disadvantage or favor any particular 

user in relationship to another user 

because the proposed changes relate to 

OCC’s plan for raising and maintaining 

adequate capital from its owner 

exchanges, and therefore do not affect 

clearing members’ or others’ access to 

OCC’s services or the nature of these 

services. 

For the foregoing reasons, OCC 

believes that the proposed rule change 

is in the public interest, would be 

consistent with the requirements of the 

Act applicable to clearing agencies and 

would not impose a burden on 

competition. 

(C) Clearing Agency’s Statement on 

Comments on the Proposed Rule 

Change Received From Members, 

Participants, or Others 

Written comments on the proposed 

rule change were not and are not 

intended to be solicited with respect to 

the proposed rule change and none have 

been received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the self-regulatory organization 

consents, the Commission will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed.26

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 


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27 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 34–73805 

(December 10, 2014), 79 FR 74790 (December 16, 

2014) (SR–FICC–2014–11). 

4 In the case of GSD locked-in trades, comparison 

occurs upon receipt of the trade data submitted to 

FICC from the locked-in trade source. GSD Rule 6C. 

5See GSD Rule 11B and MBSD Rule 5. 

6The MBSD Rules define a ‘‘SBO-Destined 

Trade’’ as a to-be-announced (‘‘TBA’’) transaction in 

the clearing system intended for TBA Netting in 

accordance with the provisions of the Rules. MBSD 

Rule 1. In a TBA transaction, members agree on a 

sale price, quantity, and the characteristics of the 

securities being sold, but they do not specify which 

particular securities will be delivered on the 

settlement date. 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

OCC–2015–02 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–OCC–2015–02. 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 Web site (http://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 Web site 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 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of OCC and on OCC’s Web site at 

http://www.theocc.com/components/

docs/legal/rules_and_bylaws/sr_occ_15_

02.pdf. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–OCC–2015–02 and should 

be submitted on or before February 20, 

2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.27

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–01755 Filed 1–29–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74132; File No. SR–FICC– 

2014–11] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Order 

Approving Proposed Rule Change To 

Amend the Government Securities 

Division Rulebook and the Mortgage 

Backed Securities Clearing Rules In 

Order To Move the Time of Novation 

With Respect to Certain Trades, 

Include Rules To Reflect Existing 

Processes, and Clarify Certain Rules 

To Reflect Current Practices 

January 26, 2015. 

I. Introduction 

On December 2, 2014, the Fixed 

Income Clearing Corporation (‘‘FICC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–FICC–2014–11 pursuant 

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

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder.2 The proposed 

change was published for comment in 

the Federal Register on December 16, 

2014.3 The Commission received no 

comment letters in response to the 

proposed rule change. For the reasons 

discussed below, the Commission is 

approving the proposed rule change. 

II. Description 

The rule change, as proposed, moves 

the time of novation applicable to 

certain transactions submitted to FICC’s 

Government Securities Division 

(‘‘GSD’’) and FICC’s Mortgage Backed 

Securities Division (‘‘MBSD’’) to earlier 

in the clearing process in order to 

provide members with additional legal 

certainty, for purposes of members’ 

regulatory capital requirements, that 

FICC will be the legal counterparty with 

respect to their guaranteed trades. 

Currently, FICC guarantees the 

settlement of a trade upon comparison, 

which generally occurs when FICC 

issues initial ‘‘output’’ to GSD netting 

members or MBSD clearing members, as 

applicable, indicating that their trades 

have compared,4 provided that the trade 

meets the requirements of the GSD 

Rulebook (‘‘GSD Rules’’) or the MBSD 

Rulebook (‘‘MBSD Rules’’), as 

applicable.5

Novation, which refers to the 

termination of delivery, receive and 

related payment obligations between the 

original parties to the contract and the 

replacement of such obligations with 

identical obligations between each party 

and FICC, currently does not occur until 

later in the clearing and settlement 

process than comparison. Under the 

GSD Rules, novation currently occurs 

when subsequent ‘‘netting output’’ is 

issued to netting members (usually the 

day before settlement). Under the MBSD 

Rules, novation currently occurs when 

subsequent ‘‘pool netting output’’ is 

issued to clearing members (usually the 

day before settlement). 

FICC stated in its proposed rule 

change that it was proposing the rule 

change because it understood that, as its 

members (or their advisors) analyze 

their netting rights with respect to 

transactions cleared through FICC for 

purposes of regulatory capital 

requirements, it is beneficial for 

members that FICC become the legal 

counterparty at the point its guarantee 

attaches. 

Time of Novation—Rule Changes 

Under the revised GSD Rules and 

MBSD Rules, as approved, novation will 

occur at comparison for netting eligible 

transactions (for GSD) and SBODestined Trades 6 (for MBSD). This 

means that, at the point of trade 

comparison, FICC will both guarantee 

the settlement of the transactions (as it 

does today) and novate such 

transactions, becoming the legal 

counterparty to each submitting member 

with respect to such transactions. 

Under the revised GSD Rules, as 

approved pursuant to this rule change, 

all netting eligible transactions that 

compare in accordance with the GSD 

Rules will novate at the point of 

comparison. 

As amended by this proposal, 

pursuant to the MBSD Rules, only SBODestined Trades, all of which are 


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