7056 Federal Register / Vol. 80, No. 26 / Monday, February 9, 2015 / Notices 

13 17 CFR 200.30–3(a)(12). 

1 12 U.S.C. 5465(e)(1). 

2 17 CFR 240.19b–4(n)(1)(i). 

3 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 

(‘‘PMFIs’’). The Commission notes that the SEC 

Proposed Rules are pending. The Commission will 

evaluate the advance notice under the Clearing 

Supervision Act and the rules currently in force 

thereunder. 

4According to OCC, Amendment No. 1 to the SR– 

OCC–2014–813 (‘‘Filing’’): (i) Updates OCC’s plan 

for raising additional capital (‘‘Capital Plan’’) in 

connection with negotiations between OCC and the 

options exchanges that own equity in OCC 

(‘‘Stockholder Exchanges’’ or ‘‘stockholders’’) and 

that would contribute additional capital under the 

Capital Plan, (ii) corrects typographical errors in the 

Filing, and (iii) updates the Term Sheet included as 

an exhibit to the Filing, which summarizes material 

features of the Capital Plan. 

5The material features of the Capital Plan are 

summarized in the Term Sheet that is included as 

Exhibit 3. Certain details of the Term Sheet may 

change as a result of further negotiations or changes 

in financial figures, but OCC does not anticipate 

any material changes to the Capital Plan. OCC 

intends to separately file a proposed rule change 

seeking approval of changes to its By-Laws, 

Certificate of Incorporation and relevant 

agreements, including its Stockholders Agreement, 

necessary to implement the Capital Plan. 

6See Securities Exchange Act Release No. 71699 

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

(‘‘SEC Proposed Rules’’). 

All submissions should refer to File 

Number SR–CME–2015–003 and should 

be submitted on or before March 2, 

2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Jill Peterson, 

Assistant Secretary. 

[FR Doc. 2015–02499 Filed 2–6–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74202; File No. SR–OCC– 

2014–813] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of an Advance Notice, as 

Modified by Amendment No. 1, 

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 

February 4, 2015. 

Pursuant to Section 806(e)(1) of Title 

VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

entitled the Payment, Clearing, and 

Settlement Supervision Act of 2010 

(‘‘Payment, Clearing and Settlement 

Supervision Act’’ or ‘‘Clearing 

Supervision Act’’) 1 and Rule 19b– 

4(n)(1)(i) 2 under the Securities 

Exchange Act of 1934 (‘‘Act’’) notice is 

hereby given that on December 29, 2014, 

The Options Clearing Corporation 

(‘‘OCC’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the advance notice as described in Items 

I and II below, which Items have been 

prepared by OCC.3 On January 14, 2015, 

OCC filed Amendment No. 1 to the 

advance notice.4 The Commission is 

publishing this notice to solicit 

comments on the advance notice from 

interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Advance 

Notice 

This advance notice 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 

Advance Notice 

In its filing with the Commission, 

OCC included statements concerning 

the purpose of and basis for the advance 

notice and discussed any comments it 

received on the advance notice. 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) and (B) below, of the 

most significant aspects of these 

statements. 

(A) Clearing Agency’s Statement on 

Comments on the Advance Notice 

Received From Members, Participants or 

Others 

Written comments on the advance 

notice were not and are not intended to 

be solicited with respect to the advance 

notice and none have been received. 

(B) Advance Notices Filed Pursuant to 

Section 806(e) of the Payment, Clearing 

and Settlement Supervision Act 

The proposed change sets forth the 

Capital Plan under which the 

Stockholder Exchanges 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. 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) 

the Refund Policy [sic], and (iii) a policy 

for calculating the amount of dividends 

to be paid to the options exchanges 

owning equity in OCC (‘‘Dividend 

Policy’’). The Capital Plan is proposed 

to be implemented on or about February 

27, 2015, subject to all necessary 

regulatory approvals.5

Purpose of the Proposed Change 

The purpose of this proposed change 

is to implement the Capital Plan, which 

would significantly increase OCC’s 

capital in connection with its increased 

responsibilities as a systemically 

important financial market utility, and 

which OCC believes 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 this filing, 

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. The proposed 

change 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 proposal includes 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 proposed change 

includes the Replenishment Capital 

commitment, which would provide 

OCC access to additional equity 

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Federal Register / Vol. 80, No. 26 / Monday, February 9, 2015 / Notices 7057 

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. 

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. 

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 change is intended to 

provide OCC with the means to increase 

its stockholder 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 

proposed change 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 

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7058 Federal Register / Vol. 80, No. 26 / Monday, February 9, 2015 / Notices 

15See 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. 

16 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. 

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 

comprehensive across risk types, 

including credit, market pension, 

operation, 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). 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 15 ... 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 requires 

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 

required Business Risk Buffer of 25% is 

below OCC’s 10-year historical prerefund 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 operating 

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.16 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% at this time, OCC 

may increase fees for the remainder of 

the year. 

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 

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17This sentence and the previous sentence relate 

to a provision added to the Refund and Dividend 

Policies and designed to preserve the original 

business understanding between OCC and the 

Stockholder Exchanges even if refunds are no 

longer deductible. 

18See, e.g., the Permanent Schedule 

Reinstatement Filing, supra n. 14 [sic]; 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 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, are 

based on, among other things, the 

current tax treatment of refunds as a 

deductible expense. 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.17

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 used 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 will 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 proposed change, 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 its clearing members 

of the fees it determines it would apply 

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 it determines it would apply 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 prior to the 

refund over (ii) the sum of (x) the 

amount of pre-tax income after the 

refund necessary to produce after-tax 

income 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’ 

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 

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7060 Federal Register / Vol. 80, No. 26 / Monday, February 9, 2015 / Notices 

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. 

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 would be 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 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 

outstanding 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 

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. 

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Federal Register / Vol. 80, No. 26 / Monday, February 9, 2015 / Notices 7061 

21The requirement for stockholder consent would 

arise under OCC’s Restated Certificate of 

Incorporation, which would provide that any 

decision to attempt a recovery would require 

separate approval by the stockholders, while a 

decision to wind-down would require separate 

approval by the stockholders. 

22Based 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. 

23SEC Proposed Rules at 417, FR 29507, 29616 

(May 22, 2014). 

24SEC Proposed Rules at 408, FR 29507, 29613 

(May 22, 2014). 

25SEC Proposed Rules at 408–409, FR 29507, 

29614 (May 22, 2014). 

26SEC Proposed Rules at 412–413, FR 29507, 

29615 (May 22, 2014). 

27SEC Proposed Rules at 417–418, FR 29507, 

29616 (May 22, 2014). 

28SEC Proposed Rules at 418, FR 29507, 29616 

(May 22, 2014). 

29 12 U.S.C. 5464(b). 

30 12 U.S.C. 5464(b)(3). 

31See generally Securities Exchange Act Release 

No. 71699 (March 12, 2014), 79 FR 29507 (May 22, 

2014). 

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 

$100,000,000 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.21

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.22 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. 

Compliance with Rule 17Ad–22(e)(15) 

The capital base described above will 

permit OCC to hold at all times cash and 

other assets of high quality and 

sufficiently liquid to allow OCC to meet 

its current and projected operating 

expenses under a range of scenarios, 

including adverse market conditions. In 

compliance with proposed Rule 17Ad– 

22(e)(15),23 OCC proposes at all times to 

hold liquid net assets funded by equity 

sufficient to cover potential general 

business losses so that OCC can 

continue operations and services as a 

going concern if those losses 

materialize, which assets will always be 

greater than either (x) six months of the 

covered clearing agency’s current 

operating expenses, or (y) the amount 

determined by the Board to be sufficient 

to ensure a recovery or orderly winddown of critical operations and services 

of the covered clearing agency, as 

contemplated by the plans established 

under paragraph (e)(3)(ii) 24 of the 

proposed Rule. These assets will be held 

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) 25 of proposed Rule 17Ad– 

22, as applicable, and the liquidity risk 

standard in paragraph (e)(7)(i) and (ii) 26

of that proposed rule. 

OCC believes that the Replenishment 

Capital Plan described above together 

with OCC’s ability to set fees and retain 

earnings as described above will assure 

OCC’s ability to remain at all times in 

compliance with the requirements of 

proposed Rule 17Ad–22(e)(15),27

including providing the basis for 

maintaining a viable capital plan for 

replenishment capital in compliance 

with subparagraph (e)(15)(iii) 28 of the 

rule. 

Statutory Basis for the Advance Notice 

OCC believes that the proposed 

change is consistent with Section 805(b) 

of the Clearing Supervision Act 29

because the proposed change will 

reduce systemic risk.30 OCC believes 

that implementation of the Capital Plan 

will provide OCC with an immediate 

injection of capital and future 

committed capital to help ensure that it 

can continue to provide its clearing 

services if it suffers business losses as a 

result of a decline in revenues or 

otherwise. OCC believes that the 

proposed change, as described above, is 

necessary for it to meet the capital 

requirements under the proposed 

amendments 31 to Rule 17Ad–22. For 

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7062 Federal Register / Vol. 80, No. 26 / Monday, February 9, 2015 / Notices 

32See note 5, supra. 

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

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(1). 

4 17 CFR 240.19b–4. 

these same reasons, the proposed 

change will reduce systemic risk 

because it will promote confidence that 

OCC will be able to continue operating 

even if it suffers business losses. 

Anticipated Effect on and Management 

of Risk 

OCC believes that the proposed 

change will reduce OCC’s overall level 

of risk because it will help ensure that 

OCC will be able to continue to provide 

its clearing services even if it suffers 

significant business losses. As described 

above, the proposed change includes a 

significant infusion of permanent 

capital. In addition, each feature of the 

Capital Plan would help ensure that 

OCC’s capital is sufficient on an ongoing 

basis to allow it to withstand business 

losses, whether resulting from a decline 

in revenue or otherwise. The Fee Policy 

would provide for the Business Risk 

Buffer, which is designed to ensure that 

fees will be sufficient to cover projected 

operating expenses. The Refund Policy 

and Dividend Policy both would allow 

for refunds of fees or payment of 

dividends, respectively, only to the 

extent that they would allow OCC to 

maintain shareholders’ equity at the 

Target Capital Requirement. They 

would also prohibit refunds and 

dividends when Class C Common Stock 

is outstanding under the Replenishment 

Capital Plan and OCC was in the 

process of rebuilding its capital base. In 

addition, the Replenishment Capital 

Plan would establish a mandatory 

mechanism for the contribution of 

additional capital by OCC’s stockholder 

exchanges in the event capital fell below 

desired levels. Together these features of 

the Capital Plan help ensure that OCC 

maintains levels of capital sufficient to 

allow it to absorb substantial business 

losses and meet its increased 

responsibilities imposed upon it as a 

systemically important financial market 

utility, which in turn helps reduce 

OCC’s overall level of risk. 

III. Date of Effectiveness of the Advance 

Notice and Timing for Commission 

Action 

The designated clearing agency may 

implement this change if it has not 

received an objection to the proposed 

change within 60 days of the later of (i) 

the date that the Commission receives 

the notice of proposed change, or (ii) the 

date the Commission receives any 

further information it requests for 

consideration of the notice. The 

designated clearing agency shall not 

implement this change if the 

Commission has an objection. 

The Commission may, during the 60- 

day review period, extend the review 

period for an additional 60 days for 

proposed changes that raise novel or 

complex issues, subject to the 

Commission providing the designated 

clearing agency with prompt written 

notice of the extension. The designated 

clearing agency may implement a 

change in less than 60 days from the 

date of receipt of the notice of proposed 

change by the Commission, or the date 

the Commission receives any further 

information it requested, if the 

Commission notifies the designated 

clearing agency in writing that it does 

not object to the proposed change and 

authorizes the designated clearing 

agency to implement the change on an 

earlier date, subject to any conditions 

imposed by the Commission. 

The designated clearing agency shall 

post notice on its Web site of proposed 

changes that are implemented. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed.32

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing. 

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–2014–813 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–2014–813. 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 advance notice that 

are filed with the Commission, and all 

written communications relating to the 

advance notice 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 

http://www.optionsclearing.com/about/

publications/bylaws.jsp. 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– 

2014–813 and should be submitted on 

or before February 24, 2015. 

By the Commission. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–02566 Filed 2–6–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74198; File No. SR– 

NASDAQ–2015–007] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Amend the 

Rules of The NASDAQ Options Market 

Regarding Sharing of Risk Settings 

February 3, 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 

28, 2015, The NASDAQ Stock Market 

LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III, below, which Items 

have been prepared by the Exchange. 

The Commission is publishing this 

notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

The Exchange proposes to amend the 

rules of The NASDAQ Options Market 

(‘‘NOM’’), pursuant to Section 19(b)(1) 

of the Securities Exchange Act of 1934 

(‘‘Act’’) 3 and Rule 19b–4 thereunder,4 to 

mstockstill on DSK4VPTVN1PROD with NOTICES