13058 Federal Register / Vol. 80, No. 48 / Thursday, March 12, 2015 / Notices 

3All entities that currently intend to rely on the 

Order are named as applicants. Any other entity 

that relies on the Order in the future will comply 

with the terms and conditions of the Order and of 

the Reference Order, which is incorporated by 

reference herein. 

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

2 17 CFR 240.19b–4. OCC 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 (‘‘Payment, 

Clearing and Settlement Supervision Act’’). 12 

U.S.C. 5465(e)(1). On February 26, 2015, the 

Commission issued a notice of no objection to the 

advance notice filing. See Exchange Act Release No. 

74387 (February 26, 2015) (SR–OCC–2014–813). 

3Securities Exchange Act Release No. 74136 

(January 26, 2015), 80 FR 5171 (January 30, 2015) 

(SR–OCC–2015–02). As the Commission noted in 

the notice of filing of the proposed rule change, 

OCC stated that the purpose of this proposal is, in 

part, to facilitate compliance with proposed 

Commission rules and address Principle 15 of the 

Principles for Financial Market Infrastructures 

(‘‘PFMIs’’). The proposed Commission rules are 

pending. See Securities Exchange Act Release No. 

71699 (March 12, 2014), 79 FR 29508 (May 22, 

2014) (S7–03–14). Therefore, the Commission has 

evaluated this proposed rule change under the Act 

and the rules currently in force thereunder. See 

Securities Exchange Act Release No. 74136 (January 

26, 2015), 80 FR 5171 (January 30, 2015) (SR–OCC– 

2015–02). 

4See Letter from Eric Swanson, General Counsel 

& Secretary, BATS Global Markets, Inc., (February 

19, 2015) (‘‘BATS Letter I’’); Letter from Tony 

McCormick, Chief Executive Officer, BOX Options 

Exchange, (February 19, 2015) (‘‘BOX Letter I’’); 

Letter from Howard L. Kramer on behalf of 

Belvedere Trading, CTC Trading Group, IMC 

Financial Markets, Integral Derivatives, 

Susquehanna Investment Group, and Wolverine 

Trading, (February 20, 2015) (‘‘MM Letter’’); Letter 

from Ellen Greene, Managing Director, Financial 

Services Operations, SIFMA, (February 20, 2015) 

(‘‘SIFMA Letter’’); Letter from James E. Brown, 

General Counsel, OCC, (February 23, 2015) 

(responding to BATS Letter and BOX Letter) (‘‘OCC 

Letter I’’); Letter from James E. Brown, General 

Counsel, OCC, (February 23, 2015) (responding to 

MM Letter) (‘‘OCC Letter II’’); Letter from Barbara 

J. Comly, Executive Vice President, General Counsel 

& Corporate Secretary, Miami International 

Securities Exchange, LLC (February 24, 2015) 

(‘‘MIAX Letter I’’); Letter from James E. Brown, 

General Counsel, OCC, (February 24, 2015) 

(responding to SIFMA Letter) (‘‘OCC Letter III’’); 

Letter from John A. McCarthy, General Counsel, 

KCG Holdings, Inc., (February 26, 2015) (‘‘KCG 

Letter I’’); Letter from Eric Swanson, General 

Counsel and Secretary, BATS Global Markets, Inc., 

(February 27, 2015) (‘‘BATS Letter II’’); Letter from 

John A. McCarthy, General Counsel, KCG Holdings, 

Inc., (February 27, 2015) (‘‘KCG Letter II’’); Letter 

from Richard J. McDonald, Chief Regulatory 

Counsel, Susquehanna International Group, LLP, 

(February 27, 2015), (‘‘SIG Letter I’’); Letter from 

Barbara J. Comly, Executive Vice President, General 

Counsel & Corporate Secretary, Miami International 

Securities Exchange, LLC (March 1, 2015) (‘‘MIAX 

Letter II’’); Letter from James E. Brown, General 

Counsel, OCC, (March 2, 2015) (‘‘OCC Letter IV’’); 

Letter from Eric Swanson, General Counsel and 

Secretary, BATS Global Markets, Inc. (March 3, 

2015)(‘‘BATS Letter III’’); and Letter from Tony 

McCormick, Chief Executive Officer, BOX Options 

Exchange, (March 3, 2015) (‘‘BOX Letter II’’); Letter 

from Brian Sopinsky, General Counsel, 

Susquehanna International Group, LLP, (March 4, 

2015) (‘‘SIG Letter II’’). Since the proposal was filed 

as both an advance notice and proposed rule 

change, the Commission considered all comments 

received on the proposal, regardless of whether the 

comments were submitted to the proposed rule 

change or advance notice. See comments on the 

advance notice (File No. SR–OCC–2014–813), 

http://www.sec.gov/comments/sr-occ-2014-813/

occ2014813.shtml and comments on the proposed 

rule change (File No. SR–OCC–2015–02), http://

www.sec.gov/comments/sr-occ-2015-02/

occ201502.shtml. In its evaluation of the proposed 

rule change, the Commission assessed whether the 

proposal was consistent with the requirements of 

the Act and the applicable rules and regulations 

thereunder. 

with the Manager (any such entity 

included in the term ‘‘Manager’’); (b) 

operates as an exchange-traded managed 

fund as described in the Reference 

Order; and (c) complies with the terms 

and conditions of the Order and of the 

Reference Order, which is incorporated 

by reference herein (each such company 

or series and Initial Fund, a ‘‘Fund’’).3

6. Section 6(c) of the Act provides that 

the Commission may exempt any 

person, security or transaction, or any 

class of persons, securities or 

transactions, from any provisions of the 

Act, if and to the extent that such 

exemption is necessary or appropriate 

in the public interest and consistent 

with the protection of investors and the 

purposes fairly intended by the policy 

and provisions of the Act. Section 17(b) 

of the Act authorizes the Commission to 

exempt a proposed transaction from 

section 17(a) of the Act if evidence 

establishes that the terms of the 

transaction, including the consideration 

to be paid or received, are reasonable 

and fair and do not involve 

overreaching on the part of any person 

concerned, and the proposed 

transaction is consistent with the 

policies of the registered investment 

company and the general purposes of 

the Act. Section 12(d)(1)(J) of the Act 

provides that the Commission may 

exempt any person, security, or 

transaction, or any class or classes of 

persons, securities or transactions, from 

any provision of section 12(d)(1) if the 

exemption is consistent with the public 

interest and the protection of investors. 

7. Applicants submit that for the 

reasons stated in the Reference Order: 

(1) With respect to the relief requested 

pursuant to section 6(c) of the Act, the 

relief is appropriate, in the public 

interest and consistent with the 

protection of investors and the purposes 

fairly intended by the policy and 

provisions of the Act; (2) with respect to 

the relief request pursuant to section 

17(b) of the Act, the proposed 

transactions are reasonable and fair and 

do not involve overreaching on the part 

of any person concerned, are consistent 

with the policies of each registered 

investment company concerned and 

consistent with the general purposes of 

the Act; and (3) with respect to the relief 

requested pursuant to section 12(d)(1)(J) 

of the Act, the relief is consistent with 

the public interest and the protection of 

investors. 

By the Division of Investment 

Management, pursuant to delegated 

authority. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–05596 Filed 3–11–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74452; File No. SR–OCC– 

2015–02] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Approving 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 

March 6, 2015. 

On January 14, 2015, The Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change SR–OCC–2015–02 

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

Securities Exchange Act of 1934 

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

The proposed rule change was 

published for comment in the Federal 

Register on January 30, 2015.3 The 

Commission received seventeen 

comment letters on OCC’s proposal from 

OCC and seven other commenters or 

groups.4 This order approves the 

proposed rule change. 

I. Description 

OCC is amending its By-Laws and 

other governing documents, and 

adopting 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’’) will make an additional 

capital contribution and commit to 

replenishment capital (‘‘Replenishment 

Capital’’) in circumstances discussed 

below, and will receive, among other 

things, the right to receive dividends 

from OCC. In addition to the new 

capital contribution and Replenishment 

Capital commitment, the main features 

of the Capital Plan include: (i) A policy 

establishing OCC’s clearing fees at a 

level that would be sufficient to cover 

OCC’s estimated operating expenses 


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5The Stockholder Exchanges are: Chicago Board 

Options Exchange, Incorporated; International 

Securities Exchange, LLC; NASDAQ OMX PHLX 

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

6See 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. 

7The 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. 

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’’). OCC 

states that it intends to implement the 

Capital Plan on or after February 27, 

2015, subject to all necessary regulatory 

approvals. 

OCC states that it is implementing 

this Capital Plan, in part, to increase 

significantly its capital in connection 

with being designated systemically 

important by the Financial Stability 

Oversight Council pursuant to the 

Payment, Clearing and Settlement 

Supervision Act. The Capital Plan calls 

for an infusion of substantial additional 

equity capital by the Stockholder 

Exchanges to be made on or about 

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 will provide OCC with access to 

additional equity contributions 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. 

A. 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. OCC is a Delaware 

business corporation and is owned 

equally by the Stockholder Exchanges— 

five national securities exchanges for 

which OCC provides clearing services.5

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 provides 

clearing services to four futures 

exchanges. 

According to OCC, it has devoted 

substantial efforts during the past year 

to: (1) Develop a 5-year forward looking 

model of expenses; (2) quantify 

maximum recovery and wind-down 

costs under OCC’s recovery and winddown 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. 

Incorporating the results of those efforts, 

the amendments to its By-Laws and 

other governing documents are intended 

to allow OCC to implement the Capital 

Plan and thereby provide OCC with the 

means to increase its shareholders’ 

equity. 

B. OCC’s Projected Capital Requirement 

As 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 wind-down plan (‘‘Baseline Capital 

Requirement’’), plus (ii) a target capital 

buffer linked to plausible loss scenarios 

from operational risk, business risk and 

pension risk (‘‘Target Capital Buffer’’) 

(collectively, ‘‘Target Capital 

Requirement’’). OCC determined that for 

2015, the 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 is designed to 

provide a significant capital cushion to 

offset potential business losses. 

According to OCC, it had total 

shareholders’ equity of approximately 

$25 million as of December 31, 2013.6

OCC is adding additional capital of $222 

million to meet its 2015 Target Capital 

Requirement. OCC determined that a 

viable plan for Replenishment Capital 

should provide for a replenishment 

capital amount that would give OCC 

access to additional capital as needed 

up to a maximum of the Baseline 

Capital Requirement (‘‘Replenishment 

Capital Amount’’).7 Therefore, OCC’s 

Capital Plan will include the following 

in order to provide OCC in 2015 with 

ready access to approximately $364 

million in equity capital: 

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 

C. Procedures Followed in Order To 

Determine Capital Requirement 

According to OCC, various measures 

were used in determining the 

appropriate level of capital. 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, 

operational, and business risk. Based on 

internal operational risk scenarios and 

loss modeling at 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 OCC’s 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 on-balance 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% 

can be 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. 

Additionally, OCC determined that its 

maximum recovery costs will be $100 

million and projected wind-down costs 

would be $73 million. OCC projected its 

expenses for 2015 will be $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 

$117 million, and thus serves as OCC’s 

Baseline Capital Requirement. 

According to OCC, it then computed the 

appropriate amount of a Target Capital 

Buffer from operational risk, business 

risk, and pension risk, resulting in a 


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8On December 18, 2014, OCC’s Board of Directors 

voted to approve OCC’s Capital Plan. At the time 

of the vote, OCC’s Board of Directors was comprised 

of 18 directors—five Stockholder Exchanges, three 

public directors, one management director, and 

nine clearing member directors. 

9According to OCC, ‘‘the $72 million is after 

giving effect to the approximately $40 million 

refund’’ expected to be made in early 2015 for 

activities in 2014. Securities Exchange Act Release 

No. 74136 (January 26, 2015), 80 FR 5171 (January 

30, 2015) (SR–OCC–2015–02). 

10The pro rata basis is based on the Stockholder 

Exchanges’ interest in OCC. Currently, each 

Stockholder Exchange owns 20% of OCC. 

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

order to achieve the 25% Business Risk Buffer, OCC 

will file a proposed rule change seeking approval 

of the revised fee schedule. 

12Each Stockholder Exchange owns the same 

amount of Class A common stock and Class B 

common stock. Class B common stock is entitled to 

receive dividends, whereas Class A common stock 

is not. Class A common stock is entitled to vote for 

Member Directors, whereas Class B common stock 

is entitled to vote for the Management Director and 

Public Directors. Upon the liquidation of OCC, the 

assets available for distribution to shareholders will 

be distributed as follows: Holders of Class A 

common stock and Class B common stock will be 

first paid the par value of their shares. Next, each 

holder of Class B common stock will receive a 

distribution of $1 million. Next, an amount equal 

to OCC’s shareholders’ equity at December 31, 1998 

of $22,902,094, minus the distributions described 

above, will be distributed to those holders who 

acquired their Class B common stock before 

December 31, 1998. Finally, any remaining 

shareholders’ equity will be distributed equally to 

all holders of Class B common stock. For more 

information, see OCC’s 2014 financial statements 

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

docs/about/annual-reports/occ_2014_annual_

report.pdf. 

determination that the current Target 

Capital Buffer should be $130 million. 

Thus, the Target Capital Requirement 

will be $117 million + $130 million = 

$247 million. 

D. Overview of, and Basis for, OCC’s 

Proposal To Acquire Additional Equity 

Capital 

According to OCC, in order to meet its 

Target Capital Requirement, and after 

consideration of alternatives, OCC’s 

Board of Directors approved a proposal 8

from OCC’s Stockholder Exchanges 

pursuant to 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 9 .......................... 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 by the 

Stockholder Exchanges will be made in 

respect of their Class B Common Stock 

on a pro rata basis.10 The Stockholder 

Exchanges also have committed 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 will be 

capped at a total of $200 million that 

could be outstanding at any point in 

time. OCC estimates that the Baseline 

Capital Requirement will not exceed 

$200 million before 2022. If the limit is 

approached, OCC will 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 previously mentioned $200 

million cap. 

E. Fee, Refund, and Dividend Policies 

Upon reaching the Target Capital 

Requirement, the Capital Plan and the 

proposed Fee Policy will 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 required Business Risk Buffer 

target net income margin 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. 

According to OCC, the projected 

reduction in net income margin from 

OCC’s actual historical 10-year average 

of 31% to the new target of 25% reflects 

OCC’s commitment to continue to 

operate as an industry utility and 

ensuring that market participants 

benefit from OCC’s operational 

efficiencies in the future. This reduction 

will permit OCC to charge lower fees to 

market participants rather than 

maximize refunds to clearing members 

and dividend distributions to 

Stockholder Exchanges. According to 

OCC, it will review its fee schedule on 

a quarterly basis to manage revenue as 

closely to this target as possible. 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 realized in practice is 

materially below 25% after the first 

quarter, OCC may increase fees for the 

remainder of the year.11

The Capital Plan will 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 OCC’s Board of Directors, 

effective in the second quarter of 2015. 

OCC will endeavor to provide clearing 

members with no less than 60-day 

notice in advance of when the changes 

to fee levels will become effective, 

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 shareholders of all of OCC’s 

outstanding Class B Common Stock.12

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 dividends are not. 

The Refund and Dividend Policies each 

will provide that in the event that 

refunds payable under the Refund 

Policy are not tax deductible, the 

policies will be amended to restore the 

relative economic benefits between the 

recipients of the refunds and the 

Stockholder Exchanges. 

1. Fee Policy 

Under the Fee Policy, in setting fees 

each year, OCC will 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% will allow OCC to set fees, and to 

manage the risk that such fees may 

generate less revenue than expected due 

to lower-than-expected trading volume 

or other factors, or that expenses may be 

higher than projected. The Fee Policy 

also will include provisions from 


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13The Commission notes that future changes to 

OCC’s fee schedule as well as future changes to the 

Fee Policy, Refund Policy, and Dividend Policy, are 

subject to Section 19(b)(1) of the Act and Section 

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

Supervision Act, as applicable, both of which 

require OCC to submit appropriate regulatory filings 

with the Commission provide an opportunity for 

public comment, and require the Commission to 

review and ultimately disapprove, object to, or 

require modification or rescission, as applicable, if 

the changes do not meet regulatory requirements. 

See 15 U.S.C. 78s(b)(1); 12 U.S.C. 805(e); 17 CFR 

240.19b–4(n). 

14The pro rata basis is based on the Stockholder 

Exchanges’ interest in OCC. Currently, each 

Stockholder Exchange owns 20% of OCC. 

existing Article IX, Section 9 of the ByLaws, which provide that the fee 

schedule also may include additional 

amounts necessary to (i) maintain such 

reserves as are deemed reasonably 

necessary by OCC’s Board of Directors 

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, OCC states that these 

provisions will be invoked only in 

extraordinary circumstances and to the 

extent that the Board of Directors 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 ordinarily will be based on 

its projected expenses and the Business 

Risk Buffer of 25%. 

Under the Capital Plan, OCC will use 

the following formula to 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 will include projections as 

to relative volume in each such 

category. The clearing fee schedule 

therefore will be set to achieve a 

blended or average rate per contract that 

is projected to be sufficient, when 

multiplied by total projected contract 

volume, to achieve the Annual Revenue 

Target. Under extraordinary 

circumstances, OCC will 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. OCC will 

notify clearing members of the fees OCC 

determines it will apply for any 

particular period by describing the 

change in an information memorandum 

distributed to all clearing members and 

will file any change to its fee schedule 

with the Commission pursuant to its 

obligations under Section 19(b)(1) of the 

Act.13

2. Refund Policy 

Under the Refund Policy, except at a 

time when Replenishment Capital is 

outstanding as described below, OCC 

will 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) the 

pre-tax 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 federal 

laws and regulations. OCC will not be 

able to pay a refund on a particular date 

unless dividends are paid on the same 

date. 

If Replenishment Capital has been 

contributed and remains outstanding, 

OCC will 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 will 

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 any Replenishment Capital 

has not been repaid in full or 

shareholders’ equity has not been 

restored to the Target Capital 

Requirement within 24 months, OCC 

will 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. 

3. Dividend Policy 

The Dividend Policy provides that, 

except at a time when Replenishment 

Capital is outstanding as described 

below, OCC will 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) aftertax 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 federal 

laws and regulations. If Replenishment 

Capital has been contributed and 

remains outstanding, OCC will not pay 

dividends until such time as the Target 

Capital Requirement is restored. 

F. Replenishment Capital Plan 

OCC also is establishing a 

Replenishment Capital Plan whereby 

OCC’s Stockholder Exchanges are 

obligated to provide on a pro rata 

basis 14 a committed amount of 

Replenishment Capital should OCC’s 

total shareholders’ equity fall below the 

‘‘hard trigger,’’ described below. The 

aggregate committed amount for all five 

Stockholder Exchanges in the form of 

Replenishment Capital that could be 

accessed at any time will 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 

Formula’’). The $200 million figure in 

the Cap Formula accounts for projected 

growth in the Baseline Capital 

Requirement for the foreseeable future. 

The commitment to provide 

Replenishment Capital will not be 

limited by time, but rather only by the 

Cap Formula. Replenishment Capital 

will be called in whole or in part after 

the occurrence of a ‘‘hard trigger’’ event 

described below. If the Baseline Capital 


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15According to OCC, based on current federal tax 

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. 16See supra note 12. 

Requirement approaches or exceeds 

$200 million, OCC’s Board of Directors 

may consider, as part of its regular, 

periodic review of the Replenishment 

Capital Plan, 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 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 will 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 is a 

component of OCC’s overall Capital 

Plan. In implementing the 

Replenishment Capital Plan, OCC’s 

management will 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 will take certain 

steps upon the occurrence of either. 

The ‘‘soft trigger’’ for re-evaluating 

OCC’s capital will 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 will be a warning 

sign that OCC’s capital has fallen to a 

level that requires attention and 

responsive action to prevent it from 

falling to unacceptable levels. Upon a 

breach of the soft trigger, OCC’s senior 

management and OCC’s Board of 

Directors will 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 

will occur if shareholders’ equity falls 

below 125% of the Baseline Capital 

Requirement (‘‘Hard Trigger 

Threshold’’). OCC considers that a 

breach of the Hard Trigger Threshold is 

a sign that significant corrective action, 

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. Based on current numbers, 

OCC’s shareholders’ equity will have to 

fall more than $100 million below the 

fully funded capital amount described 

above in order to breach the Hard 

Trigger Threshold. 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. In the event of such 

breach, OCC’s Board of Directors must 

determine whether to attempt a 

recovery, a wind-down of OCC’s 

operations, or a sale or similar 

transaction, subject in each case to any 

necessary Stockholder consent. If the 

Board of Directors decides to winddown OCC’s operations, OCC will 

access the Replenishment Capital in an 

amount sufficient to fund the winddown, as determined by the Board of 

Directors, and subject to the Cap 

Formula. If the Board of Directors 

decides to attempt a recovery of OCC’s 

capital and business, OCC will 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 Formula described above. 

While Replenishment Capital is 

outstanding, no refunds or dividends 

will 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 to how OCC calculates 

refunds and dividends may be necessary 

(as described in more detail above in 

OCC’s Refund Policy and Dividend 

Policy). In addition, while 

Replenishment Capital is outstanding, 

OCC first will utilize the entire amount 

of available funds to repurchase, on a 

pro rata basis from each Stockholder 

Exchange, 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 Stockholder 

Exchanges for taxes on dividend income 

(if any) that they may have to recognize 

as a result of such repurchase.15 For this 

purpose, ‘‘Available Funds’’ will 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’’ will mean $20 

million above the Hard Trigger 

Threshold, so that OCC’s shareholders’ 

equity will remain at or above the 

Minimum Replenishment Level after 

giving effect to the repurchase. 

Furthermore, under the Dividend and 

Refund Policies, refunds and dividends 

will be suspended until such time as the 

Target Capital Requirement is restored. 

G. Amendments to Governing 

Documents 

In order to implement the Capital 

Plan, OCC is amending its By-Laws and 

Restated Certificate of Incorporation and 

amending and restating its Stockholders 

Agreement. 

1. Amendments to By-Laws 

OCC is amending its By-Laws in order 

to implement the Capital Plan. 

Specifically, OCC is amending 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 is being 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 will constitute a quorum for any 

such meeting of the Stockholders. In 

addition, OCC is amending 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, is being 

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 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 amendments to the 

Stockholders Agreement, to purchase 

the shares of common stock of another 

Stockholder. Article VIIA, Section 3, is 

amended to conform to the changes to 

Article VIIA, Section 2. 

OCC is amending 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 will require 

unanimous consent from the holders of 

Class A Common Stock and Class B 

Common Stock.16 This amendment is 

intended to protect Stockholder 

Exchanges from an action taken without 

their consent that could increase their 

likelihood of being required to provide 

Replenishment Capital. Similarly, 

Article XI, Section 1 is amended to 

account for the possible issuance of the 


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non-voting Class C Common Stock 

consistent with the Restated Certificate 

of Incorporation 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, is being 

amended in three ways. First, the 

concept of the Business Risk Buffer will 

be incorporated into Article IX, Section 

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

amended to provide that OCC only will 

add amounts for reserves and surpluses 

in addition to the Business Risk Buffer 

in extraordinary circumstances and only 

to the extent that the Board of Directors 

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, 

is being amended to expressly reference 

the potential payment of dividends in 

accordance with the Dividend Policy. 

2. Amendments to Restated Certificate 

of Incorporation 

OCC is amending its Restated 

Certificate of Incorporation in order to 

implement the Capital Plan. Article IV 

is 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) 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 is 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 will not restrict the ability 

of OCC to enter into the Replenishment 

Capital Plan. Finally, technical changes 

will be made to Article VI in connection 

with the creation of Class C Common 

Stock as non-voting stock. 

3. Amendments to Stockholders 

Agreement 

OCC is amending its 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. In part, the 

amendments to the Stockholders 

Agreement will 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. OCC considers 

this change 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 

will be able to exercise its right of first 

refusal. OCC believes that providing the 

non-selling Stockholder Exchanges with 

a secondary right of first refusal will 

increase the chances that a selling 

Stockholder Exchange will find a 

purchaser for its shares from among 

OCC’s existing owners. Because OCC’s 

Stockholders Agreement already has 

been amended several other times, for 

convenience OCC is 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 amendments to the 

Stockholders Agreement is described 

below, in the order they appear in the 

agreement. OCC is making 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 ByLaws. OCC is amending Section 3 to 

delete an obsolete reference to a plan 

relating to OCC’s original reorganization 

into a common clearing facility for all 

options exchanges. 

OCC is amending 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 amending 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) will further clarify that if 

OCC consented to a partial sale, the 

Stockholder Exchanges’ rights of first 

refusal still will 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 is amending Section 6(a) to 

provide Stockholders, upon the nonexercise 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) is 

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) is 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) is 

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) takes the place of current 

Section 6(e), which is deleted. Section 

6(e) currently provides that such a 

pledge or transfer will automatically be 

deemed to create a transfer of the shares 

to OCC. 

OCC is making 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 is deleting Section 

9 to remove the right of Stockholders to 

require OCC to purchase their shares of 

stock. 

OCC is amending 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 will 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 


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17See supra note 4. 

18 Id. 

19 Id. 

20See BOX Letter I; SIFMA Letter; MM Letter; 

and KCG Letter I. 

21See BOX Letter I; SIFMA Letter; BATS Letter 

I and II; MM Letter; MIAX Letter I and II; KCG 

Letter I and II; and SIG Letters I and II. 

22See BATS Letter I and II; BOX Letter I; MIAX 

Letter I and II; and MM Letter. 

23 Id. 

24See MIAX Letter II. 25 Id. 26See BATS Letter I and MIAX Letter I. 27See BATS Letter II. 28 Id. 

29 Id. 

30See OCC Letter I and IV. 

31 Id. 

32 Id. 

33See OCC Letter I. 

price originally offered for such shares. 

OCC is making 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) is amended such that any 

consideration to be paid by OCC upon 

the exercise of a right of first refusal will 

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 is amending 

current Section 10(e) by moving its 

provisions addressing the subordination 

of payments by OCC and non-payment 

of dividends under certain 

circumstances into Section 10(d) as 

discussed above. OCC proposes 

technical amendments to current 

Section 10(g) concerning the process 

under which OCC would acquire shares 

upon exercise of its right of first refusal 

and will redesignate Section 10(g) as 

Section 10(e). OCC also is moving 

technical provisions of the current 

Section 10(f) concerning the payment of 

such shares into Section 10(e). Section 

10(f) will then be amended to address 

procedures for Stockholders that 

exercise their right of first refusal. 

Section 11 of the Stockholders 

Agreement is being 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 will be amended to provide 

that the transfer of a Stockholder’s 

shares under that section will 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) is being amended to 

make reference to the Stockholders 

Agreement. Section 14(b) will be 

amended to make a technical change 

relating to the legend on OCC’s stock 

certificates. OCC is amending Section 15 

to update the mailing addresses of the 

Stockholder Exchanges for written 

notices and formal communications. 

Section 16(c) is being amended to 

clarify that a Stockholder Exchange will 

be able to assign its rights under the 

Stockholders Agreement only to a party 

to whom it will be permitted to transfer 

its shares. 

In addition, Section 16(c) is being 

amended to provide that OCC may only 

assign its repurchase rights under 

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

Stockholders Agreement. OCC will be 

able to assign such rights with respect 

to all or a portion of the shares of stock 

owned by a Stockholder Exchange, and 

will 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) is being amended to 

effectuate the amendment and 

restatement of the existing Stockholders 

Agreement. 

II. Summary of Comment Letters 

The Commission received seventeen 

comment letters in total.17 Thirteen 

comment letters were received from 

seven commenters on OCC’s proposal.18

OCC submitted four letters responding 

to the issues raised by the 

commenters.19 Four of the commenters 

generally supported OCC’s need to raise 

additional capital 20 though all seven 

commenters opposed how the Capital 

Plan proposed to raise the additional 

capital.21

Four of the commenters set forth 

arguments that the OCC proposal is 

inconsistent with Section 17A(b)(3)(I) of 

the Act because it imposes a burden on 

competition that is not necessary or 

appropriate in furtherance of the 

purpose of the Act.22 These commenters 

stated that the OCC proposal places the 

Stockholder Exchanges at a competitive 

advantage because they would be able to 

use dividend payments to offset 

operating costs, which would enable 

them to provide trading and execution 

services at lower prices than their nonStockholder counterparts.23 One 

commenter highlighted that, of the 

seven non-Stockholder Exchanges, only 

MIAX, BATS, and BOX are not affiliates 

of the Stockholder Exchanges.24

Further, the same commenter offered 

that, should the subsidized fees be 

reduced to a level that could not be 

sustained by non-affiliated exchanges, 

the ability of such non-affiliated 

exchanges to provide services to 

investors and the public could be 

affected.25 Additionally, two of the 

commenters stated that the extent of this 

competitive advantage was unknown, 

because the dollar amounts associated 

with dividend payments were redacted 

from the publicly-available filing.26 One 

commenter argued that the Stockholder 

Exchanges would be able to subsidize 

the costs they provide to their members 

through an excessive rate of return 

(estimated at 16% to 18% or more).27

This commenter noted that this rate is 

far above market rates, especially 

considering the commenter’s view that 

the risk associated with the investment 

is low.28 The commenter further argued 

that dividends are unlikely to be 

changed or discontinued because to do 

so would require the unanimous vote of 

the Stockholder Exchanges.29

In response, OCC expressly stated that 

the proposal would not impose any 

burden on competition.30 OCC further 

stated that the dividend payments—if 

any are declared—should not be viewed 

simply as additional revenue for 

subsidizing the costs of services 

provided, but as fair compensation to 

the Stockholder Exchanges for their 

substantial capital contributions, 

limited ‘‘upside’’ and future risks under 

the Capital Plan.31 OCC also stated that 

the Stockholder Exchanges are receiving 

only what the Board of Directors—with 

the assistance of financial advisors and 

in the exercise of its business 

judgment—considered to be fair and in 

the best interests of OCC, in light of the 

nature of the Stockholder Exchanges’ 

capital investments and the risks 

inherent in their funded and unfunded 

capital commitments.32 Additionally, 

OCC noted that its proposal sufficiently 

describe the considerations that went 

into setting the specific terms of the 

Capital Plan, including the Fee, Refund, 

and Dividend Policies.33

One commenter raised the issue that 

the OCC proposal is inconsistent with 

Section 17A(b)(3)(D) of the Act because 

the fees and charges under the proposal 


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34See MM Letter. 

35 ‘‘If the SEC allows the five owners to monetize 

OCC in this fashion, the conflicts of interest will 

diminish the prospect that OCC will perform 

efficiently to keep transaction fees low and 

operating expense under control. [. . .] Given the 

potential of the dividend to increase with the size 

of OCC’s budget, we are concerned where 

transaction fees may go in the future.’’ MM Letter 

at 13. 

36See MM Letter at 5. 

37See OCC Letter II. The Commission notes that 

future changes to OCC’s fee schedule as well as 

future changes to the Fee Policy, Refund Policy, and 

Dividend Policy, are subject to Section 19(b)(1) of 

the Act and Section 806(e) of the Payment, Clearing, 

and Settlement Supervision Act, as applicable, both 

of which require OCC to submit appropriate 

regulatory filings with the Commission provide an 

opportunity for public comment, and require the 

Commission to review and ultimately disapprove, 

object to, or require modification or rescission, as 

applicable, if the changes do not meet regulatory 

requirements. See 15 U.S.C. 78s(b)(1); 12 U.S.C. 

805(e); 17 CFR 240.19b–4(n). 

38 Id. 

39 Id. Five of the current 20 director positions on 

OCC’s Board of Directors are held by 

representatives of the five Stockholder Exchanges: 

Chicago Board Options Exchange, Inc.; 

International Securities Exchange, LLC; NASDAQ 

OMX PHLX LLC; NYSE MKT LLC; and NYSE Arca, 

Inc. 

40See BATS Letter I; MIAX Letter I and II; KCG 

Letter I; and SIG Letter I. 

41See BATS Letter I; MIAX Letter I and II; KCG 

Letter I; and SIG Letter I. As the Commission noted 

in the notice of filing of the proposed rule change, 

OCC stated that the purpose of this proposal is, in 

part, to facilitate compliance with proposed 

Commission rules and address Principle 15 of the 

PFMIs. The proposed Commission rules are 

pending. See Securities Exchange Act Release No. 

71699 (March 12, 2014), 79 FR 29508 (May 22, 

2014) (S7–03–14). Therefore, the Commission has 

evaluated this proposed rule change under the Act 

and the rules currently in force thereunder. See 

Securities Exchange Act Release No. 74136 (January 

26, 2015), 80 FR 5171 (January 30, 2015) (SR–OCC– 

2015–02). See also supra note 3. 

42See SIG Letter I. See also supra note 3. 

43See MIAX Letter I and MM Letter. See also 

supra note 3. 

44See OCC Letter IV. Pursuant to Section 

19(b)(2)(C)(iii), the Commission may not approve a 

proposed rule change earlier than 30 days after the 

date of publication unless the Commission finds 

good cause for doing so and publishes the reason 

for the finding (referred to as ‘‘accelerated’’ 

approval). The Commission notes that the statutory 

time period for approval prior to the thirtieth day 

has passed. See 15 U.S.C. 78s(b)(2)(C)(iii). 

45See SIFMA Letter; BATS Letter I; BOX Letter 

I; MM Letter; SIG Letter II; and KCG Letter I. 

46See SIFMA Letter; BATS Letter I; MM Letter; 

and KCG Letter I. 

47See SIFMA Letter and KCG Letter I. 

48 Id. 

49 Id.; BATS Letter I. 

50See OCC Letter I. 

51See OCC Letter II. 

52See BATS Letter I and II; MIAX Letter I and II; 

MM Letter; SIFMA Letter; SIG Letter II; and KCG 

Letter I. 

53See BATS Letter I and II; MIAX Letter I and II; 

MM Letter; SIFMA Letter; and KCG Letter I. 

54See BATS Letter II and III; and BOX Letter II. 

55See BATS Letter II. 

56See MM Letter. 

are neither equitable nor reasonable.34

The commenter expressed concern that: 

(i) The Dividend Policy creates a 

conflict of interest for the Stockholder 

Exchanges that could influence future 

fees; 35 and (ii) OCC should not increase 

its budget ‘‘without the ability of market 

participants, who ultimately finance 

OCC through transaction fees, to be 

assured that OCC (as the only clearing 

agency for U.S. listed options) continues 

to operate with the public marketplace 

foremost in mind.’’ 36

In response, OCC noted that any 

changes to its fee schedule require a rule 

filing with the Commission, subject to 

the applicable standards of the Act.37

Further, OCC noted that change to the 

Refund, Dividend, and Fee Policies are 

all subject to Commission review and 

approval, and this process affords 

clearing members the opportunity to 

object to any changes in those 

policies.38 Additionally, the annual 

budget is established by vote of a simple 

majority, which requires broad support 

of public and/or clearing member 

directors.39

Four commenters took issue with 

OCC’s request for accelerated 

effectiveness.40 One reason these 

commenters argued this request should 

be denied is because the Commission’s 

proposed Regulation 17Ad–22(e)(15) is 

still under consideration and has yet to 

be adopted.41 One letter stated that OCC 

already has the capital on hand to 

comply with the proposed regulation, so 

there is no urgency as portrayed in the 

OCC proposal and in OCC’s responses to 

prior comments.42 Further, the Capital 

Plan, they argue, presents several 

important policy issues that require 

additional time for debate and further 

details.43 On March 2, 2015, OCC 

responded that this point was moot 

because an approval no longer requires 

acceleration given that the minimum 

period of 30 days from the date of the 

filing without acceleration has passed.44

Six commenters expressed concern 

that the Capital Plan converts OCC from 

a so-called traditional industry utility 

model to a for-profit model that 

maximizes returns for the Stockholder 

Exchanges.45 Under this model, OCC set 

transaction fees to cover its operational 

costs plus some reasonable excess for 

unforeseen expenses or drops in 

revenue, and refunded the excess back 

to its members through rebates.46 Under 

the proposal, refunds to members and 

their customers will be limited to 50% 

of the excess fees, with the remainder of 

after-tax income being designated as 

dividend payments for the Stockholder 

Exchanges.47 In calculating the excess 

fees available for a refund, the proposal 

further reduces the amount available by 

deducting amounts needed to fund 

increases in OCC’s capital 

requirements.48 The commenters 

asserted that the approach thus 

abandons the industry utility model in 

favor of a profit-maximizing structure 

that prioritizes dividends and enhances 

the future returns of the Stockholder 

Exchanges at the expense of members 

and participants.49

In its response, OCC disagreed and 

contended that the proposal is 

consistent with the industry utility 

model because it effectively refunds 

100% of the excess funds not paid to 

fund capital requirements or 

replenishment commitments of the 

Stockholder Exchanges.50 Additionally, 

OCC asserted that it is a 

mischaracterization to describe the 

proposal as a departure from the 

industry utility model because the 

proposal allows for the Board of 

Directors to make adjustments to fees 

based on expenses, volumes, and 

revenues if projections for the 

remainder of the calendar year show 

that either: (i) Fee levels will be higher 

than projected or (ii) operating expenses 

are lower than budgeted, thereby 

allowing market participants to take 

advantage of lower fees.51

Six commenters stated that the OCC 

proposal failed to adequately discuss 

the viability of alternative means of 

raising capital,52 such as raising capital 

from third-party investors, or from 

clearing members, which would offer 

non-equity owner exchanges the 

opportunity to become Stockholders so 

that they may also participate with 

respect to dividends.53 Two 

commenters specified that they were not 

invited to participate in the proposal 

process, nor were they aware of the 

proposal until it was filed with the 

Commission.54 One commenter stated 

that it would have offered to provide 

equity capital to the OCC at a rate of 

return significantly less than what the 

existing Stockholder Exchanges would 

receive under the proposed plan.55

Another commenter suggested a specific 

alternative known as a ‘‘Payer-Asset’’ 

account, whereby excess fee revenue 

would be escrowed to a payer asset 

account that would not be an asset of 

the Stockholder Exchanges, but rather 

would be property of the market 

participants.56 Excess fees from the 

account would be returned to market 

participants through rebates, and, in the 

event of the dissolution of OCC, the 

account would be distributed to the 

investors as opposed to the Stockholder 


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57 Id. 

58See MIAX Letter II. 

59See OCC Letter I. 

60See OCC Letter II. 

61See MM Letter. 

62 Id. 

63See OCC Letter II. 

64 Id. 

65 Id. 

66 Id. 

67 Id. 

68See MIAX Letter II; BATS Letter II and III; BOX 

Letter II; and SIG Letter I. 

69See MIAX Letter II and BATS Letter II. 

70 Id. 

71 Id. 

72See BATS Letter III and BOX Letter II. 

73 Id. 

74See OCC Letter IV. 

75 Id. 

76See MIAX Letter II; BATS Letter II; and SIG 

Letters I and II. 

77See SIG Letter I. 

78See OCC Letter IV. 

79See OCC Letter IV (citing to Section 144, 

Delaware General Corporation Law). 

80 Id. 

81 Id. 

82See BATS Letter II; KCG Letter II; and SIG 

Letter I. 

83 15 U.S.C. 78s(b)(2)(C). 

Exchanges.57 Because of disputes 

regarding the process, one commenter 

suggested a 60-day hold on the 

approval, so that any party with a 

superior financial proposal may be 

given the opportunity to present such 

plan to OCC.58

OCC responded to these commenters 

by stating that the Board of Directors 

considered potential alternatives, 

engaging in a nearly year-long process 

in which it analyzed a wide range of 

alternative methods to increase capital 

before determining that the Capital Plan 

was the most viable and in the best 

interests of OCC.59 OCC also stated that 

an escrow fund would not be an asset 

of OCC, and therefore may not 

constitute liquid net assets funded by 

equity.60

One commenter argued that the 

Replenishment Capital Plan is more of 

a loan than equity capital and that the 

Replenishment Capital Plan is 

structured such that the likelihood of it 

ever being called is very low.61 That 

commenter also argued that the new 

reserve capital structure creates a 

conflict of interest in OCC’s budget 

because it would unjustly enrich the 

five Stockholder Exchanges and create a 

conflict in the performance of their 

positions on OCC’s Board of Directors.62

OCC countered the first contention by 

stating that the Replenishment Capital 

will be equity capital because: (i) It will 

be listed on the balance sheet as 

stockholders’ equity; (ii) it will be 

funded in exchange for the issuance of 

Class C common stock; (iii) it will be 

treated as equity for tax purposes; and, 

most importantly, (iv) the holders of the 

Class C common stock will be 

subordinated to those creditors of OCC 

in the event of any bankruptcy or 

liquidation.63 In addition, OCC stated 

that even though the Replenishment 

Capital is not intended to remain 

outstanding indefinitely, there is no 

legal requirement that it be repurchased 

and it is far from assured, given the 

circumstances under which it would be 

funded, that it ever would be 

repurchased.64

As to the assertion regarding conflicts, 

OCC responded that the proposal’s 

terms require the ongoing participation 

and assent of the industry 

representatives on the Board of 

Directors.65 Additionally, changes to 

each of the OCC Fee, Dividend, and 

Refund Policies all require an 

affirmative vote of two-thirds of the 

Board of Directors as well as the 

approval of each of the Stockholder 

Exchanges.66 OCC further noted that in 

order to adopt an annual budget, there 

must be a majority vote of the Board of 

Directors, thus requiring support and 

approval from both public directors and 

member directors.67

Four commenters suggested that there 

were multiple governance issues 

involved with the Board of Directors’ 

approval of the OCC proposal, including 

that OCC failed to follow its own ByLaws or internal policies.68 For 

example, two commenters stated that, at 

the time of the vote, OCC only had three 

public directors instead of five as 

required by OCC By-Laws, and that the 

vacancies for these positions were not 

filled until after the vote on the Capital 

Plan.69 Further, these same commenters 

took issue with whether the Capital Plan 

was approved by a ‘‘majority,’’ because 

of the nine clearing members, one did 

not attend, one abstained, four voted in 

favor, and three voted against.70 These 

commenters argued that an abstention 

should be counted as a ‘‘no’’ vote, 

which would mean that a vote of the 

member directors was evenly split.71

Two commenters contended that 

because this Capital Plan is a matter of 

competitive significance, OCC failed to 

follow its By-Laws as well as 

representations it made to the 

Commission in adopting those By-Laws, 

by not promptly informing nonStockholder Exchanges of the Capital 

Plan.72 These commenters raised the 

concern that had non-Stockholder 

Exchanges been promptly informed of 

this matter, they would have had a right 

by request to make presentations 

regarding the Capital Plan to the OCC 

Board of Directors or appropriate 

committee of the board.73

OCC responded that the proposed 

Capital Plan was properly approved in 

accordance with OCC’s By-Laws.74

Specifically, OCC articulated that its 

Capital Plan received the affirmative 

vote of two-thirds of the directors ‘‘then 

in office,’’ which is the relevant 

standard under OCC’s By-Laws.75

Commenters further took issue with 

the vote approving the Capital Plan 

because interested directors generally 

recuse themselves from interested party 

transactions, and the five Stockholder 

Exchanges failed to recuse themselves 

from either the deliberations or the vote, 

despite having a significant economic 

interest in the outcome of the vote.76

One commenter stated that the 

Stockholder Exchanges also should have 

recused themselves under OCC’s own 

conflict of interest policy, and that their 

failure to do so should invalidate the 

vote approving the proposal.77

OCC responded that the approval of 

the Capital Plan did not require any of 

its directors to recuse themselves.78

OCC cited to both its By-Laws and 

Delaware law to support its position. 

Specifically, OCC stated that under 

Delaware law, a decision is not 

improper simply because directors 

participating in the decision had an 

interest in the decision.79 OCC noted 

that, in accordance with Delaware 

General Corporation Law, all material 

facts were disclosed and known to its 

Board of Directors prior to its good faith 

approval of the proposed Capital Plan.80

OCC further stated that its Board of 

Directors satisfied OCC’s By-Laws in 

approving the Capital Plan, namely the 

requirements set forth in Article XI, 

Section 1 of its By-Laws, which requires 

‘‘the affirmative vote of two-thirds 

majority of the directors then in office 

(and not less than a majority of the 

number of directors fixed by the ByLaws).’’ 81

In addition, three commenters 

suggested that because the Capital Plan 

raises significant issues, at a minimum, 

it should not be subject to delegation to 

Commission staff for approval, and 

instead should be referred for full 

review and consideration by the 

Commissioners.82

III. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Act 83

directs the Commission to approve a 

proposed rule change of a selfregulatory organization if the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and the rules 


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84As the Commission noted in the notice of filing 

of the proposed rule change, OCC stated that the 

purpose of this proposal is, in part, to facilitate 

compliance with proposed Commission rules and 

address Principle 15 of the PFMIs. The proposed 

Commission rules are pending. See Securities 

Exchange Act Release No. 71699 (March 12, 2014), 

79 FR 29508 (May 22, 2014) (S7–03–14). As such, 

the possibility of future Commission rulemaking is 

immaterial to both OCC’s justification for the 

Capital Plan and to our analysis. Therefore, the 

Commission has evaluated this proposed rule 

change under the Act and the rules currently in 

force thereunder. See Securities Exchange Act 

Release No. 74136 (January 26, 2015), 80 FR 5171 

(January 30, 2015) (SR–OCC–2015–02). 

85 15 U.S.C. 78q–1(b)(3)(A). 

86 15 U.S.C. 78q–1(b)(3)(F). 

87 15 U.S.C. 78q–1(b)(3)(D). 

88 15 U.S.C. 78q–1(b)(3)(I). 

89 15 U.S.C. 78q–1(b)(3)(A). 

90 15 U.S.C. 78q–1(b)(3)(F). 

91 15 U.S.C. 78q–1(b)(3)(D). 

92See MM Letter at 13. 

93See MM Letter. 

94 ‘‘If the SEC allows the five owners to monetize 

OCC in this fashion, the conflict of interest will 

diminish the prospect that OCC will perform 

efficiently to keep transaction fees low and 

operating expense under control. [. . .] Given the 

potential of the dividend to increase with the size 

of OCC’s budget, we are concerned where 

transaction fees may go in the future.’’ MM Letter 

at 13. 

95MM Letter at 5. 

96 In order to address the concern that the conflict 

of interest will diminish the prospect that OCC will 

perform efficiently to keep transaction fees low and 

operation expenses under control, OCC stated in 

response that higher operating expenses will result 

in an increased Target Capital Requirement, which 

will require additional capital contributions to be 

withheld from both dividends and refunds. Thus, 

OCC argues, an increase in operating expenses 

results in larger cumulative capital contributions 

from the Stockholder Exchanges. If an increase in 

the Business Risk Buffer does result in an increase 

in dividends, the larger cumulative capital 

contributions will have the effect of reducing any 

increase in the rate of return that would otherwise 

result from the increase in dividends. See OCC 

Letter II. In addition, OCC also contends that it 

would be necessary for the exchange directors to 

obtain additional support either from public 

directors or member directors or a combination of 

the two in order to approve a budget with increased 

expenses. See OCC Letter I. 

97 15 U.S.C. 78s(b)(1). 

98 12 U.S.C. 805(e). 

99See 15 U.S.C. 78s(b)(1); 12 U.S.C. 805(e); and 

17 CFR 240.19b–4(n). 

100See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b– 

4(n). 

101See 15 U.S.C. 78s(b)(2)(C)(ii). 

102See 12 U.S.C. 5465(e)(1)(F). 

103See 12 U.S.C. 5465(e)(2)(D). 

104See OCC Letter II at 11. 

and regulations thereunder applicable to 

such organization. 

After carefully considering OCC’s 

proposal, the comments received, and 

OCC’s responses thereto, the 

Commission finds that OCC’s proposed 

rule change is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a registered clearing agency.84 In 

particular, the Commission finds that 

the Capital Plan is consistent with the 

following provisions of the Act: (i) 

Section 17A(b)(3)(A); 85 (ii) Section 

17A(b)(3)(F); 86 (iii) Section 

17A(b)(3)(D); 87 and (iv) Section 

17A(b)(3)(I),88 as described below. 

The Commission recognizes that 

commenters did not support the Capital 

Plan. The Commission, however, must 

approve a proposed rule change if it 

finds that the proposed rule change is 

consistent with the requirements of the 

Act and the applicable rules and 

regulations thereunder. Although the 

commenters raised a number of 

substantive points, the Commission was 

not persuaded that these concerns 

render OCC’s Capital Plan inconsistent 

with the Act and the applicable rules 

and regulations thereunder. 

In particular, the Commission finds 

that the Capital Plan is consistent with 

Section 17A(b)(3)(A) of the Act,89 which 

requires, in part, that a registered 

clearing agency is so organized and has 

the capacity to be able to facilitate the 

prompt and accurate clearance and 

settlement of securities transactions, 

and to safeguard securities and funds in 

its custody and control, or for which it 

is responsible. OCC’s proposed rule 

change is consistent with these 

requirements because the Capital Plan is 

designed to ensure that OCC can 

continue to promptly and accurately 

clear and settle securities transactions, 

and assure the safeguarding of securities 

and funds which are in the custody or 

control of OCC or for which it 

responsible even if it suffers significant 

operational losses. The Capital Plan is 

designed to provide OCC with sufficient 

capital and an ability to replenish 

capital in the event such capital falls 

below certain levels, which in turn 

further positions OCC to remain 

sufficiently capitalized at all times. 

The Commission also finds that the 

Capital Plan is consistent with Section 

17A(b)(3)(F) of the Act,90 which 

requires, in part, that the rules of a 

registered clearing agency are designed 

to promote the prompt and accurate 

clearance and settlement of securities 

transactions, and to assure the 

safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible. OCC’s Capital Plan is 

consistent with these requirements 

because OCC is amending its By-Laws 

and other governing documents to adopt 

certain policies for the purpose of 

implementing the Capital Plan, which, 

as described above, is designed to 

ensure that OCC can continue to 

promptly and accurately clear and settle 

securities transactions, and assure the 

safeguarding of securities and funds 

which are in the custody or control of 

OCC or for which it is responsible even 

if it suffers significant operational 

losses. 

In addition, the Commission finds 

that the Capital Plan is consistent with 

Section 17A(b)(3)(D) of the Act,91 which 

requires that the rules of a registered 

clearing agency provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

participants. One commenter contended 

that the Capital Plan is inconsistent 

with this provision.92 This commenter’s 

concerns were focused on possible 

future fees.93 Specifically, the 

commenter expressed concern that: (i) 

The Dividend Policy creates a conflict of 

interest for the Stockholder Exchanges 

that could influence future fees; 94 and 

(ii) OCC should not increase its budget 

‘‘without the ability of market 

participants, who ultimately finance 

OCC through transaction fees, to be 

assured that OCC (as the only clearing 

agency for U.S. listed options) continues 

to operate with the public marketplace 

foremost in mind.’’ 95 Neither of these 

concerns about possible future fees 

convinces the Commission that the 

Capital Plan is inconsistent with 

providing for the equitable allocation of 

reasonable dues, fees, and other charges 

among its participants.96

Future changes to OCC’s fee schedule 

as well as future changes to the Fee 

Policy, Refund Policy, and Dividend 

Policy, are subject to Section 19(b)(1) of 

the Act 97 and Section 806(e) of the 

Payment, Clearing, and Settlement 

Supervision Act,98 as applicable, both of 

which require OCC to (i) submit 

appropriate regulatory filings with the 

Commission,99 (ii) provide an 

opportunity for public comment,100 and 

(iii) require the Commission to review 

and ultimately disapprove,101 object 

to,102 or require modification or 

rescission,103 as applicable, if these 

future proposed changes do not meet 

regulatory requirements. OCC 

recognizes this.104

Moreover, the Capital Plan is 

consistent with providing for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

participants in the following ways. The 

Fee Policy provides 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 

allow for refunds of fees or payment of 

dividends, respectively, only to the 

extent that the distribution of which 

would allow OCC to maintain 

shareholders’ equity at the Target 


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105 15 U.S.C. 78q–1(b)(3)(D). 

106 15 U.S.C. 78q–1(b)(3)(I). 

107See BATS Letter I and II; BOX Letter I; MIAX 

Letter I and II; and MM Letter. 

108 Id. 

109See BATS Letter II. 

110 15 U.S.C. 78q–1(b)(3)(I). 

111See MIAX Letter II; BATS Letter II and III; SIG 

Letter I; and BOX Letter II. 

112See OCC Letter IV. 

113See OCC Letter IV (citing to Section 144, 

Delaware General Corporation Law). Subsequently, 

OCC confirmed that OCC and its Board of Directors 

conducted its business in conformity with its ByLaws identified in the comment letters cited in note 

111. 

114 15 U.S.C. 78q–1(b)(3). 

115 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

Capital Requirement. The Refund Policy 

and Dividend Policy also prohibit 

refunds and dividends when Class C 

Common Stock is outstanding under the 

Replenishment Capital Plan, and OCC is 

in the process of rebuilding its capital 

base. In addition, the Replenishment 

Capital Plan establishes a mandatory 

mechanism for the contribution of 

additional capital by OCC’s Stockholder 

Exchanges in the event capital falls 

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 

ongoing obligations as a critical 

component of the national system for 

clearance and settlement, which in turn 

helps reduce OCC’s overall level of risk, 

while also being consistent with Section 

17A(b)(3)(D) of the Act.105

The Commission finds the Capital 

Plan is consistent with Section 

17A(b)(3)(I) of the Act,106 which 

requires that the rules of a registered 

clearing agency do not impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. The Commission 

recognizes that four commenters set 

forth arguments that the Capital Plan is 

inconsistent with this provision because 

the Capital Plan does not address the 

competitive burden on non-Stockholder 

Exchanges.107 More specifically, these 

commenters argue that the Capital Plan 

places the Stockholder Exchanges at a 

competitive advantage over the nonStockholder Exchanges because they 

would be able to use dividend payments 

to offset operating costs, which would 

in turn enable them to provide trading 

and execution services at lower prices 

than their non-Stockholder 

counterparts.108 Another commenter 

stated that the rate of return is 

excessive, far above market rates, and 

does not reflect the low risk of the 

investment.109 As further discussed 

below, the Commission is not persuaded 

by these arguments. 

As determined by OCC’s Board of 

Directors, the Stockholder Exchanges 

have agreed to make a substantial equity 

contribution to ensure OCC has 

sufficient capital immediately and have 

agreed to commit to a replenishment 

capital contribution should OCC’s 

capital fall below specified levels. OCC 

considers that the dividends are being 

paid to Stockholder Exchanges to 

compensate the Stockholder Exchanges 

for bearing the risk of the loss of their 

capital contributions, both in the near 

term and in the future, should OCC 

need to replenish those funds. These 

contributions and potential 

contributions are considerable and 

remain at risk when outstanding. As 

such, OCC considers the dividends not 

to be windfall profits or an extra refund, 

as some commenters contend, but rather 

a plan to direct cash flows to those 

entities that put their capital at risk. The 

Stockholder Exchanges are contributing 

their own capital, and bearing the risk 

of that contribution, as such, the 

dividends serve as compensation for 

bearing that risk. 

Further, the cost of that capital 

investment and the rate of return that 

will be paid to the Stockholder 

Exchanges were determined to be fair 

and in the best interests of OCC by 

OCC’s Board of Directors, which has 

representation from the Stockholder 

Exchanges, clearing members, and 

independent directors, and in 

consultation with outside financial 

advisors. OCC has represented that the 

Board of Directors determined, in its 

exercise of business judgment and in 

compliance with its governance 

provisions and its responsibilities under 

Delaware corporate laws, that the 

dividends were fair and in the best 

interests of OCC, particularly in light of 

the nature of the investment and the 

risks inherent in the funded and 

unfunded capital commitments by the 

Stockholder Exchanges. 

We understand that in a perfect 

capital market, the dividend would 

compensate Stockholder Exchanges 

exactly for the risk borne by the capital 

contribution (i.e., the rate of return 

exactly equals OCC’s cost of capital). 

Further, we acknowledge that a 

dividend that does not accurately reflect 

the true risk of the investment may 

result in a burden on competition on 

one group versus another. The 

magnitude and incidence of the burden 

depends on whether the dividend 

payment is high or low relative to the 

true cost of the capital. OCC is a unique 

entity and not publicly traded. As such, 

determining accurate rates on the cost of 

capital is subjective. Absent available 

market prices for OCC’s equity shares, 

OCC’s Board of Directors must use its 

judgment to determine the appropriate 

or competitive rate of return and the 

dividend policy that appropriately 

reflects the risk of the Stockholder 

Exchanges’ equity investment. 

Given the critical role OCC plays in 

the U.S. options market and its 

designation as a systemically important 

financial market utility, the Commission 

believes that it is both necessary and 

appropriate for OCC to obtain and retain 

sufficient capital to ensure its ongoing 

operations in the event of substantial 

business losses. While the precise 

magnitude and incidence of any burden 

that exists in this case is necessarily 

subjective, the Commission believes 

that, even if OCC’s Capital Plan may 

result in some burden on competition, 

such a burden is necessary and 

appropriate in furtherance in the 

purposes of the Act given the 

importance of OCC’s ongoing operations 

to the U.S. options market and the role 

of the Capital Plan in assuring its ability 

to facilitate the clearance and settlement 

of securities transactions in a wide 

range of market conditions. For these 

reasons, the Commission believes OCC’s 

Capital Plan, as approved by its Board 

of Directors in the exercise of its 

business judgment, is consistent with 

OCC’s obligations under Section 

17A(b)(3)(I) of the Act.110

Several commenters raised concerns 

that OCC’s Capital Plan was not 

approved in accordance with OCC’s ByLaws due to vacancies on the Board, 

that certain Board directors (i.e., 

Stockholder Exchanges) were 

‘‘interested parties’’ and therefore 

should have recused themselves from 

any decision to approve or disapprove 

OCC’s proposal, and OCC failed to 

promptly inform non-Stockholder 

Exchanges of the proposed change.111

As indicated in OCC’s response 

letter,112 OCC represents that OCC and 

its Board of Directors have conducted its 

business in conformity with applicable 

state laws and its own By-Laws.113 The 

Commission has no basis to dispute 

OCC’s position on this matter. For these 

reasons, the Commission believes OCC’s 

Capital Plan, as approved, is consistent 

with OCC’s obligations under the 

Act.114

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposal is 

consistent with the requirements of the 

Act and in particular with the 

requirements of Section 17A of the 

Act 115 and the rules and regulations 

thereunder. 


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impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

116 15 U.S.C. 78s(b)(2). 

117 17 CFR 200.30–3(a)(12). 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,116 that the 

proposed rule change (File No. SR– 

OCC–2015–02) be, and it hereby is, 

approved as of the date of this notice or 

the date of an order by the Commission 

authorizing OCC to implement OCC’s 

advance notice proposal that is 

consistent with this proposed rule 

change (File No. SR–OCC–2014–813), 

whichever is later. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.117

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–05556 Filed 3–11–15; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Motor Carrier Safety 

Administration 

Driver Qualifications; Regulatory 

Guidance Concerning the Use of 

Computerized Employer Notification 

Systems for the Annual Inquiry and 

Review of Driving Records 

AGENCY: Federal Motor Carrier Safety 

Administration. 

ACTION: Notice of regulatory guidance. 

SUMMARY: FMCSA provides regulatory 

guidance concerning the use of Stateoperated employer notification systems 

(ENS) for the annual inquiry and review 

of driving records required by 49 CFR 

391.25. The guidance explains the use 

of State-operated ENS that provide 

motor carriers with a department of 

motor vehicle report for every State in 

which the driver held either an 

operator’s license, a commercial driver’s 

license (CDL), or permit when a driver 

is enrolled in the system. Many State 

driver licensing agencies (SDLAs) 

provide ENS that either automatically 

update requestors (push-system) on 

license status, crashes and convictions 

of laws or regulations governing the 

operation of motor vehicles or allow the 

requestor to regularly query the record 

(pull-system) for this information. The 

use of these systems to check the 

driving record, at least annually, 

satisfies the requirement for an annual 

review of each driver’s record. This 

includes when a third-party is used to 

accumulate the records for a motor 

carrier. This revises the Agency 

guidance issued in 2003 that referenced 

to a specific third-party vendor. 

DATES: This guidance is effective March 

12, 2015. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Thomas L. Yager, Chief, Driver and 

Carrier Operations Division, Office of 

Bus and Truck Standards and 

Operations, 1200 New Jersey Ave. SE., 

Washington, DC 20590, Telephone 202– 

366–4325, Email: MCPSD@dot.gov. 

SUPPLEMENTARY INFORMATION: 

Legal Basis 

The Secretary of Transportation has 

statutory authority to set minimum 

standards for commercial motor vehicle 

safety. These minimum standards must 

ensure that: (1) CMVs are maintained, 

equipped, loaded, and operated safely; 

(2) the responsibilities imposed on 

operators of CMVs do not impair their 

ability to operate the vehicles safely; (3) 

the physical condition of CMV operators 

is adequate to enable them to operate 

the vehicles safely; (4) the operation of 

CMVs does not have a deleterious effect 

on the physical condition of the 

operators; and (5) an operator of a 

commercial motor vehicle is not coerced 

by a motor carrier, shipper, receiver, or 

transportation intermediary to operate a 

commercial motor vehicle in violation 

of a regulation (49 U.S.C. 31136(a)(1)– 

(5), as amended). The Secretary also has 

broad power in carrying out motor 

carrier safety statutes and regulations to 

‘‘prescribe recordkeeping and reporting 

requirements’’ and to ‘‘perform other 

acts the Secretary considers 

appropriate’’ (49 U.S.C. 31133(a)(8) and 

(10)). 

The Administrator of FMCSA has 

been delegated authority under 49 CFR 

1.87(f) to carry out the functions vested 

in the Secretary of Transportation by 49 

U.S.C. chapter 311, subchapters I, III 

and IV, relating to commercial motor 

vehicle programs and safety regulation. 

Background 

On January 13, 2003, FMCSA issued 

a letter to a company providing 

regulatory guidance concerning the use 

of computerized employer notification 

systems for the annual inquiry and 

review of driving records required by 49 

CFR 391.25. The guidance explained 

that the use of a specific third-party 

computerized ENS that provides motor 

carriers with a department of motor 

vehicle report for every State in which 

the driver held either an operator’s 

license, a CDL, or permit when a driver 

is enrolled in the system, and provides 

an update anytime the State licensing 

agency enters new information about 

license status, crashes and convictions 

of laws or regulations governing the 

operation of motor vehicles satisfies the 

requirement for an annual review of 

each driver’s record. However, the 

guidance referenced a specific vendor 

providing such services to the motor 

carrier industry. 

The regulatory guidance issued to the 

specific company was subsequently 

posted to FMCSA’s Web site as question 

#4 to 49 CFR 391.25 (See http://

www.fmcsa.dot.gov/regulations/title49/

section/391.25?guidance). The 2003 

guidance reads as follows: 

Question 4: Does the use of a thirdparty computerized system that 

provides motor carriers with a complete 

department of motor vehicle report for 

every State in which the driver held a 

commercial motor vehicle operator’s 

license or permit when a driver is 

enrolled in the system, and then 

automatically provides an update 

anytime the State licensing agency 

enters new information on the driving 

record, satisfy the requirements of 

§ 391.25? 

Guidance: Yes. Since motor carriers 

would be provided with a complete 

department of motor vehicle report for 

every State in which the driver held a 

commercial motor vehicle operator’s 

license or permit when a driver is 

enrolled in the system, and then 

provided with an update any time the 

State licensing agency enters new 

information on the driving record, the 

requirements of § 391.25(a) would be 

satisfied. When the motor carrier 

manager reviews the information on the 

driving record, and the License Monitor 

system records the identity of the 

manager who conducted the review, the 

requirements of § 391.25(b) and (c) 

would be satisfied. 

With regard to the requirement that 

the response from each State agency, 

and a note identifying the person who 

performed the review, may be 

maintained in the driver’s qualification 

files, motor carriers may satisfy the 

record keeping requirement by using 

computerized records in accordance 

with 49 CFR 390.31. Section [390.31] 

allows all records that do not require 

signatures to be maintained through the 

use of computer technology provided 

the motor carrier can produce, upon 

demand, a computer printout of the 

required data. Therefore, motor carriers 

using an automated computer system 

would not be required to maintain paper 

copies of the driving records, or a note 

identifying the person who performed 

the review, in each individual driver 

qualification file provided a computer 

printout can be produced upon demand 

of a Federal or State enforcement 

official. 


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