[Federal Register Volume 87, Number 36 (Wednesday, February 23, 2022)]
[Notices]
[Pages 10262-10265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03824]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94270; File No. SR-OCC-2021-803]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Concerning The Options 
Clearing Corporation's Cash and Investment Management

February 17, 2022.

I. Introduction

    On December 23, 2021, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2021-803 (``Advance Notice'') pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled Payment, Clearing and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') \3\ to (i) adopt OCC's policy regarding cash and 
related investments to its rules, and (ii) amend OCC's Rules governing 
the use of Clearing Fund contributions to ensure access in the event of 
the failure of an investment counterparty with whom OCC has invested 
cash collateral.\4\ The Advance Notice was published for public comment 
in the Federal Register on January 12, 2022,\5\ and the Commission has 
received no comments regarding the substance of the changes proposed in 
the Advance Notice.\6\ The Commission is hereby providing notice of no 
objection to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ See Notice of Filing infra note 5, at 87 FR 1814.
    \5\ Securities Exchange Act Release No. 93915 (Jan. 6, 2022), 87 
FR1814 (Jan. 12, 2022) (File No. SR-OCC-2021-803) (``Notice of 
Filing''). On December 23, 2021, OCC also filed a related proposed 
rule change (SR-OCC-2021-014) with the Commission pursuant to 
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder 
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. In the Proposed Rule Change, which was published in 
the Federal Register on January 12, 2022, OCC seeks approval of 
proposed changes to its rules necessary to implement the Advance 
Notice. Securities Exchange Act Release No. 93916 (Jan. 6, 2022), 87 
FR 1819 (Jan. 12, 2022) (File No. SR-OCC-2021-014). The comment 
period for the related Proposed Rule Change filing closed on 
February 2, 2022.
    \6\ A comment letter addressed market conduct generally; 
however, additional discussion is unnecessary because the substance 
of the letter does not bear on the basis for the Commission's 
decision not to object to the proposal. Comments on the Advance 
Notice are available at https://www.sec.gov/comments/sr-occ-2021-803/srocc2021803.htm. Since the proposal contained in the Advance 
Notice was also filed as a proposed rule change, all public comments 
received on the proposal are considered regardless of whether the 
comments are submitted on the Proposed Rule Change or the Advance 
Notice.
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II. Background \7\
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    \7\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    OCC is proposing to adopt a policy governing OCC's cash and 
investment practices (the ``Cash and Investment Management Policy'' or 
``Policy'') and amend its rules regarding access to Clearing Fund 
contributions to address the failure of an investment counterparty to 
return Clearing Member cash collateral, which would also allow OCC to 
use such collateral to access its revolving credit facility.

A. Policy Regarding Cash and Related Investments

    OCC's current rules include provisions governing the management and 
investment of OCC's own funds and cash deposited by Clearing Members. 
Pursuant to its rules, OCC's Board of Directors (``Board'') may invest 
funds in excess of the amount needed as working capital in Government 
securities or such other securities or financial instruments.\8\ 
Further, OCC's Rules allow for the investment of cash deposited in 
respect of a Clearing Member's margin requirements or Clearing Fund 
contributions by OCC for its account in Government securities.\9\ OCC 
proposes to add its Cash and Investment Management Policy to its 
current investment related rules.\10\
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    \8\ See By-Law Art. IX, Sec. 1.
    \9\ See OCC Rule 604(a); Rule 1006(c).
    \10\ See Notice of Filing, 87 FRat 1815.
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    The proposed Cash and Investment Management Policy (i) outlines the 
safeguarding standards for cash and related investments managed by OCC 
to minimize credit and liquidity risk, and (2) provides guidelines for 
investments permitted by OCC's rules as described above. With regard to 
safeguarding cash, the Policy would allow OCC to hold OCC Cash \11\ and 
Clearing Member Cash \12\ in demand deposit accounts with commercial 
banks or in accounts at a Federal Reserve Bank. Consistent with OCC's 
current rules, the Policy would require OCC to move all margin and 
Clearing Fund cash related to a suspended Clearing Member into a 
liquidating settlement account for use in meeting the obligations of 
the Clearing Member.\13\ The Policy would also require that OCC employ 
a bank account structure that segregates customer funds per applicable 
regulatory

[[Page 10263]]

requirements \14\ and OCC's By-Laws and Rules.\15\
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    \11\ Under the proposed Policy, OCC Cash would include working 
capital related to future operating costs, inclusive of financial 
resources held to meet liquidity and resiliency requirements, 
proceeds from lines of credit, if any, maintained to support OCC's 
working capital, and investments made with OCC Cash. OCC Cash would 
also include OCC's Minimum Corporate Contribution. See Securities 
Exchange Act Release No. 92038 (May 27, 2021), 86 FR 29861 (Jun. 3, 
2021) (File No. SR-OCC-2021-003) (establishing a persistent minimum 
level of OCC's own capital that it would contribute to default 
losses or liquidity shortfalls prior to allocating a default loss to 
the Clearing Fund contributions of non-defaulting Clearing Members). 
OCC Cash would not include cash held in respect of OCC's pension 
plan, post-retirement welfare plan, or other deferred compensation 
plans.
    \12\ Under the proposed Policy, Clearing Member Cash would 
include cash collateral deposited as margin or Clearing Fund 
contributions, cash held in liquidating settlement accounts for 
suspended Clearing Members pursuant to OCC's Rule 1104, and 
investments made with Clearing Member Cash. Clearing Member Cash 
would also include proceeds from OCC's syndicated credit facility 
and liquidity facilities. See Securities Exchange Act Release No. 
88971 (May 28, 2020), 85 FR 34257 (Jun. 3, 2020) (File No. SR-OCC-
2020-804) (discussing OCC's revolving credit facility); Securities 
Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 36444 (Jun. 
16, 2020) (File No. SR-OCC-2020-803) (discussing OCC's non-bank 
liquidity facility).
    \13\ See OCC Rule 1104.
    \14\ See 17 CFR 39.15 (requiring a derivatives clearing 
organization to comply with the segregation requirements section 4d 
of the Commodity Exchange Act).
    \15\ See OCC By-Laws Art. VI, Sec. 3(f) (providing for 
maintenance of segregated futures accounts).
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    With regard to investments, the Policy would provide that OCC's 
investment strategy is to preserve principal and maintain adequate 
liquidity. OCC outlines its specific investment in internal procedures, 
but will publish its investment strategy in its Qualitative Disclosures 
posted to OCC's public website.\16\ Under the proposed Policy, OCC will 
invest only with counterparties that meet the financial and operational 
standards outlined in OCC's procedures concerning its banking 
relationships.\17\
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    \16\ OCC's Qualitative Disclosures are available at https://www.theocc.com/Risk-Management/PFMI-Disclosures.
    \17\ Additionally, OCC's Third-Party Risk Management Framework 
describes the basis for evaluating financial institutions based on 
financial resources and operational capacity, such as whether a 
relationship is structured to allow prompt access to assets and 
whether a custodian is a supervised and regulated institution that 
adheres to generally accepted accounting practices, maintains 
safekeeping procedures, and has controls that fully protect these 
assets. See Securities Exchange Act Release No. 90797 (Dec. 23, 
2021), 85 FR 86592, 86593 (Dec. 30, 2021) (File No. SR-OCC-2020-
014).
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    The Policy would affirm OCC's current practice of not investing 
Clearing Fund cash, which is instead maintained in accounts at a 
Federal Reserve Bank or a commercial bank. The Policy would also limit 
the investment of margin cash to instruments that provide liquidity to 
OCC by the following business day. In contrast, the Policy would not 
limit the investment of OCC cash in excess of 110 percent of its Target 
Capital Requirement \18\ to overnight transactions. Further, the Policy 
would require procedures to ensure that end-of-day margin cash balances 
remain above the aggregate level of any Required Cash Deposits to 
support OCC's management of liquidity risk.\19\ Under the Policy, 
interest or gain received on investments will belong to OCC except as 
otherwise provided for in OCC's rules.\20\
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    \18\ OCC's Target Capital Requirement is the amount of 
shareholders' equity recommended by OCC management and approved by 
the Board to ensure compliance under both the Commission and 
Commodity Futures Trading Commission rules and to keep such 
additional amount the Board may approve for capital expenditures. 
See OCC Rule 101(T)(1).
    \19\ Under its Liquidity Risk Management Framework, OCC may 
require a Clearing Member Group to post cash collateral to 
supplement OCC's Available Liquidity Resources when stressed 
liquidity demands for that Clearing Member Group are above 
established thresholds or until the settlement demand is met. See 
Exchange Act Release No. 89014 (Jun. 4, 2020), 85 FR 35446, 35449 
(Jun. 10, 2020) (File No. SR-OCC-2020-003).
    \20\ See e.g., Securities Exchange Act Release No. 82502 (Jan. 
12, 2018), 82 FR 2825, 2826 (Jan. 19, 2018) (File No. SR-OCC-2017-
009) (stating that OCC would pass interest income earned on Clearing 
Fund cash deposited at a Federal Reserve Bank through to its 
Clearing Members).
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B. Access to Clearing Fund Contributions

    OCC's current Rules define the conditions under which OCC may use 
Clearing Fund assets to make good losses or expenses suffered by OCC or 
by the Clearing Fund with regard to borrowings made by OCC.\21\ OCC's 
rules also define the conditions under which OCC may borrow Clearing 
Fund assets.\22\ OCC's Rules address OCC's authority to access Clearing 
Fund assets related to the failure of a bank or clearing organization 
to perform its obligations to OCC, but not the failure of an investment 
counterparty. OCC proposes a series of changes to its Rules, described 
below, to broaden OCC's authority to access Clearing Fund assets to 
address the potential failure of an investment counterparty to meet its 
obligations to OCC. Such changes would also align with modifications to 
OCC's revolving credit facility.\23\
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    \21\ See OCC Rule 1006(a) and (c).
    \22\ See OCC Rule 1006(f).
    \23\ See Notice of Filing, 87 Fed. Reg at1817. In anticipation 
of the proposed changes, OCC modified the permitted uses set forth 
in the credit agreement, implemented on June 21, 2021, to align with 
the proposed changes to OCC Rule 1006. Id. OCC provided a summary of 
the terms and conditions for the 2021 credit agreement in a 
confidential Exhibit 3 to the Advance Notice. Id.
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    OCC proposes to amend its Rules 1006(a) and (c) to add ``investment 
counterparty'' to the list of counterparties whose failure to perform 
any obligation to OCC when due because of its bankruptcy, insolvency, 
receivership, suspension of operations, or any similar event that 
causes OCC to sustain a loss. OCC also proposes to amend its Rule 
1006(f) to authorize OCC to take possession of cash or securities 
deposited by Clearing Members as contributions to the Clearing Fund and 
securities in which OCC has invested Clearing Fund cash contributions 
if OCC reasonably believes it necessary to borrow to meet its liquidity 
needs for same day settlement as a result of the failure of an 
investment counterparty. The proposed changes to Rules 1006(a), (c), 
and (f) would limit access, however, to failures with respect to cash 
invested under OCC's Rules 604(a) and 1002(c), which deal with margin 
cash and Clearing Fund cash contributions, respectively.
    OCC is also proposing to restate and reorganize Rule 1006(f), which 
currently consists of a single paragraph, into four subparagraphs with 
the following headings: (1) Conditions; (2) Uses; (3) Term; Clearing 
Fund Charge; and (4) Substitution Requests. To eliminate a potential 
inconsistency with Rule 1006(c), OCC would revise the condition 
triggering OCC's access to the Clearing Fund from failure ``to achieve 
daily settlement'' to failure ``to perform any obligation to the 
Corporation when due.'' The proposed changes to 1006(f) also include 
the removal of a gendered pronoun and other administrative changes.

III. Discussion and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: To mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for SIFMUs and 
strengthening the liquidity of SIFMUs.\24\
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    \24\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe regulations containing risk management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency.\25\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \26\
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    \25\ 12 U.S.C. 5464(a)(2).
    \26\ 12 U.S.C. 5464(b).
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    <bullet> To promote robust risk management;
    <bullet> to promote safety and soundness;
    <bullet> to reduce systemic risks; and
    <bullet> to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk 
management standards may address such areas as risk management and 
default policies and procedures, among other areas.\27\
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    \27\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\28\ The Clearing Agency 
Rules require,

[[Page 10264]]

among other things, each covered clearing agency to establish, 
implement, maintain, and enforce written policies and procedures that 
are reasonably designed to meet certain minimum requirements for its 
operations and risk management practices on an ongoing basis.\29\ As 
such, it is appropriate for the Commission to review advance notices 
against the Clearing Agency Rules and the objectives and principles of 
these risk management standards as described in Section 805(b) of the 
Clearing Supervision Act. As discussed below, the Commission believes 
the changes proposed in the Advance Notice are consistent with the 
objectives and principles described in Section 805(b) of the Clearing 
Supervision Act,\30\ and in the Clearing Agency Rules, in particular 
Rules 17Ad-22(e)(13) and (16).\31\
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    \28\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See 
also Covered Clearing Agency Standards, 81 FR 70786. OCC is a 
``covered clearing agency'' as defined in Rule 17Ad-22(a)(5).
    \29\ 17 CFR 240.17Ad-22.
    \30\ 12 U.S.C. 5464(b).
    \31\ 17 CFR 240.17Ad-22(e)(13) and 17 CFR 240.17Ad-22(e)(16).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposal contained in OCC's 
Advance Notice is consistent with the stated objectives and principles 
of Section 805(b) of the Clearing Supervision Act. Specifically, as 
discussed below, the Commission believes that the changes proposed in 
the Advance Notice are consistent with promoting robust risk 
management, promoting safety and soundness, reducing systemic risks, 
and supporting the stability of the broader financial system.\32\
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    \32\ 12 U.S.C. 5464(b).
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    The Commission believes that the addition of the Cash and 
Investment Management Policy to OCC's rules is consistent with the 
promotion of robust risk management. As described above, the Policy 
would build on OCC's current rules for managing cash and investments. 
The Policy includes standards for safeguarding OCC Cash and Clearing 
Fund Cash through the application of OCC's counterparty standards. 
Further, the Policy includes limitations on the tenure of investments 
to support OCC's liquidity risk management practices. The Commission 
believes that adding the Policy to OCC's rules will support OCC's 
management of risk with regard to the safeguarding of funds and 
investments.
    The Commission also believes that the proposed changes to broaden 
OCC's authority to access Clearing Fund contributions are consistent 
with the promotion of safety and soundness. Ensuring that OCC has the 
authority to access Clearing Fund contributions to contain losses and 
shortfalls would reduce the likelihood that OCC would have insufficient 
financial resources to address such losses and shortfalls, which in 
turn would enhance the safety and soundness of OCC. Further, the 
Commission believes that, to the extent the proposed changes are 
consistent with promoting OCC's safety and soundness, they are also 
consistent with supporting the stability of the broader financial 
system. OCC has been designated as a SIFMU, in part, because its 
failure or disruption could increase the risk of significant liquidity 
or credit problems spreading among financial institutions or 
markets.\33\ As noted above, the Commission believes that the proposed 
changes would support OCC's ability to continue providing services to 
the options markets by addressing losses and shortfalls arising out of 
the default of a Clearing Member. OCC's continued operations would, in 
turn, help support the stability of the financial system by reducing 
the risk of significant liquidity or credit problems spreading among 
market participants that rely on OCC's central role in the options 
market.
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    \33\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited Feb. 17, 2022).
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    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Advance Notice are consistent with 
Section 805(b) of the Clearing Supervision Act.\34\
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    \34\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(13) Under the Exchange Act

    Rule 17Ad-22(e)(13) under the Exchange Act requires, among other 
things, that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
ensure the covered clearing agency has the authority to take timely 
action to contain losses and liquidity demands and continue to meet its 
obligations.\35\
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    \35\ 17 CFR 240.17Ad-22(e)(13).
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    As the Commission has observed previously, OCC relies on the 
resources in its Clearing Fund to manage the potential losses arising 
out of the default of a Clearing Member under extreme but plausible 
market conditions.\36\ Similarly, OCC relies on such resources to 
manage potential liquidity shortfalls arising out of the default of a 
Clearing Member under extreme but plausible market conditions.\37\ In 
the event of a Clearing Member default, OCC's inability to access the 
defaulter's cash collateral due to the failure of an investment 
counterparty could inhibit OCC's ability to contain losses and 
liquidity demands unless it has access to the Clearing Fund 
contributions of non-defaulting Clearing Members. Further, the 
Commission believes that the proposed changes to restate and reorganize 
Rule 1006(f) would provide clarity to such authority. As described 
above, the proposed changes would increase OCC's authority to access 
Clearing Fund contributions to address losses or shortfalls arising out 
of the failure of an investment counterparty to perform with regard to 
investments of margin cash or Clearing Fund cash and such changes would 
align with the terms of OCC's revolving credit agreement.
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    \36\ See Securities Exchange Act Release No. 87717 (Dec. 11, 
2019), 84 FR 68985, 68987 (Dec. 17, 2019) (File No. SR-OCC-2019-
009).
    \37\ See Securities Exchange Act Release No. 89014 (Jun. 4, 
2020), 85 FR 35446, 35450 (Jun. 10, 2020) (File No. SR-OCC-2020-003) 
(stating that cash contributions to the Clearing fund serve as an 
important source of liquidity and that non-cash contributions 
provide a source of collateral necessary for OCC to access sources 
of liquidity).
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    The Commission believes, therefore, that the proposed changes to 
broaden OCC's authority to access to Clearing Fund contributions are 
consistent with Rule 17Ad-22(e)(13) under the Exchange Act.\38\
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    \38\ 17 CFR 240.17Ad-22(e)(13).
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C. Consistency With Rule 17Ad-22(e)(16) Under the Exchange Act

    Rule 17Ad-22(e)(16) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to safeguard its own and 
its participants' assets, minimize the risk of loss and delay in access 
to these assets, and invest such assets in instruments with minimal 
credit, market and liquidity risks.\39\ In adopting Rule 17Ad-
22(e)(16), the Commission provided guidance for consideration by 
covered clearing agencies.\40\ Such guidance included the consideration 
of whether a covered clearing agency's investment strategy is 
consistent with its overall risk management strategy and fully 
disclosed to participants.\41\
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    \39\ 17 CFR 240.17Ad-22(e)(16).
    \40\ Covered Clearing Agency Standards, 81 FR at 70837.
    \41\ Id.
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    The Commission believes that the proposed Cash and Investment 
Management Policy would support and enhance OCC's current rules 
regarding the investment of its and its participants' cash assets. As 
described above, the Policy outlines safeguarding standards, such as 
allowing OCC Cash and Clearing Member Cash to be

[[Page 10265]]

deposited only in a Federal Reserve Bank or in demand deposit accounts 
with institutions that meet the standards set out in OCC's current risk 
management strategy (e.g., OCC's Third Party Risk Management Framework) 
to minimize the risk of loss or delay in access to such funds. The 
Commission believes further that limiting the investment of cash to 
Government Securities, and specifically limiting the investment of 
Clearing Member Cash to instruments that provide liquidity to OCC by 
the following business day, is consistent with investing in assets with 
minimal credit, market and liquidity risks.\42\
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    \42\ The Policy would allow OCC to invest its own cash in 
longer-tenured instruments only where such cash is in excess of 110 
percent of OCC's Target Capital Requirement.
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    The Commission believes, therefore, that the addition of the Cash 
and Investment Management Policy to OCC's rules is consistent with Rule 
17Ad-22(e)(16) under the Exchange Act.\43\
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    \43\ 17 CFR 240.17Ad-22(e)(16).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-OCC-2021-803) and that OCC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-OCC-
2021-014, whichever is later.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03824 Filed 2-22-22; 8:45 am]
BILLING CODE 8011-01-P