Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 2825 

21 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Unless specified otherwise, capitalized terms 

shall have the meaning OCC ascribes in its By-Laws 

and Rules. 

4Exchange Act Release No. 82156 (Nov. 27, 

2017), 82 FR 57015 (Dec. 1, 2017) (SR–OCC–2017– 

019) (‘‘Notice’’). 

5Two comment letters were submitted to the 

Commission expressing approval of the proposed 

rule change. See Letter from Rosa Beltran dated 

Nov. 28, 2017; Letter from Michael Kitlas dated 

Nov. 27, 2017. 

6See Exchange Act Release No. 81058 (June 30, 

2017), 82 FR 31371 (July 6, 2017) (SR–OCC–2017– 

803); Exchange Act Release No. 76641 (Dec. 14, 

2015), 80 FR 79114 (Dec. 18, 2015) (SR–OCC–2015– 

805). Both facilities allow OCC to obtain cash in 

exchange for Government securities 60 minutes 

after notice is given and collateral is posted. 7OCC represented that it performed an analysis 

of its stress liquidity demands based on a 1-in-70 

year hypothetical market event. Specifically, OCC 

started its analysis by selecting the largest historical 

peak monthly settlements that occurred over the 

historical look-back period of data generated by the 

stress test system. It then also selected certain large 

non-expiration days to supplement the analysis. 

From this it estimated the mark-to-market and cash 

settled exercise and assignment obligations for the 

members driving the historical peak demand under 

the proposed stress tests scenario to determine the 

stressed peak demand. 

proposed rule change (SR–NYSEAMER– 

2017–26) be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.21

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–00855 Filed 1–18–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82502; File No. SR–OCC– 

2017–019] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Approving Proposed Rule Change, as 

Modified by Amendment No. 1, 

Concerning The Options Clearing 

Corporation’s Adoption of a New 

Minimum Cash Requirement for the 

Clearing Fund 

January 12, 2018 

I. Introduction 

The Options Clearing Corporation 

(‘‘OCC’’), on November 14, 2017, filed 

with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

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

Exchange Act of 1934 (‘‘Exchange 

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

proposed rule change (SR–OCC–2017– 

019) to propose a new minimum cash 

contribution requirement for its Clearing 

Fund 3 (‘‘Cash Clearing Fund 

Requirement’’) and also provide for the 

pass-through interest income earned on 

such deposits to its Clearing Members. 

On November 22, 2017, OCC filed 

Amendment No. 1 to the proposed rule 

change, which made clarifications 

regarding the calculation of the interest 

earned on deposits. The proposed rule 

change was published for comment in 

the Federal Register on December 1, 

2017.4 The Commission received two 

comments regarding the proposed 

change.5 For the reasons discussed 

below, the Commission is approving the 

proposed rule change. 

II. Description of the Proposed Rule 

Change 

OCC maintains a Clearing Fund, 

composed of contributions required to 

be made by all Clearing Members, to 

satisfy losses suffered by OCC under a 

number of circumstances, including the 

default or failure of a Clearing Member 

to meet any obligation for which OCC 

may be responsible in the exercise of its 

duties as a central counterparty. 

Presently, Article VIII, Section 3(a) of 

OCC’s By-Laws provides that Clearing 

Fund contributions shall be in the form 

of cash and Government securities, but 

neither OCC’s By-Laws nor Rules 

provides a minimum cash requirement 

for contributions to the Clearing Fund. 

Article VIII, Section 4(a) of OCC’s ByLaws allows for OCC to invest cash 

contributions to the Clearing Fund, 

partially or wholly, in OCC’s account in 

Government securities, and to the extent 

that such contributions are not so 

invested, they shall be deposited by 

OCC in a separate account or accounts 

for Clearing Fund contributions in 

approved custodians. Article VIII, 

Section 4(a) of OCC’s By-Laws, 

however, presently does not account for 

the treatment of interest earned on cash 

deposits held in OCC’s bank account at 

the Federal Reserve. 

A. Proposed Change To Establish the 

Cash Clearing Fund Requirement 

OCC proposed to establish a Cash 

Clearing Fund Requirement for its 

Clearing Fund to increase the amount of 

qualifying liquid resources available to 

OCC to account for the event there is an 

extreme scenario in the financial 

markets and OCC has to address any 

resultant liquidity demands. Further, 

the proposal sought to ensure that OCC 

holds, and maintains access to, a more 

consistent level of cash clearing fund 

resources in its available prefunded 

financial resources. Specifically, the 

proposed rule change would require 

that Clearing Members collectively 

contribute $3 billion in cash to the 

Clearing Fund. Each Clearing Member’s 

proportionate share of the Cash Clearing 

Fund Requirement shall be determined 

by the current Clearing Fund allocation 

methodology in OCC Rule 1001. 

OCC’s current liquidity resources are 

sized to cover historically observed 

liquidity demands and potential 

demands based on forecasts with a 12 

month time horizon. The sizing 

calculations, in turn, are based on the 

potential exposure resulting from the 

default of a single clearing member. 

Further, the current clearing fund is 

sized, at a minimum, to ensure that OCC 

maintains sufficient collateral to access 

its committed liquidity facilities. OCC 

represented that it maintains committed 

liquidity facilities of $3 billion to cover 

its calculated historical and forecasted 

demands.6

After analyzing its liquidity demands 

in extreme stress scenarios,7 OCC 

determined that it would propose the $3 

billion Cash Clearing Fund Requirement 

to increase the amount and reliability of 

its liquid resources. OCC represented 

that, based upon its analysis, the peak 

stressed liquidity demands of the largest 

or two largest Clearing Members, which 

normally occur in conjunction with 

certain monthly expirations, could 

exceed the capacity of OCC’s current 

committed liquidity facilities. Although 

OCC believes that it would be able to 

cover the resulting shortfall with cash 

already present in the Clearing Fund, 

OCC stated that it could not rely on 

such cash always being available 

because, under OCC’s current By-Laws 

and Rules, there is no ability for OCC to 

ensure that a minimum amount of cash 

is maintained in the Clearing Fund at all 

times. As a result, OCC believes that the 

proposed $3 billion Cash Clearing Fund 

Requirement, combined with OCC’s $3 

billion of committed liquidity facilities, 

would provide liquid resources 

sufficient to cover the peak stressed 

liquidity demands of the largest one or 

two Clearing Members observed in the 

analysis. 

B. Proposed Change To Allow 

Temporary Increase of Cash Clearing 

Fund Requirement 

The proposed change would also 

provide authority for OCC to 

temporarily increase the amount of the 

Cash Clearing Fund Requirement. OCC’s 

Executive Chairman, Chief 

Administrative Officer (‘‘CAO’’), or 

Chief Operating Officer (‘‘COO’’), would 

have the authority, upon providing 

notice to the Risk Committee, to 

temporarily raise the Cash Clearing 

Fund Requirement up to an amount that 

includes the size of the Clearing Fund 


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2826 Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 

8However, OCC represented that it would not 

decrease the Cash Clearing Fund Requirement 

while the regulatory approvals for a change in the 

Cash Clearing Fund Requirement are being obtained 

to ensure that OCC continues to maintain sufficient 

liquid resources to cover its liquidity demands 

during that time. 

9While interest income earned by OCC from its 

bank account at the Federal Reserve would be 

passed on to its Clearing Members, OCC anticipates 

that it would charge a cash management fee to cover 

associated costs (i.e., administrative and similar 

costs). OCC would file a separate proposed rule 

change with the Commission, subject to receiving 

all necessary regulatory approvals for the proposed 

changes described herein, prior to implementing 

any cash management fee. 

10 15 U.S.C. 78s(b)(2)(C). 

11 15 U.S.C. 78q–1(b)(3)(F); 17 CFR 240.17Ad– 

22(e)(7). 

12 15 U.S.C. 78q–1(b)(3)(F). 

as determined in accordance with Rule 

1001 for the month in question. A 

Clearing Member will be required to 

satisfy any increase in its required cash 

contribution pursuant to an increase in 

the Cash Clearing Fund Requirement no 

later than one hour before the close of 

the Fedwire on the business day 

following OCC’s issuance of an 

instruction to increase cash 

contributions. 

In such circumstances, the Risk 

Committee, by rule, would be obligated 

to review any such temporary increase 

as soon as practicable, but in any event 

within 20 calendar days of the increase. 

In its review, the Risk Committee shall 

determine whether (1) the increase in 

the minimum Cash Clearing Fund 

Requirement is no longer required, or 

(2) OCC’s Clearing Fund contribution 

requirements and other related rules 

should be modified to ensure that OCC 

continues to maintain sufficient liquid 

resources to cover its largest aggregate 

payment obligations in extreme but 

plausible market conditions. In the 

event that the Risk Committee would 

determine to permanently increase the 

Cash Clearing Fund Requirement, OCC 

would initiate any regulatory approval 

process required to effect such a 

change.8

OCC acknowledged that increasing 

the Cash Clearing Fund Requirement 

could impose a liquidity constraint on 

its clearing members. Accordingly, OCC 

has proposed to limit the circumstances 

in which it could make such an 

increase. By rule, OCC would only be 

able to exercise this authority to protect 

OCC, its clearing members, or the 

general public. Further, any Cash 

Clearing Fund Requirement increase 

would have to: (i) Be based upon thenexisting facts and circumstances, (ii) be 

in furtherance of the integrity of OCC 

and the stability of the financial system, 

and (iii) take into consideration the 

legitimate interests of Clearing Members 

and market participants. 

These changes would be reflected in 

new paragraph (a)(i) of Section 3 of 

Article VIII of OCC’s By-Laws, as well 

as in new Interpretation and Policy .04 

to Section 3 of Article VIII. 

C. Proposed Changes to Pass-Through 

Interest on Clearing Fund Cash to 

Clearing Members 

Under the proposal, OCC stated that 

substantially all the cash deposits in the 

Clearing Fund would be held in an 

account established by OCC at a Federal 

Reserve Bank. OCC proposes that it 

would pass the interest income earned 

in such account through to its Clearing 

Members. Specifically, OCC proposes to 

revise Article VIII, Section 4(a) of OCC’s 

By-Laws to provide that any interest 

earned on cash deposits held at an 

account at the Federal Reserve shall 

accrue to the benefit of Clearing 

Members (calculated daily based on 

each Clearing Member’s pro rata share 

of Clearing Fund cash deposits), 

provided that such Clearing Members 

have provided OCC with all tax 

documentation as OCC may from time 

to time require in order to effectuate 

such payment. 

To accommodate the pass through of 

interest income, OCC would also amend 

its Fee Policy to add definitions for 

‘‘Pass-Through Interest Revenue’’ and 

‘‘Operating Expenses’’ to exclude from 

the calculation of the Business Risk 

Buffer projected interest revenue and 

expense, respectively, related to the 

pass-through of earned interest from 

OCC to Clearing Members.9 OCC also 

proposes to add a new example of the 

Business Risk Buffer calculation 

reflecting this change and make 

clarifying changes throughout the policy 

to incorporate the use of the new 

defined terms. In addition, OCC 

proposes to amend the Fee Policy to 

remove references to ‘‘Proposed Rule 

17Ad–22(e)(15)’’ to reflect the adoption 

of the Commission’s Covered Clearing 

Agency Standards. 

D. Proposed Conforming Changes 

In conjunction with the 

aforementioned changes, OCC is also 

proposing to make four related 

conforming changes. First, OCC 

proposes to revise Interpretation and 

Policy .01 of Rule 1001 to reflect that 

the new minimum Clearing Fund size is 

$3 billion (instead of $1 billion) plus 

110% of the size of OCC’s committed 

liquidity facilities, which conforms to 

the Cash Clearing Fund Requirement. 

Second, OCC proposes to amend the 

definition of ‘‘Approved Custodian’’ in 

Article I, Section 1 of the By-Laws to 

clarify that the Federal Reserve Bank 

may also be an Approved Custodian, to 

the extent it is available to OCC. Third, 

OCC is proposing to delete existing 

Article VIII, Section 4(b), regarding the 

establishment of a segregated funds 

account for cash contributions to the 

Clearing Fund. The segregated funds 

account allows a Clearing Member to 

contribute cash to a bank or trust 

company account maintained in the 

name of OCC, subject to OCC’s 

exclusive control, but the account also 

includes the name of the Clearing 

Member and any interest accrues to the 

Clearing Member rather than OCC. OCC 

proposes to eliminate this account type 

because Clearing Members have not 

expressed interest in using such an 

account, no such accounts are in use 

today, and moving forward, 

substantially all cash Clearing Fund 

contributions will held in OCC’s 

account at the Federal Reserve Bank. 

Fourth, OCC proposes to introduce new 

language to Article VIII, Section 4(a) to 

clarify that cash contributions to the 

Clearing Fund that are deposited at 

approved custodians may be 

commingled with the Clearing Fund 

contributions of different Clearing 

Members. 

III. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Exchange 

Act directs the Commission to approve 

a proposed rule change of a selfregulatory organization if it finds that 

such proposed rule change is consistent 

with the requirements of the Exchange 

Act and the rules and regulations 

thereunder applicable to such 

organization.10 After carefully 

considering the proposed rule change 

and the two comment letters submitted, 

the Commission finds that the proposed 

rule change is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

applicable to OCC. More specifically, 

the Commission finds that the proposal 

is consistent with Section 17A(b)(3)(F) 

of the Exchange Act and Rule 17Ad– 

22(e)(7) under the Exchange Act.11

A. Consistency With Section 

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

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

Act requires that the rules of a registered 

clearing agency be designed to do, 

among other things, promote the prompt 

and accurate clearance and settlement of 

securities transactions and, in general, 

protect investors and the public 

interest.12 Based on the analysis 

provided by OCC, the Commission 

believes that OCC’s conclusion is 


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Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 2827 

13 15 U.S.C. 78q–1(b)(3)(F). 

14 17 CFR 240.17Ad–22(e)(7). 

15 17 CFR 240.17Ad–22(e)(7). 

16 17 CFR 240.17Ad–22(e)(7)(i). 

17 17 CFR 240.17Ad–22(e)(7)(iii). 

18 17 CFR 240.17Ad–22(e)(7)(viii). 

19 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

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

20 17 CFR 200.30–3(a)(12). 

reasonable, i.e., that under certain 

stressed conditions as set forth in the 

analysis, the peak stressed liquidity 

demands of the largest clearing member 

could exceed the size of OCC’s 

committed liquidity facilities. Moreover, 

the Commission understands that OCC 

is unable to rely on the likelihood that 

there will always be deposits of cash in 

the Clearing Fund sufficient to cover 

such demands because, under its 

current By-laws and Rules, there is no 

ability for OCC to ensure that a 

minimum amount of cash is maintained 

in the Clearing Fund at all times. 

Therefore, there is a risk that OCC could 

face liquidity shortfalls in the event of 

a default by a clearing member whose 

payment obligations exceed OCC’s 

liquid resources. 

OCC determined to address this risk 

by proposing to establish the Cash 

Clearing Fund Requirement. 

Establishing the Cash Clearing Fund 

Requirement would provide OCC with 

more qualifying liquid resources, which, 

in turn, enhances OCC’s ability to cover 

payment obligations that could arise in 

stressed conditions. Therefore, the 

Commission believes that this outcome 

would enhance OCC’s ability to manage 

its liquidity risk exposure, thereby 

promoting prompt and accurate 

clearance and settlement of securities 

transactions. 

Further, the proposal to give OCC the 

authority to temporarily increase the 

Cash Clearing Fund Requirement gives 

OCC additional means to address 

liquidity shortfalls in extreme scenarios. 

Therefore, the Commission believes that 

increasing the amount of cash, and thus 

the overall amount of qualifying liquid 

resources, available to cover OCC’s 

liquidity demands arising in stressed 

scenarios is consistent with the 

promotion of prompt and accurate 

clearance and settlement of securities 

transactions. 

OCC is the sole registered clearing 

agency for the U.S. listed options 

markets. As such, it is important for 

OCC to implement measures that 

enhance its ability to manage risks that 

could cause a financial loss or 

settlement disruption and threaten the 

stability of the U.S. listed options 

markets and the broader financial 

system. The Commission believes that 

the proposed change is designed to 

enhance OCC’s ability to continue to 

make timely settlement of payment 

obligations and otherwise service the 

U.S. options markets while in the midst 

of experiencing an extreme market event 

in the form of the default of up to two 

of its largest clearing members. As such, 

the Commission believes the proposed 

change is consistent with the protection 

of investors and the public interest. 

Accordingly, the Commission finds 

that the proposed rule change is 

consistent with Section 17A(b)(3)(F) of 

the Exchange Act.13

B. Consistency With Rule 17Ad–22(e)(7) 

of the Exchange Act 

The Commission further believes that 

the proposed change is consistent with 

Rule 17Ad–22(e)(7) under the Exchange 

Act, which requires that a covered 

clearing agency establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

effectively measure, monitor, and 

manage its liquidity risk.14 This 

includes measuring, monitoring, and 

managing the covered clearing agency’s 

settlement and funding flows on an 

ongoing and timely basis, as well as its 

use of intraday liquidity.15 The 

Commission believes that the proposed 

change is consistent with several 

particular sub-parts of Rule 17Ad– 

22(e)(7), which require that OCC’s 

liquidity risk management policies and 

procedures be reasonably designed to 

achieve the following: 

• Maintaining sufficient liquid 

resources at the minimum in all relevant 

currencies to effect same-day and, 

where appropriate, intraday and 

multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

foreseeable stress scenarios that 

includes, but is not limited to, the 

default of the participant family that 

would generate the largest aggregate 

payment obligation for the covered 

clearing agency in extreme but plausible 

market conditions; 16

• using the access to accounts and 

services at a Federal Reserve Bank or 

other relevant central bank, when 

available and where the board of 

directors of the covered clearing agency 

has determined that it would be 

practical to enhance its management of 

liquidity risk;17 and 

• addressing foreseeable liquidity 

shortfalls that would not be covered by 

a covered clearing agency’s liquid 

resources and seeking to avoid 

unwinding, revoking, or delaying the 

same-day settlement of payment 

obligations.18

By proposing the Cash Clearing Fund 

Requirement and increasing the amount 

of qualifying liquid resources available 

to cover OCC’s liquidity demands 

arising in stressed scenarios, OCC has 

taken measures consistent with the 

requirement in Rule 17Ad–22(e)(7)(i) 

that it maintain sufficient liquid 

resources to effect settlement of its 

payment obligations with a high degree 

of confidence under a wide range of 

foreseeable stress scenarios. OCC also 

represented that substantially all of 

OCC’s Clearing Fund deposits 

consisting of cash would be held in an 

account established by OCC at a Federal 

Reserve Bank and further clarified that 

interest earned in such an account 

would be paid to its members on a 

specified basis. By proposing to use its 

access to accounts at a Federal Reserve 

Bank to support the maintenance of the 

Cash Clearing Fund Requirement, OCC 

has taken measures consistent with the 

requirement in Rule 17Ad–22(e)(7)(iii) 

which provides for using access to a 

central bank account, where available 

and determined to be practical. Further, 

the proposed authority to temporarily 

increase the Cash Clearing Fund 

Requirement is intended to allow OCC 

to address a foreseeable liquidity 

shortfall and is therefore consistent with 

the requirement in Rule 17Ad– 

22(e)(7)(viii) addressing such shortfalls. 

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

change is consistent with the 

requirements of the Exchange Act, and 

in particular, with the requirements of 

Section 17A of the Exchange Act 19 and 

the rules and regulations thereunder. 

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 

that the proposed rule change (SR– 

OCC–2017–019), as modified by 

Amendment No.1, be, and hereby is, 

approved. 

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.20

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–00858 Filed 1–18–18; 8:45 am] 

BILLING CODE 8011–01–P 


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