[Federal Register Volume 83, Number 13 (Friday, January 19, 2018)]
[Notices]
[Pages 2825-2827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00858]


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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Unless specified otherwise, capitalized terms shall have the 
meaning OCC ascribes in its By-Laws and Rules.
    \4\ Exchange Act Release No. 82156 (Nov. 27, 2017), 82 FR 57015 
(Dec. 1, 2017) (SR-OCC-2017-019) (``Notice'').
    \5\ Two 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.
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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 By-Laws 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\
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    \6\ See 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.
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    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.
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    \7\ OCC 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.
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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

[[Page 2826]]

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\
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    \8\ However, 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.
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    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 then-existing 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.
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    \9\ While 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.
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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 self-regulatory 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\
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    \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).
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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

[[Page 2827]]

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.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    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\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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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:
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    \14\ 17 CFR 240.17Ad-22(e)(7).
    \15\ 17 CFR 240.17Ad-22(e)(7).
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    <bullet> 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\
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    \16\ 17 CFR 240.17Ad-22(e)(7)(i).
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    <bullet> 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
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    \17\ 17 CFR 240.17Ad-22(e)(7)(iii).
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    <bullet> 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\
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    \18\ 17 CFR 240.17Ad-22(e)(7)(viii).
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    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.
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    \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).
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    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.
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    \20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-00858 Filed 1-18-18; 8:45 am]
 BILLING CODE 8011-01-P