3224 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 

276 15 U.S.C. 78s(b)(2). 

277 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4(n)(1)(i). 

3OCC has filed a proposed rule change with the 

Commission in connection with the proposed 

change. See SR–OCC–2017–021. 

4OCC’s By-Laws and Rules can be found on 

OCC’s public website: http://optionsclearing.com/ 

about/publications/bylaws.jsp. 

5 17 CFR 240.17Ad–22. 

6 17 CFR 240.17Ab2–2. 

7 15 U.S.C. 78q–1. 

8 12 U.S.C. 5461 et. seq. 

9 17 CFR 240.17Ad–22(a)(5). 

10 17 CFR 240.17Ad–22(e)(3)(ii). 

11 Id. 

12OCC maintains a recovery and orderly winddown plan that was prepared in response to 

evolving international standards for CCPs. The 

existing version of OCC’s recovery and orderly 

wind-down plan was prepared in advance of the 

adoption of the CCA rules. 

13As defined by Rule 17Ad–22(e)(3)(ii), those 

scenarios are: ‘‘credit losses, liquidity shortfalls, 

losses from general business risks and other losses.’’ 

17 CFR 240.17Ad–22(e)(3)(ii). 

14See Standards for Covered Clearing Agencies, 

81 FR 70786, 70810 (Oct. 13, 2016). 

15 Id. 

16See 81 FR at 70808. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act 276 that the 

proposed rule change (SR–BatsBZX– 

2017–34), 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.277

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–01093 Filed 1–22–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82514; File No. SR–OCC– 

2017–810] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Advance Notice 

Concerning Updates to and 

Formalization of OCC’s Recovery and 

Orderly Wind-Down Plan 

January 17, 2018. 

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) under the Securities 

Exchange Act of 1934 (‘‘Act’’),2 notice is 

hereby given that on December 8, 2017, 

The Options Clearing Corporation 

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

Exchange Commission (‘‘Commission’’) 

an advance notice as described in Items 

I, II and III below, which Items have 

been prepared by OCC. The Commission 

is publishing this notice to solicit 

comments on the advance notice from 

interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Advance 

Notice 

This advance notice is filed in 

connection with a proposed change to 

formalize and update OCC’s Recovery 

and Orderly Wind-Down Plan (‘‘RWD 

Plan’’ or ‘‘Plan’’), consistent with the 

requirement applicable to OCC in Rule 

17Ad–22(e)(3)(ii). 

The RWD Plan was included as 

confidential Exhibit 5 of the filing.3 The 

proposed change is described in detail 

in Item II below. All terms with initial 

capitalization not defined herein have 

the same meaning as set forth in OCC’s 

By-Laws and Rules.4

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Advance Notice 

In its filing with the Commission, 

OCC included statements concerning 

the purpose of and basis for the advance 

notice and discussed any comments it 

received on the advance notice. The text 

of these statements may be examined at 

the places specified in Item IV below. 

OCC has prepared summaries, set forth 

in sections A and B below, of the most 

significant aspects of these statements. 

(A) Clearing Agency’s Statement on 

Comments on the Advance Notice 

Received From Members, Participants or 

Others 

Written comments were not and are 

not intended to be solicited with respect 

to the proposed rule change and none 

have been received. OCC will notify the 

Commission of any written comments 

received by OCC. 

(B) Advance Notices Filed Pursuant to 

Section 806(e) of the Payment, Clearing, 

and Settlement Supervision Act 

Description of the Proposed Change 

Background 

On September 28, 2016 the 

Commission adopted amendments to 

Rule 17Ad–22 5 and added new Rule 

17Ab2–2 6 pursuant to Section 17A of 

the Securities Exchange Act of 1934 7

and the Payment, Clearing, and 

Settlement Supervision Act of 2010 

(‘‘Payment, Clearing and Settlement 

Supervision Act’’) 8 to establish 

enhanced standards for the operation 

and governance of those clearing 

agencies registered with the 

Commission that meet the definition of 

a ‘‘covered clearing agency,’’ as defined 

by Rule 17Ad–22(a)(5) 9 (collectively, 

the new and amended rules are herein 

referred to as ‘‘CCA’’ rules). The CCA 

rules require that covered clearing 

agencies, among other things: 

[E]stablish, implement, maintain and enforce 

written policies and procedures reasonably 

designed to . . . [m]aintain a sound risk 

management framework for comprehensively 

managing legal, credit, liquidity, operational, 

general business, investment, custody, and 

other risks that arise in or are borne by the 

[CCA], which . . . [i]ncludes plans for the 

recovery and orderly wind-down of the 

[CCA] necessitated by credit losses, liquidity 

shortfalls, losses from general business risk, 

or any other losses.10

OCC is defined as a covered clearing 

agency under the CCA rules, and 

therefore is subject to the requirements 

of the CCA rules, including Rule 17Ad– 

22(e)(3).11

Proposed RWD Plan 

OCC is proposing to update, formalize 

and adopt its RWD Plan.12 Consistent 

with the Commission’s guidance 

concerning the requirements of Rule 

17Ad–22(e)(3)(ii), the purpose of the 

proposed RWD Plan is to (i) 

demonstrate that OCC has considered 

the scenarios which may potentially 

prevent it from being able to provide its 

‘‘Critical Services’’ (defined below) as a 

going-concern,13 (ii) provide 

appropriate plans for OCC’s recovery or 

orderly wind-down based on the results 

of such consideration; 14 and (iii) impart 

to relevant authorities the information 

reasonably anticipated to be necessary 

for purposes of recovery and orderly 

wind-down planning.15

As discussed in greater detail below, 

in preparing the proposed Plan, OCC 

was informed by relevant guidance from 

not only from OCC’s regulators, but also 

from certain international organizations. 

Within the framework of this guidance, 

OCC has drafted the proposed Plan to 

reflect OCC’s specific characteristics, 

including its ownership, organizational, 

and operational structures, as well as 

OCC’s size and systemic importance 

relative to the products that its clears.16

The proposed RWD Plan consists of 

eight chapters. A description of each of 

the first seven chapters of the proposed 

Plan is provided below (Chapter 8 of the 

proposed plan consists of a series of 

appendices containing supporting 

material). 

Chapter 1: Executive Summary 

Chapter 1 of the RWD Plan would 

provide an executive summary and 

overview of the proposed Plan. Chapter 

1 would begin by acknowledging OCC’s 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3225 

17The Financial Stability Oversight Council 

designated OCC a SIFMU on July 18, 2012 pursuant 

to the Payment, Clearing and Settlement 

Supervision Act. See 12 U.S.C. 5463. 

18See 81 FR 70786. 

19CPSS–IOSCO, Principles for financial market 

infrastructures (Apr. 16, 2012), available at http:// 

www.bis.org/publ/cpss101a.pdf. 

20FSB, Recovery and Resolution Planning for 

Systemically Important Financial Institutions: 

Guidance on Identification of Critical Functions 

and Critical Shared Services. 

21CPMI–IOSCO, Recovery of financial market 

infrastructures (published as revised on July 5, 

2017), available at: http://www.bis.org/cpmi/publ/ 

d162.pdf (‘‘Recovery Report’’). 

22CFTC Staff Letter 16–61, available at: http://

www.cftc.gov/idc/groups/public/@lrlettergeneral/ 

documents/letter/16-61.pdf. 

23FSB, Essential Aspects of CCP Resolution 

Planning, (Aug. 16, 2016), available at: http://

www.fsb.org/wp-content/uploads/EssentialAspects-of-CCP-Resolution-Planning.pdf. 

24FSB, Guidance on Central Counterparty 

Resolution and Resolution Planning, (July 5, 2017), 

available at: http://www.fsb.org/wp-content/ 

uploads/P050717-1.pdf. (‘‘CCP Resolution Report’’). 

25CPMI–IOSCO, Resilience of central 

counterparties: further guidance on the PFMI 

(published on July 5, 2017), available at: http://

www.bis.org/cpmi/publ/d163.pdf. 

26The three lines of defense are discussed in 

greater detail in a proposed rule change regarding 

OCC’s ‘‘Risk Management Framework.’’ See 

Securities Exchange Act Release No. 34–81909 (Oct. 

19, 2017), 82 FR 49456 (Oct. 25, 2017) (SR–OCC– 

2017–005). 

27Each of the items listed is discussed in the 

‘‘Subsequent Events’’ section of OCC’s 2016 Annual 

Report, available at: https://www.theocc.com/ 

components/docs/about/annual-reports/occ-2016- 

annual-report.pdf. 

status as a designated Systemically 

Important Financial Market Utility 

(‘‘SIFMU’’) 17 and would recognize that 

the proposed Plan is designed to satisfy 

OCC’s regulatory requirements under 

Rule 17Ad–22(e)(3)(ii). Chapter 1 would 

include a list of relevant guidance that 

was considered by OCC in drafting the 

proposed Plan; the guidance considered 

by OCC includes, but is not limited to, 

the materials listed below: 

• The sections of the preamble to the 

Commission’s adopting release for its 

CCA rules that address topics relating to 

recovery and orderly wind-down of a 

CCA; 18

• Principles for Financial Market 

Infrastructures (‘‘PFMI’’), published by 

the Bank for International Settlements 

Committee on Payment and Settlement 

Services and the Board of the 

International Organization of Securities 

Commissions (‘‘CPSS–IOSCO’’); 19

• Recovery and Resolution Planning 

for Systemically Important Financial 

Institutions: Guidance on Identification 

of Critical Functions and Critical Shared 

Services, published by the Financial 

Stability Board (‘‘FSB’’); 20

• Recovery of Financial Market 

Infrastructures, published by the Bank 

for International Settlements Committee 

on Payments and Market Infrastructures 

and the Board of the International 

Organization of Securities Commissions 

(‘‘CPMI–IOSCO’’); 21

• Commodity Futures Trading 

Commission (‘‘CFTC’’) Staff Letter 16– 

61, published by the Division of 

Clearing and Risk of the CFTC; 22

• Essential Aspects of CCP Resolution 

Planning, published by the FSB; 23

• Guidance on Central Counterparty 

Resolution and Resolution Planning, 

published by the FSB; 24 and 

• Resilience of Central 

Counterparties: Further Guidance on the 

PFMI, published by CPMI–IOSCO.25

Chapter 1 would highlight OCC’s 

designated Critical Services and would 

summarize the approach OCC used in 

preparing its ‘‘Stress Scenarios,’’ which 

are six detailed storyline scenarios that 

address OCC’s possible response to one 

or more of the following stresses: 

Individual Clearing Member default, 

multiple successive Clearing Member 

defaults, disruption or failure of a bank 

or liquidity facility provider, inability to 

access another financial market 

infrastructure and general business and 

operational risks. The Stress Scenarios 

would be included in Appendix H of 

the Plan. Chapter 1 would restate each 

of the five qualitative ‘‘Recovery Trigger 

Events’’ that are identified in Chapter 5 

of the RWD Plan (which constitutes 

OCC’s ‘‘Recovery Plan’’) and explain 

that the timeframe for OCC’s recovery, 

based on the Stress Scenarios, could 

range from intraday to several months. 

Chapter 1 also would restate each of the 

six qualitative ‘‘W[ind-]D[own ]P[lan] 

Trigger Events,’’ which, if occurring 

during OCC’s recovery efforts, could 

likely jeopardize the viability of OCC’s 

recovery and signal that initiation of 

OCC’s Wind-Down Plan (‘‘WDP’’) 

should be considered. Chapter 1 would 

explain that, given OCC’s critical role as 

the sole clearing organization for all 

securities options exchanges in the U.S., 

OCC would seek to focus primarily on 

recovering from any severe stress 

scenario; however, in the extremely 

remote circumstance that that OCC 

experienced a stress severe enough to 

initiate the WDP, the ultimate goal of 

OCC’s resolution would be to transfer 

ownership of OCC itself by the 

consummation of a consensual sale or 

similar transaction, in a manner 

ensuring the ongoing provision of OCC’s 

Critical Services. Chapter 1 would 

conclude by summarizing OCC’s 

assumptions for the duration of its 

resolution process and the estimated 

amount of operating capital needed to 

fund OCC’s resolution. 

Chapter 2: OCC Overview 

Chapter 2 of the proposed RWD Plan 

is designed to impart information that 

OCC believes would be essential to 

relevant authorities for purposes of 

recovery and orderly wind-down 

planning, as well as to provide readers 

of the Plan with necessary context for 

the subsequent discussion and analysis 

of OCC’s ‘‘Critical Services’’ and 

‘‘Critical Support Functions’’ in Chapter 

4 (discussed below) and of OCC’s 

resolution process in Chapter 6 

(discussed below). To accomplish this, 

Chapter 2 would provide a detailed 

description of OCC’s business, 

summarizing the role that OCC plays in 

the options market and the services and 

products it provides to its clearing 

members and market participants. 

Chapter 2 also would describe the 

regulatory oversight to which OCC is 

subject, and give details on the basic 

structure and organization of OCC’s 

Board of Directors and management. 

Chapter 2 also would provide OCC’s 

financial statements and summarize the 

services OCC provides to its clearing 

members and other financial market 

utilities (‘‘FMUs’’). Chapter 2 would 

include details about OCC’s internal and 

external interconnectedness, 

distinguishing as appropriate between 

financial, operational and external 

forms of interconnectedness. Chapter 2 

would further provide an explanation of 

each of OCC’s three lines of defense, 

which are employed to mitigate the 

various risks to which OCC is 

exposed,26 and the internal controls 

framework used to implement OCC’s 

three lines of defense model. Chapter 2 

would also discuss the participation and 

role of OCC’s internal Management 

Committee and the Board of Directors 

and its various committees in OCC’s risk 

management process. Finally, Chapter 2 

would provide a discussion of OCC’s 

budgeting process, pricing decisions, 

refund pricing, retirement plan 

obligations, other material financial 

obligations and sources of funds 

relevant to OCC’s critical operations.27

Chapter 3: Support Functions 

In Chapter 3 of the proposed RWD 

Plan, OCC would identify each of its 

fourteen different internal support 

functions and provide a brief 

description of the activities performed 

by each such support function. 

Together, Chapters 2 and 3 of the 

proposed Plan are designed to provide 

foundational information about the 

organization and operation of OCC that 

might be essential to relevant authorities 

in the event of an orderly wind-down 

planning. Like Chapter 2, the 


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3226 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 

28See Recovery Report, p. 8. 

29The criteria OCC selected align with criteria set 

forth in the Recovery Report to identify services as 

‘‘critical’’ based upon ‘‘the importance to the 

service to the FMI’s participants and other FMIs, 

and to the smooth functioning of the markets the 

FMI serves and, in particular, the maintenance of 

financial stability.’’ See Recovery Report, p. 8. 

30For the purposes of the RWD Plan, OCC would 

define ‘‘recovery’’ consistent with the definition 

advanced by CPMI–IOSCO, which is ‘‘the actions of 

an FMI, consistent with its rules, procedures, and 

other ex-ante contractual arrangements, to address 

any uncovered credit loss, liquidity shortfall, 

capital inadequacy, or business, operational or 

other structural weakness, including the 

replenishment of any depleted pre-funded financial 

resources and liquidity arrangements, as necessary 

to maintain the FMI’s viability as a going concern.’’ 

See Recovery Report, p. 3. 

31As stated above, the Stress Scenarios are six 

detailed storyline scenarios that address OCC’s 

possible response to one or more of the following 

stresses: Individual Clearing Member default, 

multiple successive Clearing Member defaults, 

disruption or failure of a bank or liquidity facility 

provider, inability to access another financial 

market infrastructure and general business and 

operational risks. 

information provided in Chapter 3 also 

would provide readers of the RWD Plan 

with necessary context for the 

subsequent discussion and analysis in 

Chapters 4 and 6. 

Chapter 4: Critical Services and Critical 

Support Functions 

The primary purpose of Chapter 4 of 

the proposed RWD Plan would be to 

identify OCC’s ‘‘Critical Services’’ and 

‘‘Critical Support Functions.’’ A 

‘‘Critical Service,’’ as defined in the 

proposed Plan, is a service provided by 

OCC that, if interrupted, would likely 

have a material negative impact on 

participants or significant third parties, 

give rise to contagion, or undermine the 

general confidence of markets the FMU 

serves.28 Similarly, a ‘‘Critical Support 

Function,’’ as defined in the proposed 

Plan, is a function within OCC that must 

continue in some capacity in order for 

OCC to be able to continue providing its 

Critical Services. 

Chapter 4 of the proposed Plan sets 

forth the framework that OCC has used 

to designate its ‘‘Critical Services’’ and 

provides the analysis that OCC 

employed such designation. As 

proposed, the framework for designating 

OCC’s ‘‘Critical Services’’ enlists the 

following criteria to determine if failure 

or discontinuation of a particular its 

services would adversely impact 

financial and operational capabilities of 

OCC’s clearing members, other FMUs, 

and/or the broader financial system: 

• Market Dominance: This criterion 

considers OCC’s market share in the 

relevant service and evaluation of 

importance of relevant service to 

clearing members and to the overall 

economy. 

• Substitutability: This criterion 

considers the existence of service 

providers other than OCC that could 

replicate the functionality of OCC’s 

Critical Service if such Critical Service 

failed or was discontinued and the 

ability to transfer customers and 

transactions to other providers in a short 

timeframe. 

• Interconnectedness: This criterion 

considers the depth and breadth of 

connections between OCC and other 

market participants that increase the 

likelihood of contagion if the service 

failed or was discontinued. 

• Barriers to Entry: This criterion 

considers the business, structural, and/ 

or operational complexity of OCC’s 

services that may increase barriers to 

entry to other service providers.29

In proposed Chapter 4, OCC further 

reduces each criterion to between one 

and three ‘‘measurable indicators.’’ Each 

measureable indicator is assigned a 

‘‘high,’’ ‘‘medium’’ or ‘‘low’’ rating 

relative to each of the services 

evaluated, and each rating assigned to a 

measurable indicator is given equal 

weight in OCC’s designation analysis. 

OCC evaluated eight discreet services, 

five of which were assigned a ‘‘high’’ 

rating for at least one of the measurable 

indicators in each of the four selected 

criteria. In proposed Chapter 4, certain 

qualitative and quantitative 

characteristics of each of those five 

discreet services is further discussed in 

order to reach a conclusion about the 

service’s criticality. In proposed Chapter 

4, OCC designates several of its services 

as Critical Services on the basis of this 

final discussion; the services designated 

as Critical Services would include, but 

not be limited to, clearance services for 

listed options and clearance services for 

futures. 

Proposed Chapter 4 derives OCC’s 

Critical Support Functions from the 

Critical Services designations. In 

proposed Chapter 4, OCC inventories 

each of the fourteen support functions 

discussed in Chapter 3 and determines 

which are minimally necessary for the 

continued and orderly operation each of 

the services identified as Critical 

Services. On the basis of this 

identification process, proposed Chapter 

4 identifies the eleven support functions 

as ‘‘Critical Support Functions.’’ 

The final sections of Chapter 4 would 

discuss the critical vendors for each of 

the Critical Support Functions, as well 

as the critical external interconnections 

that OCC maintains with other FMUs, 

exchanges (including designated 

contract markets), clearing and 

settlement banks, custodian banks, letter 

of credit banks, clearing members and 

credit facility lenders. These sections 

would be supported by the materials in 

Appendix B (which identifies OCC’s 

clearing members), Appendix C (which 

identifies OCC’s settlement banks), 

Appendix D (which identifies OCC’s 

custodial banks), Appendix E (which 

identifies OCC’s letter of credit banks), 

Appendix F (which identifies OCC’s key 

vendors and service providers) and 

Appendix G (which identifies key 

agreements to be maintained). 

Chapter 5: Recovery Plan 

Chapter 5 of OCC’s proposed Plan 

would constitute OCC’s Recovery Plan. 

Consistent with the above-stated 

purpose of a recovery and orderly winddown plan, the purpose of Chapter 5 

would be to demonstrate that OCC has 

considered scenarios which may 

potentially prevent it from being able to 

provide its Critical Services as a goingconcern and that, based on the scenarios 

considered, OCC has prepared 

appropriate plans for its recovery.30

The Recovery Plan would begin by 

describing the approach OCC initially 

took in developing the stress scenarios 

and recovery scenarios in OCC’s 

existing orderly recovery and winddown plan. Proposed Chapter 5 would 

then describe the approach OCC took in 

refining existing scenarios and adding 

new scenarios to arrive at the six 

storyline Stress Scenarios in Appendix 

H of the proposed RWD Plan.31

The Recovery Plan would next 

identify and discuss each of OCC’s 

‘‘Enhanced Risk Management Tools’’ 

and ‘‘Recovery Tools,’’ which together 

would form the tool set that OCC could 

deploy, as applicable facts and 

circumstances might warrant, in a stress 

scenario. With respect to the Enhanced 

Risk Management Tools and Recovery 

Tools, the Recovery Plan would provide 

an overview of the tool, and as 

appropriate for each tool, the Recovery 

Plan would include a discussion of the 

implementation of the tool (including 

the estimated time frame for 

implementation of the tool), the key 

risks associated with the tool, and the 

expected impact and incentives 

associated with use of the tool. 

Enhanced Risk Management Tools 

Proposed Chapter 5 would explain 

that OCC’s Enhanced Risk Management 

Tools are designed to supplement OCC’s 

existing processes and other existing 

tools in scenarios where OCC faces 

heightened stresses. Contrary to the 

Recovery Tools (which are described in 

greater detail below), the use of OCC’s 

Enhanced Risk Management Tools 


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Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3227 

32See Securities Exchange Act Release No. 34– 

82156 (Nov. 27, 2017), 82 FR 57015 (Dec. 1, 2017) 

(SR–OCC–2017–019). 

33To the extent that a loss resulting from any of 

the events referred to in Article VIII, Section 5(b) 

is recoverable out of the Clearing Fund pursuant to 

Article VIII, Section 5(a), the provisions of Article 

VIII, Section 5(a) control and render the provisions 

of Article VIII, Section 5(b) inapplicable. 

34OCC has filed a proposed rule change with the 

Commission in connection with the authority to 

borrow against the Clearing Fund to address 

liquidity needs for same-day settlement. See 

Securities Exchange Act Release No. 34–81058 (Jun. 

Continued 

would not be intended to be limited 

strictly to situations in which a 

Recovery Trigger Event has occurred. 

Rather, OCCs Enhanced Risk 

Management Tools have been designed 

such that they could be used prior to the 

occurrence of a Recovery Trigger Event 

(and preferably, the Enhanced Risk 

Management Tools would be used 

prophylactically in an effort to prevent 

the occurrence of a Recovery Trigger 

Event). As proposed, OCC would not 

anticipate there being a rigid order or 

timing for the deployment of its 

Enhanced Risk Management Tools, 

subject to one caveat—‘‘Cash Settlement 

of Physically Delivered Options and 

Single Stock Futures’’ would only be 

deployed in very narrow circumstances 

where a correspondent clearing 

organization has rejected the settlement 

obligations of an OCC Clearing Member 

and OCC does not believe it has 

sufficient liquid resources immediately 

available to facilitate settlement through 

a substitute broker. 

Descriptions of each of the Enhanced 

Risk Management Tools contained in 

the proposed Recovery Plan are 

provided below: 

Use of Current/Retained Earnings. 

Section 5(d) of Article VIII of OCC’s ByLaws provides OCC with the authority 

to use current and/or retained earnings 

to discharge a loss that would be 

chargeable against the Clearing Fund. 

The Recovery Plan would identify this 

existing authority as one of OCC’s 

Enhanced Risk Management Tools. 

As stated in Section 5(d) of Article 

VIII of the By-Laws, use of OCC’s 

current and/or retained earnings would 

require prior unanimous consent from 

the holders of OCC’s Class A common 

stock and Class B common stock. 

Accordingly, the Recovery Plan would 

acknowledge that the utility of this 

particular tool is limited by the fact that 

the tool is dependent upon receipt of 

unanimous consent from OCC’s existing 

stockholders (and therefore, the 

availability of the tool cannot be known 

in advance). The Recovery Plan would 

further acknowledge that because OCC’s 

retained earnings presently amount to 

only a small fraction of OCC’s existing 

prefunded Clearing Fund resources, the 

maximum utility of this particular tool 

may be realized in specific 

circumstances at either the beginning of 

OCC’s loss waterfall (i.e., by attempting 

to fully extinguish the liabilities and 

obligations arising from a Clearing 

Member’s default without charging the 

Clearing Fund whatsoever) or toward 

the end of OCC’s loss waterfall (i.e., by 

attempting to contribute additional 

resources that may be necessary for OCC 

to fully extinguish its liabilities and 

obligations through tear-up). 

Minimum Clearing Fund Cash 

Contribution. OCC is in the process of 

proposing a requirement that Clearing 

Members collectively contribute $3 

billion in cash to the Clearing Fund and 

that OCC would have discretionary 

authority, in certain limited 

circumstances, to increase that 

minimum cash requirement from $3 

billion up to the then-minimum size of 

the Clearing Fund. (‘‘Cash Clearing 

Fund Requirement’’).32 The Cash 

Clearing Fund Requirement would be 

included in the Recovery Plan as one of 

OCC’s Enhanced Risk Management 

Tools. 

With respect to OCC’s discretionary 

authority to increase the minimum cash 

requirement, the proposal would allow 

OCC’s Executive Chairman, Chief 

Administrative Officer (‘‘CAO’’), or 

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

providing notice to the Risk Committee 

of OCC’s Board of Directors (‘‘Risk 

Committee’’), to temporarily increase 

the amount of cash required to be 

maintained in the Clearing Fund up to 

an amount that includes the size of the 

Clearing Fund for the protection of OCC, 

clearing members or the general public. 

Any determination by the Executive 

Chairman, CAO and/or COO to 

implement a temporary increase in 

Clearing Fund size would (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. The proposal would 

require that any such temporary 

increase be reviewed by the Risk 

Committee as soon as practicable, but in 

any event within 20 calendar days of the 

increase. Clearing Members would be 

required to satisfy any such increase in 

their required cash contributions no 

later than one hour before the close of 

the Fedwire (i.e., 5:30 p.m. Central 

Time) on the business day following 

OCC’s issuance of an instruction to 

increase cash contributions. 

OCC’s Recovery Plan would 

acknowledge that the process for 

initiating any increase to the minimum 

cash requirement would be driven by 

the preparation of a ‘‘Close-Out Action 

Plan,’’ which is an internal document 

prepared in accordance with OCC’s 

Default Management Policy and Default 

Management Procedures that, among 

other things, takes into consideration 

the projected liquidity demands for 

successful management of a defaulted 

Clearing Member. The Recovery Plan 

recognizes that the expected impact of 

any increase to the minimum Clearing 

fund cash requirement could be the 

exacerbation of any ongoing liquidity 

constraints facing OCC’s Clearing 

Members. 

Borrowing Against Clearing Fund. 

Presently, Article VIII, Section 5(e) of 

OCC’s By-Laws provides OCC with the 

authority to borrow against the Clearing 

Fund in two circumstances. First, 

Article VIII, Section 5(e) of OCC’s ByLaws provides OCC the authority to 

borrow where OCC ‘‘deems it necessary 

or advisable to borrow or otherwise 

obtain funds from third parties in order 

to meet obligations arising out of the 

default or suspension of a Clearing 

Member or any action taken by the 

Corporation in connection therewith 

pursuant to Chapter XI of the Rules or 

otherwise.’’ Second, Article VIII, 

Section 5(e) of OCC’s By-Laws provides 

OCC the authority to borrow against the 

Clearing Fund where OCC ‘‘sustains a 

loss reimbursable out of the Clearing 

Fund pursuant to [Article VIII, Section 

5(b) of OCC’s By-Laws] but [OCC] elects 

to borrow or otherwise obtain funds 

from third parties in lieu of immediately 

charging such loss to the Clearing 

Fund.’’ In order for a loss to be 

reimbursable out of the Clearing Fund 

under Article VIII, Section 5(b) of OCC’s 

By-Laws, it must arise from a situation 

in which any bank or securities or 

commodities clearing organization has 

failed ‘‘to perform any obligation to 

[OCC] when due because of its 

bankruptcy, insolvency, receivership, 

suspension of operations, or because of 

any similar event.’’ 33 OCC has proposed 

to extend this borrowing authority to 

include a third scenario, whereby OCC 

could borrow (or otherwise obtain funds 

through any means determined to be 

reasonable by the Executive Chairman, 

COO or CAO) against the Clearing Fund 

if it reasonably believes such borrowing 

is necessary to meet its liquidity needs 

for same-day settlement as a result of 

the failure of any bank or securities or 

commodities clearing organization to 

achieve daily settlement.34 This 


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30, 2017), 82 FR 31371 (July 6, 2017) (SR–OCC– 

2017–803). 

35See Securities Exchange Act Release No. 34– 

81956 (Oct. 26, 2017) (SR–OCC–2017–017). 

36See Securities Exchange Act Release No. 34– 

76821 (Jan 4, 2016), 81 FR 3208 (Jan. 4, 2016) (SR– 

OCC–2016–805). 

37OCC will be filing a proposed rule change with 

the Commission in connection with this proposal. 

See SR–OCC–2017–018. 

38Under Article I of OCC’s By-Laws, the term 

‘‘correspondent clearing corporation’’ means the 

National Securities Clearing Corporation or any 

successor thereto which, by agreement with the 

OCC, provides facilities for settlements in respect 

of exercised option contracts or BOUNDs or in 

respect of delivery obligations arising from 

physically-settled stock futures. 

39 ‘‘Substitute broker’’ refers to the use of another 

OCC clearing member that remains in good standing 

at the correspondent clearing corporation and that, 

on OCC’s behalf, will facilitate settlement of OCC’s 

delivery obligations of the Rejected Cleared 

Securities through the correspondent clearing 

corporation. 

40To avoid the retroactive application of Rule 

913, OCC’s ability to require cash settlement of 

cleared securities would only apply where the 

relevant cleared securities were issued by OCC after 

regulatory approval is received for this proposed 

rule change and the change has been implemented 

by OCC. As of the date of this filing, OCC lists 

standard equity options through November 25, 2024 

and flexible style equity options through December 

18, 2026. 

41OCC has filed a proposed rule change with the 

Commission in connection with this proposal. See 

SR–OCC–2017–020. 

borrowing authority, as expanded by the 

proposed rule change, would be 

included in the Recovery Plan as one of 

OCC’s Enhanced Risk Management 

Tools. 

The Recovery Plan would 

acknowledge that the process for 

initiating any borrowing against the 

Clearing Fund would be driven by the 

preparation of a ‘‘Close-Out Action 

Plan’’ (in the event of a Clearing 

Member default), in accordance with the 

execution of OCC’s ‘‘Settlement Bank 

Failure Procedure’’ (in the event of a 

disruption to or failure of a settlement 

bank), in accordance with the execution 

of OCC’s ‘‘Linked FMI Disruption 

Procedure’’ (in the event of a disruption 

to a linked financial market 

infrastructure). The Recovery Plan 

would further acknowledge that a 

borrowing pursuant to a 

recommendation in a Close-Out Action 

Plan or under either of the Settlement 

Bank Failure Procedures or Linked FMI 

Disruption Procedures would occur in 

accordance with OCC’s ‘‘Syndicated 

Credit Facility Procedure.’’ The 

Recovery Plan recognizes that a key risk 

of this particular tool would be that in 

a heightened stress scenario OCC’s 

primary liquidity facilities already may 

be fully or partially utilized (and 

therefore, the availability of the tool 

cannot be known in advance). 

OCC’s Credit Facility. OCC maintains 

a $2.0 billion senior secured 364-day 

revolving credit facility with a syndicate 

of lenders.35 The purpose of the facility 

is to provide OCC with liquidity to meet 

settlement obligations as a central 

counterparty. The Recovery Plan would 

include the facility among OCC’s 

Enhanced Risk Management Tools. 

The Recovery Plan would recognize 

that borrowings under the facility would 

occur in accordance with OCC’s 

Syndicated Credit Facility Procedure. 

The Recovery Plan would further 

recognize that the key risk associated 

with the use of the facility is that a 

portion of the syndicate may not timely 

fund OCC’s draw. 

OCC’s Non-Bank Facility. OCC 

maintains a $1.0 billion secured nonbank liquidity facility.36 The purpose of 

the non-bank facility is to provide OCC 

with a non-bank liquidity resource to 

meet settlement obligations as a central 

counterparty. The Recovery Plan would 

include the non-bank facility among 

OCC’s Enhanced Risk Management 

Tools. 

The Recovery Plan would recognize 

that borrowings under the facility would 

occur in accordance with OCC’s ‘‘NonBank Facility Procedure.’’ The Recovery 

Plan would further recognize that the 

key risk associated with the use of the 

non-bank facility is that OCC’s 

counterparty may not timely execute the 

transaction. 

Cash Settlement of Physically 

Delivered Options and Single Stock 

Futures. OCC is in the process of 

proposing a new Rule 913,37 which 

would provide OCC the ability to 

require cash settlement of otherwise 

physically-settled delivery obligations 

arising from exercised or assigned stock 

options and/or physically-settled 

matured stock futures in the event that 

a correspondent clearing corporation 38

rejects the settlement obligations for 

such stock options and/or stock futures 

(such rejected stock options and/or 

stock futures hereinafter, ‘‘Rejected 

Cleared Securities’’) and either of the 

two following necessary conditions 

exists: (i) The liquidity demand on OCC 

to fund an alternative form of settlement 

for such Rejected Cleared Securities 

(i.e., settlement through the use of a 

‘‘substitute broker’’) 39 would exceed the 

amount of liquid resources immediately 

available to OCC, or (ii) no agent is 

available to serve as substitute broker to 

facilitate alternative settlement for 

OCC.40 In these extremely limited 

circumstances, fixing cash settlement 

amounts pursuant to proposed Rule 913 

would provide OCC with the ability to 

substantially reduce the liquidity 

demands that it might otherwise face if 

required to fund an alternative form of 

settlement to effect physical delivery. 

The Recovery Plan would include cash 

settlement of otherwise physicallydelivered options and single-stock 

futures pursuant to proposed Rule 913 

among OCC’s Enhanced Risk 

Management Tools. 

The Recovery Plan would 

acknowledge that, assuming one of the 

two necessary conditions exists, the 

process for initiating cash settlement 

would be driven by the preparation of 

a ‘‘Close-Out Action Plan,’’ which 

would recommend impacted options 

and single-stock futures be cash settled 

in lieu of physical delivery. The 

Recovery Plan would also acknowledge 

that execution of cash settlement would 

occur in accordance with OCC’s 

‘‘Alternative Cash Settlement of Cleared 

Contracts Procedure.’’ The Recovery 

Plan recognizes that a key risk of this 

particular tool would be the potentially 

detrimental impacts on Clearing 

Members and their customers, who 

would receive a cash settlement amount 

when they had anticipated receiving 

physical securities. 

Recovery Tools 

Proposed Chapter 5 would explain 

that OCC’s Recovery Tools differ from 

OCC’s Enhanced Risk Management 

Tools in that the use of each Recovery 

Tool is generally limited to a scenario in 

which a Recovery Trigger Event has 

occurred, and as discussed below, the 

sequence and timing of the deployment 

of each Recovery Tool is more 

structured than the sequence and timing 

for the deployment of the Enhanced 

Risk Management Tools. As noted 

below, each of the Recovery Tools is 

discussed in greater detail in a proposed 

rule change that has been filed with the 

Commission. 

Descriptions of each of the Recovery 

Tools contained in the proposed 

Recovery Plan are provided below: 

Assessment Powers. OCC is in the 

process of amending its By-Laws to 

revise its assessment powers such that 

OCC would have the authority to assess 

non-defaulting Clearing Members 

during any ‘‘cooling-off period’’ 

(explained below) in an aggregate 

amount equal to 200% of each such 

Clearing Member’s required 

contribution as of the time immediately 

preceding the start of the applicable 

cooling-off period (hereinafter, 

‘‘Assessment Powers’’).41 Under the 

proposed Assessment Powers, an 

automatic minimum fifteen calendar 

day cooling-off period would begin 

whenever a proportionate charge is 


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42Under the proposed Assessment Powers, the 

time frame within which a Clearing Member may 

provide a termination notice to OCC to avoid 

liability for replenishment of the Clearing Fund 

after the cooling-off period would be extended and 

the obligations of such a terminating Clearing 

Member for closing-out and transferring its 

remaining open positions would be modified. 

Specifically, to effectively terminate its status as a 

Clearing Member and not be liable replenishing the 

Clearing Fund after the cooling-off period, a 

Clearing Member would be required to: (i) Notify 

OCC in writing of its intent to terminate not later 

than the last day of the cooling-off period, (ii) not 

initiate any opening purchase or opening writing 

transaction, and, if the Clearing Member is a Market 

Loan Clearing Member or a Hedge Clearing 

Member, not initiate any Stock Loan transaction, 

through any of its accounts, and (iii) close-out or 

transfer all of its open positions by no later than the 

last day of the cooling-off period. If a Clearing 

Member failed to satisfy all of these conditions by 

the end of a given cooling-off period, it would not 

have completed all of the requirements necessary to 

terminate its status as a Clearing Member and 

therefore it would remain subject to the obligation 

to replenish the Clearing Fund after the end of the 

cooling-off period. 

43Article 6 of OCC’s By-Laws states that Clearing 

Members are required to promptly make good any 

deficiency in their required contribution that results 

from a charge against the Clearing Fund, and 

Clearing Members must make good any such 

deficiencies by 9:00 a.m. Central Time on the first 

business day following the day on which OCC 

notifies Clearing Members of such deficiency. 

44Rule 707 addresses the treatment of funds in a 

Clearing Member’s X–M accounts. Rule 1001 

addresses the size of OCC’s Clearing Fund and the 

amount of a Clearing Member’s contribution. Rules 

1104 through 1107 concern the treatment of the 

portfolio of a defaulted Clearing Member. Rules 

2210 and 2211 concern the treatment of Stock Loan 

positions of a defaulted Clearing Member. 

45OCC has filed a proposed rule change with the 

Commission in connection with this proposal. See 

SR–OCC–2017–020. 

46Article 6 of OCC’s By-Laws states that Clearing 

Members are required to promptly make good any 

deficiency in their required contribution that results 

from a charge against the Clearing Fund, and 

Clearing Members must make good any such 

deficiencies by 9:00 a.m. Central Time on the first 

business day following the day on which OCC 

notifies Clearing Members of such deficiency. 

47OCC has filed a proposed rule change with the 

Commission in connection with this proposal. See 

SR–OCC–2017–020. 

assessed by OCC against Clearing 

Members’ Clearing Fund contributions. 

While the cooling-off period would 

continue for a minimum of fifteen 

consecutive calendar days, if one or 

more of the events described in clauses 

(i) through (iv) of Article VIII, Section 

5(a) of OCC’s By-Laws occur(s) during 

that fifteen calendar day period and 

result(s) in one or more proportionate 

charges against the Clearing Fund, the 

cooling-off period would be extended 

through either (i) the fifteenth calendar 

day from the date of the most recent 

proportionate charge resulting from the 

subsequent event, or (ii) the twentieth 

day from the date of the proportionate 

charge that initiated the cooling-off 

period, whichever is sooner. During 

such cooling-off period, the proposed 

Assessment Powers would cap each 

Clearing Member’s aggregate liability to 

replenish the Clearing Fund at 200% of 

the Clearing Member’s then-required 

contribution to the Clearing Fund. Once 

the cooling-off period ends each 

remaining Clearing Member would be 

required to replenish the Clearing Fund 

in the amount necessary to meet its 

then-required contribution.42 The 

Recovery Plan would include the 

proposed Assessment Powers among 

OCC’s Recovery Tools. 

The Recovery Plan would discuss the 

mechanics for replenishment of the 

Clearing Fund, which is the mechanism 

by which assessments would be 

collected from Clearing Members.43 The 

Recovery Plan would acknowledge that 

one of the key risks associated with 

OCC’s assessment powers is that 

utilization of assessment powers (or 

even prefunded Clearing Fund 

resources) may incentivize Clearing 

Members to withdraw from membership 

(to avoid replenishing the Clearing Fund 

following the cooling-off period), 

thereby potentially reducing the size of 

the future Clearing Fund as well as 

OCC’s future assessment powers. 

Voluntary Payments. OCC is in the 

process of proposing new Rule 1009, 

which would provide a framework by 

which OCC could receive voluntary 

payments in a circumstance where a 

Clearing Member has defaulted and 

OCC has determined that, 

notwithstanding the availability of any 

remaining resources under OCC Rules 

707, 1001, 1104 through 1107, 2210 and 

2211,44 OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default.45

Under proposed Rule 1009, nondefaulting Clearing Members would be 

invited to make voluntary payments to 

the Clearing Fund, in addition to any 

amounts they are otherwise required to 

contribute. If OCC subsequently 

recovers from the estate(s) of the 

defaulted Clearing Member(s), all nondefaulting Clearing Members that made 

voluntary payments would be repaid 

from such recovery (and if the amount 

recovered the defaulted Clearing 

Member(s) is less than the aggregate 

amount of voluntary payments, nondefaulting Clearing Members that made 

voluntary payments each would receive 

a percentage of the recovery that 

corresponds to that Clearing Member’s 

percentage of the total amount of 

voluntary payments received). The 

Recovery Plan would include proposed 

Rule 1009 among OCC’s Recovery Tools. 

The Recovery Plan would discuss the 

mechanics for voluntary payments and 

the estimated time frame for issuing a 

‘‘Voluntary Payment Notice’’ and 

collecting voluntary payments (from 

several hours to overnight, depending 

on the timing of the event driving OCC’s 

determination to call for voluntary 

payments).46 The Recovery Plan would 

acknowledge that the key risk associated 

with the ability to call for voluntary 

payments is that non-defaulting 

Clearing Members would be unwilling, 

or unable, to participate. 

Voluntary Tear-Up. OCC is in the 

process of proposing new Rule 1111, 

which, in relevant part, would establish 

a framework by which non-defaulting 

Clearing Members and non-defaulting 

customers of Clearing Members could be 

given an opportunity to voluntarily 

extinguish (i.e., voluntarily tear-up) 

their open positions at OCC in a 

circumstance where a Clearing Member 

has defaulted and OCC has determined 

that, notwithstanding the availability of 

any remaining resources under OCC 

Rules 707, 1001, 1104 through 1107, 

2210 and 2211, OCC may not have 

sufficient resources to satisfy its 

obligations and liabilities resulting from 

such default.47 OCC presumes that the 

scope of any voluntary tear-up would be 

dictated by the cleared contracts 

remaining in the portfolio(s) of the 

defaulted Clearing Member(s); however, 

to ensure OCC retains sufficient 

flexibility to effectively deploy this tool 

in an extreme stress event, proposed 

Rule 1111(c) would provide the Risk 

Committee with discretion to determine 

the appropriate scope of each voluntary 

tear-up. New Rule 1111(c) also would 

impose standards designed to 

circumscribe the Risk Committee’s 

discretion, requiring that any 

determination regarding the scope of a 

voluntary tear-up would (i) be based on 

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. The 

Recovery Plan would include this 

proposed authority to call for voluntary 

tear-ups among OCC’s Recovery Tools. 

The Recovery Plan anticipates that 

OCC’s tear-up process—for both 

voluntary tear-ups as well as partial 

tear-ups—would be initiated on a date 

sufficiently in advance of the 

exhaustion of OCC’s financial resources 

such that OCC would be expected to 

have adequate remaining resources to 

cover the amount it must pay to 

extinguish the positions of Clearing 

Members and customers without 


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48OCC is not proposing a tear-up process that 

would require the imposition of ‘‘gains haircutting’’ 

(i.e., the reduction of unpaid gains) on a portion of 

OCC’s cleared contracts. In general, OCC believes 

that forced gains haircutting is a tool that can be 

more easily applied to products whose gains are 

settled at least daily, like futures through an 

exchange of variation margin, and by central 

counterparties with comparatively large daily 

settlement flows. Listed options, which constitute 

the vast majority of the contracts cleared by OCC, 

do not have daily settlement flows and any attempt 

to reduce the ‘‘unrealized gains’’ of a listed options 

contract would require the reduction of the option 

premium that is embedded within the required 

margin (such a process would effectively require 

haircutting the listed option’s initial margin). In 

OCC’s proposed tear-up process, the holders of 

torn-up positions would be assigned a Tear-Up 

Price and OCC would draw on its remaining 

financial resources in order to extinguish the tornup positions at the assigned Tear-Up Price without 

forcing a reduction in the amount unpaid gains on 

such positions. 

49Proposed Rule 1111 would provide OCC 

discretion to use remaining Clearing Fund 

contributions to re-allocate losses imposed on nondefaulting Clearing Members and customers from 

such tear-up(s). Further, proposed Rule 1111(a) also 

would provide that if OCC subsequently recovers 

from the estate(s) of the defaulted Clearing 

Member(s) and the amount of such recovery 

exceeds the amount OCC received in voluntary 

payments, then non-defaulting Clearing Members 

and non-defaulting customers that voluntarily toreup open positions and incurred losses from such 

tear-ups would be repaid from the amount of the 

recovery in excess of the amount OCC received in 

voluntary payments (if the amount recovered is less 

than the aggregate amount of voluntary tear-up, 

each non-defaulting Clearing Member and nondefaulting customer that incurred losses from 

voluntarily torn-up positions would be repaid in an 

amount proportionate to the percentage of its total 

amount of losses, costs and fees imposed on 

Clearing Members or customers as a result of the 

voluntary tear-ups). 

50See Securities Exchange Act Release No. 34– 

74387 (Feb. 26, 2015), 80 FR 12215 (Mar. 6, 2015) 

(SR–OCC–2014–813). As stated in the advance 

notice, OCC’s Baseline Capital Requirement for 

2015 was $117,000,000. 

51The Recovery Report recognizes the following 

risk exposures for an FMI: legal risk, credit risk, 

liquidity risk, general business risk, custody risk, 

investment risk and operational risk. See Recovery 

Report, p. 12. 

haircutting gains.48 The Recovery Plan 

contemplates that, if tear-up becomes 

necessary, OCC likely would initiate its 

tear-up process after the market closes 

on the date on which OCC has 

determined that the amount of its 

remaining financial resources measured 

against the estimated stressed exposure 

of the unauctioned positions in the 

portfolio(s) of the defaulted Clearing 

Member(s) warrants the initiation of 

OCC’s tear-up process (for purposes of 

this example, Day T). The Recovery Plan 

anticipates that notice of tear-up (both 

voluntary tear-up and partial tear-up) 

would be published no later than the 

morning of the following trading day 

prior to the market opening (for 

purposes of this example, Day T+1) and 

that the call for voluntary tear-ups 

would remain open throughout the 

duration of the trading on Day T+1. The 

Recovery Plan anticipates that 

voluntarily tendered positions would be 

extinguished either after the close on 

Day T+1 or prior to the opening of the 

markets on Day T+2 (where Day T+2 is 

a trading day), and that such positions 

would be extinguished at their last 

established end-of-day settlement price, 

in accordance with OCC’s existing 

practices concerning pricing and 

valuation (i.e., the closing price on Day 

T+1). 

After OCC has completed its tear-up 

process and re-established a matched 

book, OCC expects that holders of both 

voluntarily torn-up and mandatorily 

torn-up positions would be provided 

with a limited opportunity to reestablish positions in the contracts that 

were voluntarily or mandatorily 

extinguished. For the losses, costs or 

expenses imposed upon the holders of 

torn-up positions, proposed Rule 1111 

would provide OCC with two separate 

and non-exclusive means of equitably 

re-allocating such losses costs or 

expenses.49

In addition to discussing the above 

mechanics for voluntary tear-up and the 

estimated time frame for initiating and 

completing OCC’s tear-up process, the 

Recovery Plan would acknowledge that 

the key risk associated with the ability 

to call for voluntary tear-ups is that nondefaulting Clearing Members and 

nonwould be unwilling, or unable, to 

participate. 

Partial Tear-Up. Proposed Rule 1111 

also would provide the Board with 

discretion to extinguish the remaining 

(i.e., mandatorily extinguish) open 

positions of any defaulted Clearing 

Member or customer of such defaulted 

Clearing Member(s) (such positions, 

‘‘remaining open positions’’), as well as 

any related open positions as necessary 

to mitigate further disruptions to the 

markets affected by the Remaining Open 

Positions (such positions, ‘‘related open 

positions’’), in a circumstance where a 

Clearing Member has defaulted and 

OCC has determined that, 

notwithstanding the availability of any 

remaining resources under OCC Rules 

707, 1001, 1104 through 1107, 2210 and 

2211, OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default 

(such tear-ups, ‘‘partial tear-ups’’). Like 

the determination for voluntary tearups, OCC presumes that the scope of 

any partial tear-up would be dictated by 

the cleared contracts remaining in the 

portfolio(s) of the defaulted Clearing 

Member(s); however, to ensure OCC 

retains sufficient flexibility to 

effectively deploy this tool in an 

extreme stress event, proposed Rule 

111(c) would provide the Risk 

Committee with discretion to determine 

the appropriate scope for each partial 

tear-up. Proposed Rule 1111(c) would 

impose the same standards designed to 

circumscribe the Risk Committee’s 

discretion as would be imposed with 

respect to voluntary tear-ups: partial 

tear-ups would (i) be based on 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. The Recovery 

Plan would include this proposed 

authority to impose mandatory tear-ups 

among OCC’s Recovery Tools. 

As explained above, the Recovery 

Plan would anticipate that the process 

for implementing a partial tear-up 

would be intertwined with the process 

for implementing a voluntary tear-up. 

The Recovery Plan would also make 

clear that partially torn-up positions 

would be allocated to non-defaulting 

Clearing Members’ accounts (and 

further allocated by Clearing Members 

to their non-defaulting customers’ 

accounts) on a pro rata basis. 

Replenishment Capital. In 2015 OCC 

adopted a capital plan (‘‘Capital Plan’’) 

under which OCC’s stockholder 

exchanges made an additional capital 

contribution and, in the event that total 

shareholder’s equity falls below a 

certain threshold, committed to 

replenishing OCC’s capital up to an 

amount determined as OCC’s ‘‘Baseline 

Capital Requirement.’’ 50 The Recovery 

Plan would include the replenishment 

capital that OCC’s stockholder 

exchanges would be required to provide 

under the Capital Plan among OCC’s 

Recovery Tools. 

In addition to generally discussing 

each of the Enhanced Risk Management 

Tools and Recovery Tools as described 

above, the Recovery Plan also would 

provide a mapping of OCC’s Enhanced 

Risk Management Tools and Recovery 

Tools against the types of financial 

market infrastructure (‘‘FMI’’) risk 

exposures identified in the Recovery 

Report.51 The general mapping of tools 

to risk exposures is presented below: 

• Tools to address uncovered credit 

losses from a Clearing Member default: 

Use of current/retained earnings, 

proposed voluntary payments and 

proposed Assessment Powers. 

• Tools to address liquidity shortfalls: 

minimum Clearing Fund cash 

contribution, borrowing against Clearing 

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52The Recovery Report identifies the following 

purposes for an FMI’s recovery tools: (i) Tools to 

allocate uncovered credit losses caused by a 

participant default, (ii) tools to address uncovered 

liquidity shortfalls, (iii) tools to replenish financial 

resources, (iv) tools for CCPs to re-establish a 

matched book following a participant default, and 

(v) tools to allocate losses not caused by participant 

default. See Recovery Report, p. 17. 

53The Recovery Report states that a financial 

market infrastructure’s recovery tools should (i) be 

comprehensive, (ii) be effective, (ii) be transparent, 

measurable, manageable and controllable, (iv) 

create appropriate incentives, and (v) minimize 

negative impact. See Recovery Report, p. 13. 

54For the purposes of the RWD Plan, OCC would 

frame its wind-down objective consistent with the 

objective advanced by the FSB for CCP resolution: 

‘‘CCP resolution should have as its objective the 

pursuit of financial stability and ensure the 

continuity of critical CCP functions in all 

jurisdictions where those functions are critical and 

without exposing taxpayers to risk of 

loss.... The objectives of CCP resolution can be 

achieved either by: (i) restoring the ability of the 

CCP to continue to perform its critical functions as 

a going concern; or (ii) ensuring continued 

performance of those functions by another entity or 

arrangement (including a bridge entity established 

by the resolution authority) coupled with the 

orderly wind-down of the residual CCP in 

resolution.’’ See CCP Resolution Report, p. 2. 

bank facility and cash settlement of 

physically delivered options and single 

stock futures. 

• Tools to replenish financial 

resources: Replenishment capital. 

• Tools to address losses related to 

business, operational or other structural 

weaknesses (i.e., losses not caused by 

Clearing Member Default): Borrowing 

against Clearing Fund and 

replenishment capital. 

• Tools to re-establish a matched 

book: Voluntary tear-up and partial tearup. 

The Recovery Plan would include a 

short discussion of how the Enhanced 

Risk Management Tools and Recovery 

Tools would apply to each of the risk 

categories and failure scenarios 

identified in the Recovery Report.52 The 

discussion of each risk category would 

reference the appropriate Stress 

Scenarios in Appendix H that 

demonstrate the use of applicable 

Enhanced Risk Management Tools and 

Recovery Tools. The Recovery Plan also 

would discuss the Enhanced Risk 

Management Tools and Recovery Tools 

in the context of the characteristics of 

recovery tools enumerated in the CPMI– 

IOSCO Recovery Report.53

After discussing the Enhanced Risk 

Management Tools and Recovery Tools, 

the Recovery Plan would identify five 

qualitative ‘‘Recovery Trigger Events’’ 

(events that—if occurring during OCC’s 

risk management efforts—would 

indicate that OCC is facing an extreme 

stress event that potentially threatens 

OCC’s viability). The Recovery Plan 

would specify that the occurrence of a 

Recovery Trigger Event shall require 

OCC personnel to notify the 

Commission and the CFTC (and the 

Federal Deposit Insurance Corporation, 

to the extent applicable), and such 

notice shall apprise the regulator(s) of 

the specific Recovery Trigger Event that 

has occurred and sufficient information 

to enable the regulator(s) to understand 

the nature of the occurrence of the 

Recovery Trigger Event. The Recovery 

Plan would further outline an escalation 

process for the occurrence of a Recovery 

Trigger Event. The escalation process 

would start with individual support 

function leads, who would be 

responsible for communicating the 

possible occurrence of a Recovery 

Trigger Event to other support functions 

within OCC. The escalation process 

would require OCC’s Enterprise Risk 

Management and Financial Risk 

Management groups to be responsible 

for assessing the situation and providing 

recommendations regarding the 

potential use of Enhanced Risk 

Management Tools and Recovery Tools. 

The escalation process would identify 

that the Chief Executive Officer and 

Executive Chairman would be 

responsible for providing necessary 

approvals for the implementation of 

Enhanced Risk Management Tools and 

Recovery Tools, and that the Chief Risk 

Officer and the Management Committee 

would be responsible for overseeing the 

deployment of any Enhanced Risk 

Management Tools or Recovery Tools. 

The escalation process would identify 

OCC’s Board and the Risk Committee of 

the Board as being responsible for 

generally overseeing OCC’s recovery 

efforts. 

Finally, the Recovery Plan would 

provide general descriptions of how 

OCC would anticipate deploying its 

Enhanced Risk Management and 

Recovery Tools in response to each of 

the six Stress Scenarios detailed in 

Appendix H. As described above, the 

six detailed Stress Scenarios would be 

grouped into the following categories of 

stresses: Individual Clearing Member 

default, multiple successive Clearing 

Member defaults, disruption or failure 

of a bank or liquidity facility provider, 

inability to access another financial 

market infrastructure and general 

business and operational risks. 

Chapter 6: Wind-Down Plan 

Chapter 6 of OCC’s proposed RWD 

Plan would constitute OCC’s WDP. 

Consistent with the above-stated 

purpose of an orderly wind-down plan, 

Chapter 6 would demonstrate that OCC 

has considered scenarios which may 

potentially prevent it from being able to 

provide its Critical Services as a goingconcern and that OCC has adequately 

evaluated plans for its orderly winddown.54

The WDP would state OCC’s basic 

assumptions concerning the resolution 

process, including assumptions about 

the duration of the resolution process, 

the cost of the resolution process, OCC’s 

capitalization through the resolution 

process, the maintenance of Critical 

Services and Critical Support Functions 

and the retention of personnel and 

contractual relationships. The WDP 

would further identify six ‘‘WDP Trigger 

Events’’ that—if occurring during OCC’s 

recovery efforts—could likely jeopardize 

the viability of OCC’s recovery and 

signal that initiation of the WDP should 

be considered. Upon the occurrence of 

any WDP Trigger Event, the WDP would 

require OCC personnel to notify the 

Commission and the CFTC (and the 

Federal Deposit Insurance Corporation, 

to the extent applicable), and such 

notice must apprise the regulator(s) of 

the specific WDP Trigger Event that has 

occurred and sufficient information to 

enable the regulator(s) to understand the 

nature of the occurrence of the WDP 

Trigger Event. Additionally, the WDP 

would prescribe for each WDP Trigger 

Event more tailored internal notification 

requirements. These more tailored 

notification requirements would 

designate OCC personnel in specific 

support functions (generally, the 

function whose area is most closely 

related to, or impacted by, the specific 

WDP Trigger Event) as responsible for 

identifying such WDP Trigger Event and 

for notifying OCC’s senior management. 

The WDP also would reference the 

importance of the critical external 

interconnections (discussed in Chapter 

4) to the resolution process and 

highlight the key agreements that would 

be necessary to maintain throughout 

OCC’s resolution (such agreements 

would be listed in Appendix G). The 

WDP would provide a discussion of the 

key actions that OCC (or a resolution 

authority) could take during the 

resolution process. The key actions 

discussed in the WDP would include 

the following: The decision by OCC’s 

Board (informed by senior management) 

to abandon recovery and initiate OCC’s 

resolution process; the potential 

institution of new or heightened 

requirements on clearing membership; 

the potential imposition of heightened 

capital requirements on clearing 

members (consistent with the existing 

requirements in Rule 301); the 

imposition of increased margin 

requirements for Clearing Members 


sradovich on DSK3GMQ082PROD with NOTICES
3232 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 

55 12 U.S.C. 5461(b). 

56 12 U.S.C. 5464(a)(2). 

57 12 U.S.C. 5464(b). 

58 17 CFR 240.17Ad–22. See Securities Exchange 

Act Release Nos. 68080 (October 22, 2012), 77 FR 

66220 (November 2, 2012) (S7–08–11) (‘‘Clearing 

Agency Standards’’); 78961 (September 28, 2016), 

81 FR 70786 (October 13, 2016) (S7–03–14) 

(‘‘Standards for Covered Clearing Agencies’’). The 

Standards for Covered Clearing Agencies became 

effective on December 12, 2016. OCC is a ‘‘covered 

clearing agency’’ as defined in Rule 17Ad–22(a)(5) 

and therefore is subject to section (e) of Rule 17Ad– 

22. 

59 12 U.S.C. 5464(b)(1) and (4). 

60 17 CFR 240.17Ad–22(e)(3)(ii). 

61 17 CFR 240.17Ad–22(e)(3)(ii). 

62See 81 FR at 70810. 

63 17 CFR 240.17Ad–22(e)(3)(ii). 

(pursuant to the existing authority 

under Rule 603); ceasing OCC’s 

investment activities; instituting new 

operational practices (to address any 

operation weaknesses that caused, or 

contributed to, the events resulting in 

the initiation of the resolution process), 

and; targeted reductions in force (by 

each of the fourteen support functions 

discussed in Chapter 3). 

The WDP also would identify 

potential transactions that could be 

entered to accomplish the objectives of 

wind-down (‘‘WDP Transactions’’), as 

well as discuss the possibility of ceasing 

operation of OCC’s Critical Services. 

The WDP would state that the goal of 

OCC’s resolution—and thusly of any 

WDP Transaction—would be to transfer 

ownership of OCC itself by the 

consummation or a consensual sale or 

similar transaction, in a manner that 

ensures the continuation of OCC’s 

Critical Services. The WDP would 

examine the structure of three potential 

WDP Transactions, with a focus on the 

corporate, transactions, governance and 

regulatory issues relating to each 

structure. In order of preference based 

on OCC’s examination, the first 

structure would be a ‘‘Stock 

Transaction,’’ meaning a sale by OCC’s 

stockholder exchanges of all of their 

shares of stock to one or more new 

owners; the second structure would be 

a ‘‘Merger Transaction,’’ meaning a 

merger or consolidation of OCC with 

another entity (with the aim of OCC 

remaining as the surviving entity), and; 

the third structure would be an ‘‘Asset 

Transaction,’’ meaning that 

substantially all of OCC’s assets and 

some or all of OCC’s liabilities, 

including open positions in OCCcleared contracts along with related 

Clearing Fund deposits and margin 

collateral, would be transferred to a 

third party. 

With respect to the possibility of 

ceasing OCC’s Critical Services, the 

WDP would consider taking a corporate 

action to consider institution of a 

bankruptcy or insolvency proceeding, 

which would have the effect of 

triggering the existing close-out netting 

provisions in Article VI, Section 27 of 

OCC’s By-Laws. 

Chapter 7: RWD Plan Governance 

Chapter 7 of OCC’s proposed Plan 

would memorialize the prior 

governance for approval of the earlier 

drafts of OCC’s recovery and orderly 

wind-down plan and would establish an 

internal governance process for the 

maintenance, review and approval of 

the proposed RWD Plan. The internal 

governance process for the approval of 

subsequent changes to OCC’s proposed 

RWD Plan would initiate with an RWD 

Working Group, which would 

recommend any changes to OCC’s 

Management Committee. OCC’s 

Management Committee, in turn, would 

review and, as appropriate, approve and 

recommend any changes to OCC’s Risk 

Committee. OCC’s Risk Committee, in 

turn, would review and, as appropriate, 

approve and recommend any changes to 

OCC’s Board. OCC’s Board would have 

final responsibility for review and 

approval of subsequent changes to 

OCC’s proposed RWD Plan. 

Expected Effect on and Management of 

Risk 

OCC believes that the proposed 

change would reduce the nature and 

level of risk presented to OCC by 

formalizing a plans designed to enhance 

OCC’s ability to address extreme stress 

events and minimize the risks of 

contagion to OCC’s Clearing Members, 

market participants or to the wider 

financial system, including other FMIs. 

Specifically, the RP would seek to 

enhance OCC’s ability to address 

extreme stresses or crises by 

establishing a framework that OCC 

could use to navigate the use its 

Enhanced Risk Management Tools and 

Recovery Tools, with the aim of 

maintaining OCC’s viability as a going 

concern. In the event that OCC’s 

recovery efforts are not successful, the 

WDP would seek to improve the 

possibility that a resolution of OCC’s 

operations can be conducted in an 

orderly manner, thereby minimizing the 

disruption to Clearing Members and 

market participants and improving the 

likelihood of minimizing the risk of 

contagion to the broader financial 

system. In this regard, OCC believes its 

proposed RWD Plan improves the 

possibility of maintaining market and 

public confidence during a time of 

unprecedented stress. 

Consistency With the Clearing 

Supervision Act 

The stated purpose of the Clearing 

Supervision Act is to mitigate systemic 

risk in the financial system and promote 

financial stability by, among other 

things, promoting uniform risk 

management standards for systemically 

important financial market utilities and 

strengthening the liquidity of 

systemically important financial market 

utilities.55 Section 805(a)(2) of the 

Clearing Supervision Act 56 also 

authorizes the Commission to prescribe 

risk management standards for the 

payment, clearing and settlement 

activities of designated clearing entities, 

like OCC, for which the Commission is 

the supervisory agency. Section 805(b) 

of the Clearing Supervision Act 57 states 

that the objectives and principles for 

risk management standards prescribed 

under Section 805(a) shall be to: 

• Promote robust risk management; 

• promote safety and soundness; 

• reduce systemic risks; and 

• support the stability of the broader 

financial system. 

The Commission has adopted risk 

management standards under Section 

805(a)(2) of the Clearing Supervision 

Act and the Act in furtherance of these 

objectives and principles, including 

those standards adopted pursuant to the 

Commission rules cited below.58 For the 

reasons set forth below, OCC believes 

that the proposed change is consistent 

with the risk management standards 

promulgated under Section 805(a) of the 

Clearing Supervision Act.59

OCC believes that the proposed rule 

change is also consistent with Rule 

17Ad–22(e)(3)(ii).60 As stated above, the 

RWD Plan would describe OCC’s plans 

to recover from, or orderly resolve its 

operations as a result of, severe stress 

brought about by credit losses, liquidity 

shortfalls, losses from general business 

risk or other losses.61 Consistent with 

the Commission’s guidance concerning, 

the proposed RWD Plan would consider 

scenarios which may potentially 

prevent OCC from providing its Critical 

Services as a going-concern and provide 

appropriate plans for OCC’s recovery or 

orderly wind-down based on the results 

of such considerations. Further, OCC’s 

proposed Plan would seek to provide 

the information that a resolution 

authority may reasonably anticipate as 

necessary for purposes of recovery and 

orderly wind-down planning.62 In this 

regard, OCC believes its proposed rule 

change is consistent with Rule 17Ad– 

22(e)(3)(ii).63


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3233 

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

2 17 CFR 240.19b–4. 

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

4 17 CFR 240.19b–4(f)(6)(iii). 

III. Date of Effectiveness of the Advance 

Notice and Timing for Commission 

Action 

The proposed change may be 

implemented if the Commission does 

not object to the proposed change 

within 60 days of the later of (i) the date 

the proposed change was filed with the 

Commission or (ii) the date any 

additional information requested by the 

Commission is received. OCC shall not 

implement the proposed change if the 

Commission has any objection to the 

proposed change. 

The Commission may extend the 

period for review by an additional 60 

days if the proposed change raises novel 

or complex issues, subject to the 

Commission providing the clearing 

agency with prompt written notice of 

the extension. A proposed change may 

be implemented in less than 60 days 

from the date the advance notice is 

filed, or the date further information 

requested by the Commission is 

received, if the Commission notifies the 

clearing agency in writing that it does 

not object to the proposed change and 

authorizes the clearing agency to 

implement the proposed change on an 

earlier date, subject to any conditions 

imposed by the Commission. 

OCC shall post notice on its website 

of proposed changes that are 

implemented. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the advance notice is 

consistent with the Clearing 

Supervision Act. Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

OCC–2017–810 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549. 

All submissions should refer to File 

Number SR–OCC–2017–810. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the advance notice that 

are filed with the Commission, and all 

written communications relating to the 

advance notice between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of OCC and on OCC’s website at 

https://www.theocc.com/components/ 

docs/legal/rules_and_bylaws/sr_occ_17_

810.pdf. 

All comments received will be posted 

without change. Persons submitting 

comments are cautioned that we do not 

redact or edit personal identifying 

information from comment submissions. 

You should submit only information 

that you wish to make available 

publicly. 

All submissions should refer to File 

Number SR–OCC–2017–810 and should 

be submitted on or before February 13, 

2018. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–01071 Filed 1–22–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82519; File No. SR– 

CboeEDGX–2018–002] 

Self-Regulatory Organizations; CBOE 

EDGX Exchange, Inc.; Notice of Filing 

and Immediate Effectiveness of a 

Proposed Rule Change To Harmonize 

the Definition of Non-Professional User 

in Its Fee Schedule With That of Its 

Affiliates 

January 17, 2018. 

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

Securities Exchange Act of 1934 (the 

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

notice is hereby given that on January 8, 

2018, Cboe EDGX Exchange, Inc. (the 

‘‘Exchange’’ or ‘‘EDGX’’) filed with the 

Securities and Exchange Commission 

(the ‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Exchange has 

designated this proposal as a ‘‘noncontroversial’’ proposed rule change 

pursuant to Section 19(b)(3)(A) of the 

Act 3 and Rule 19b–4(f)(6)(iii) 

thereunder,4 which renders it effective 

upon filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange filed a proposal to 

amend the Market Data section of its fee 

schedule applicable to its equity options 

platform (‘‘EDGX Options’’) to 

harmonize the definition of ‘‘NonProfessional User’’ with that of its 

affiliates, Cboe Exchange, Inc. (‘‘Cboe’’) 

and Cboe C2 Exchange, Inc. (‘‘C2’’). 

The text of the proposed rule change 

is available at the Exchange’s website at 

www.markets.cboe.com, at the principal 

office of the Exchange, and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to amend the 

Market Data section of its fee schedule 

applicable to EDGX Options to 

harmonize the definition of ‘‘NonProfessional User’’ with that of its 

affiliates, Cboe and C2. In late 2016, the 

Exchange and its affiliates Cboe EDGA 

Exchange, Inc. (‘‘EDGA’’), Cboe BYX 

Exchange, Inc. (‘‘BYX’’), and Cboe BZX 

Exchange, Inc. (‘‘BZX’’) received 

approval to effect a merger (the 


sradovich on DSK3GMQ082PROD with NOTICES