3244 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 

10 17 CFR 240.19b–4(f)(6). 

11See 15 U.S.C. 78c(f). 12 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–2017–017. 

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

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

about/publications/bylaws.jsp. 

subparagraph (f)(6) of Rule 19b–4 

thereunder.10 In addition, Rule 19b– 

4(f)(6) requires a self-regulatory 

organization to give the Commission 

written notice of its intent to file the 

proposed rule change, along with a brief 

description and text of the proposed 

rule change, at least five business days 

prior to the date of filing of the 

proposed rule change, or such shorter 

time as designated by the Commission. 

The Exchange has satisfied this 

requirement. 

In its filing, the Exchange requested 

that the Commission waive the 30-day 

operative delay in order to enable the 

Exchange to immediately ensure 

consistent use of terms amongst the 

Exchange and its affiliates, thereby 

reducing the potential for confusion 

amongst market data subscribers 

regarding the type of User they may be 

considered by the Exchange. The 

Commission believes that such waiver is 

consistent with the protection of 

investors and the public interest. 

Therefore, the Commission designates 

the proposed rule change to be operative 

upon filing. For purposes only of 

waiving the 30-day operative delay, the 

Commission has also considered the 

proposed rule’s impact on efficiency, 

competition, and capital formation.11

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is: (i) Necessary or appropriate in 

the public interest; (ii) for the protection 

of investors; or (iii) otherwise in 

furtherance of the purposes of the Act. 

If the Commission takes such action, the 

Commission shall institute proceedings 

to determine whether the proposed rule 

should be approved or disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the 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– 

CboeBZX–2018–003 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number CboeBZX–2018–003. 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 proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change 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 the Exchange. 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 CboeBZX–2018–003 and 

should be submitted on or before 

February 13, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.12

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–01088 Filed 1–22–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–82513; File No. SR–OCC– 

2017–809] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Notice 

of Filing of Advance Notice 

Concerning Enhanced and New Tools 

for Recovery Scenarios 

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 

make certain revisions to OCC’s Rules 

and By-Laws to enhance OCC’s existing 

tools to address the risks of liquidity 

shortfalls and credit losses and to 

establish new tools by which OCC could 

re-establish a matched book following a 

default. Each of the tools proposed 

herein is contemplated to be deployed 

by OCC in an extreme stress event that 

has placed OCC into a recovery or 

orderly wind-down scenario. 

The proposed changes to OCC’s ByLaws and Rules were submitted as 

Exhibits 5A and 5B of the filing, and 

proposed changes to OCC’s Default 

Management Policy were submitted as 

confidential Exhibit 5C 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


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3245 

5 17 CFR 240.17Ad–22. 

6 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii), 

(e)(4)(ix), (e)(7)(ix), (e)(13), (e)(23)(i) and (e)(23)(ii). 

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 17 CFR 240.17Ad–22(e)(v)(viii). 

12 17 CFR 240.17Ad–22(e)(4)(ix). 

13 17 CFR 240.17Ad–22(e)(7)(ix). 

14 17 CFR 240.17Ad–22(e)(13). 

15 17 CFR 240.17Ad–22(e)(23)(i). 

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 

Purpose of the Proposed Change 

Background 

The purpose of this proposed rule 

change is to make certain revisions to 

OCC’s Rules and By-Laws Laws that are 

designed to enhance OCC’s existing 

tools to address the risks of liquidity 

shortfalls and credit losses and to 

establish tools by which OCC could reestablish a matched book following a 

default. Each of the tools proposed 

herein is contemplated to be deployed 

by OCC in an extreme stress event that 

has placed OCC into a recovery or 

orderly wind-down scenario. Each of 

the proposed revisions also is designed 

to further OCC’s compliance, in whole 

or in part, with the provisions of the 

Commission’s rules identified 

immediately below. 

On September 28, 2016, the 

Commission adopted amendments to 

Rule 17Ad–22 5 and added new Rules 

17Ad–22(e)(3)(ii), (e)(4)(viii), (e)(4)(ix), 

(e)(7)(ix), (e)(13), (e)(23)(i) and 

(e)(23)(ii) 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 In relevant part, 

these new rules collectively require a 

covered clearing agency (‘‘CCA’’), as 

defined by Rule 17Ad–22(a)(5),9 to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to: (1) Maintain a 

risk management framework including 

plans for recovery and orderly winddown necessitated by credit losses, 

liquidity shortfalls, general business risk 

losses or any other losses, (2) effectively 

identify, measure, monitor and manage 

its credit exposures to participants and 

those arising from its payment, clearing 

and settlement processes, including by 

addressing the allocation of credit losses 

a CCA might face if its collateral and 

other resources are insufficient to fully 

cover its credit exposures, (3) effectively 

identify, measure, monitor and manage 

credit exposures, including by 

describing the process to replenish any 

financial resource that a CCA may use 

following a default event or other event 

in which use of such resource is 

contemplated, (4) effectively identify, 

measure, monitor and manage liquidity 

risks that arises or is borne by the CCA 

by, at a minimum, describing the 

process for replenishing any liquid 

resource that a CCA may employ during 

a stress event, (5) ensure it has the 

authority and operational capacity to 

take timely action to contain losses and 

liquidity demands and continue to meet 

its obligations, (6) publicly disclose 

relevant rules and material procedures, 

including key aspects of its default rules 

and procedures, and (7) provide 

sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 

incur by participating in the CCA. The 

relevant portions of each of these new 

requirements is restated below: 

• Rule 17Ad–22(e)(3)(ii) requires that 

each CCA ‘‘establish, 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

• Rule 17Ad–22(e)(4)(viii) requires 

that each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [e]ffectively identify, measure, 

monitor, and manage its credit 

exposures to participants and those 

arising from its payment, clearing, and 

settlement processes, including by . . . 

[a]ddressing allocation of credit losses 

the [CCA] may face if its collateral and 

other resources are insufficient to fully 

cover its credit exposures, including the 

repayment of any funds the [CCA] may 

borrow from liquidity providers.’’ 11

• Rule 17Ad–22(e)(4)(ix) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [e]ffectively identify, measure, 

monitor, and manage its credit 

exposures to participants and those 

arising from its payment, clearing, and 

settlement processes, including by . . . 

[d]escribing the [CCA’s] process to 

replenish any financial resources it may 

use following a default or other event in 

which use of such resources is 

contemplated.’’ 12

• Rule 17Ad–22(e)(7)(ix) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [e]ffectively measure, monitor, and 

manage the liquidity risk that arises in 

or is borne by the [CCA], including 

measuring, monitoring, and managing 

its settlement and funding flows on an 

ongoing and timely basis, and its use of 

intraday liquidity by, at a minimum, 

doing the following...[d]escribing the 

[CCA’s] process to replenish any liquid 

resources that the clearing agency may 

employ during a stress event.’’ 13

• Rule 17Ad–22(e)(13) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [e]nsure the covered clearing 

agency has the authority and 

operational capacity to take timely 

action to contain losses and liquidity 

demands and continue to meet its 

obligations . . .’’ 14

• Rule 17Ad–22(e)(23)(i) requires that 

each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [p]ublicly disclos[e] all relevant 

rules and material procedures, 

including key aspects of its default rules 

and procedures.’’ 15

• Rule 17Ad–22(e)(23)(ii) requires 

that each CCA ‘‘establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

. . . [p]rovid[e] sufficient information to 

enable participants to identify and 

evaluate the risks, fees, and other 

material costs they incur by 


sradovich on DSK3GMQ082PROD with NOTICES
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16 17 CFR 240.17Ad–22(e)(23)(ii). 

17 17 CFR 240.17Ad–22(e)(3)(ii), (e)(4)(viii), 

(e)(4)(ix) and (e)(7)(ix). 

18Under Article VIII, Section 6 of OCC’s By-Laws, 

OCC currently has authority to assess proportionate 

charges against Clearing Members’ contributions to 

the Clearing Fund in certain enumerated situations. 

For example, Section 6 generally provides that if 

the conditions regarding a Clearing Member default 

specified in subparagraphs (a)(i) through (vi) of 

Article VIII, Section 5 of OCC’s By-Laws are 

satisfied, OCC will make good resulting losses or 

expenses that are suffered by OCC by applying the 

defaulting Clearing Member’s Clearing Fund 

contribution after first applying other funds 

available to OCC in the accounts of the Clearing 

Member. If the sum of the obligations, however, 

exceeds the total Clearing Fund contribution and 

other funds of the defaulting Clearing Member 

available to OCC, then OCC will charge the amount 

of the remaining deficiency on a proportionate basis 

against all non-defaulting Clearing Members’ 

required contributions to the Clearing Fund at the 

time. Section 5(b) of Article VIII of OCC’s By-Laws 

similarly provides for proportionate charges against 

Clearing Members’ contributions to the Clearing 

Fund when certain conditions are met that involve 

a failure by a bank or a securities or commodities 

clearing organization to perform obligations to OCC 

when they are due. 

participating in the covered clearing 

agency.’’ 16

OCC meets the definition of a CCA 

and is therefore subject to the 

requirements of the CCA rules, 

including new Rules 17Ad–22(e)(3)(ii), 

(e)(4)(viii), (e)(4)(ix), (e)(7)(ix), (e)(13), 

(e)(23)(i) and (e)(23)(ii).17

Proposed Changes 

Summary of Proposed Changes 

In order to enhance OCC’s existing 

tools to address the risks of liquidity 

shortfalls and credit losses and to 

establish new tools by which OCC could 

re-establish a matched book following a 

default, OCC is proposing to make the 

following revisions to its Rules and ByLaws: 

(1) Revise the existing assessment 

powers in Section 6 of Article VIII of 

OCC’s By-Laws, specifically to: 

(a) Establish a rolling ‘‘cooling-off 

period’’ that would be triggered by the 

payment of a proportionate charge 

against the Clearing Fund (‘‘triggering 

proportionate charge’’), during which 

period the aggregate liability of a 

Clearing Member to replenish the 

Clearing Fund (inclusive of 

assessments) would be 200% of the 

Clearing Member’s required 

contribution as of the time immediately 

preceding the triggering proportionate 

charge; 

(b) Clarify that a Clearing Member that 

chooses to terminate its membership 

status during a cooling-off period will 

not be liable for replenishment of the 

Clearing Fund immediately following 

the expiration of such cooling-off 

period, provided that the withdrawing 

Clearing Member satisfies enumerated 

criteria, including providing notice of 

such termination by no later than the 

end of the cooling-off period and by 

closing-out and/or transferring of all its 

open positions with OCC by no later 

than the last day of the cooling-off 

period; and 

(c) Delineate between the obligation of 

a Clearing Member to replenish its 

contributions to the Clearing Fund and 

its obligations to meet additional 

‘‘assessments’’ that may be levied 

following a proportionate charge to the 

Clearing Fund. 

(2) Adopt a new Rule 1009 that would 

provide OCC with discretionary 

authority to call for voluntary payments 

from non-defaulting Clearing Members 

in a circumstance where one or more 

Clearing Members has already defaulted 

and OCC has determined that it may not 

have sufficient resources to satisfy its 

obligations and liabilities resulting from 

such default. Rule 1009 also would 

establish that OCC would prioritize 

compensation of Clearing Members that 

made voluntary payments from any 

amounts recovered from the defaulted 

Clearing Members. 

(3) Adopt a new Rule 1111 that would 

provide authority to: 

(a) Allow OCC to call for voluntary 

tear-ups (‘‘Voluntary Tear-Up,’’ as 

defined below) of non-defaulting 

Clearing Member and/or customer 

positions at any time following the 

suspension or default of a Clearing 

Member, with the scope of any such 

Voluntary Tear-Ups being determined 

by the Risk Committee of OCC’s Board 

(‘‘Risk Committee’’); 

(b) Allow OCC’s Board to vote to tearup the ‘‘Remaining Open Positions’’ 

(defined below) of a defaulted Clearing 

Member, as well as any ‘‘Related Open 

Positions’’ (defined below) in a 

circumstance where OCC has attempted 

one or more auctions of such defaulted 

Clearing Member’s remaining open 

positions and OCC has determined that 

it may not have sufficient resources to 

satisfy its obligations and liabilities 

resulting from such default with the 

scope of any such tear-up (‘‘Partial TearUp’’) being determined by the Risk 

Committee; and 

(c) Allow OCC’s Board to vote to reallocate losses, costs and fees imposed 

upon holders of positions extinguished 

in a Partial Tear-Up through a special 

charge levied against remaining nondefaulting Clearing Members. 

(4) Revise the descriptions and 

authorizations in Article VIII of OCC’s 

By-Laws concerning the use of the 

Clearing Fund to reflect the discretion of 

OCC to use remaining Clearing Fund 

contributions to re-allocate losses 

imposed on non-defaulting Clearing 

Members and customers from a 

Voluntary Tear-Up or a mandatory tearup (‘‘Partial Tear-Up,’’ as defined 

below). 

Discussion of Proposed Changes 

Each of the proposed revisions to 

OCC’s Rules and By-Laws is described 

in more detail in the following subsections: 

1. Proposed Changes to OCC’s 

Assessment Powers 

a. Current Assessment Powers 

OCC’s current assessment powers are 

described in Section 6 of Article VIII of 

OCC’s By-Laws. Section 6 establishes a 

general requirement for each Clearing 

Member to promptly make good any 

deficiency in its required contribution 

to the Clearing Fund whenever an 

amount is paid out of its Clearing Fund 

contribution (whether by proportionate 

charge or otherwise).18 In this regard, a 

Clearing Member’s obligation to 

replenish the Clearing Fund is not 

currently subject to any pre-determined 

limit. Notwithstanding the foregoing, a 

Clearing Member can limit the amount 

of its liability for replenishing the 

Clearing Fund (at an additional 100% of 

the amount of its then-required Clearing 

Fund contribution) by winding-down its 

clearing activities and terminating its 

status as a Clearing Member. Any 

Clearing Member seeking to so limit its 

liability for replenishing the Clearing 

Fund must: (i) Notify OCC in writing 

not later than the fifth business day after 

the proportionate charge that it is 

terminating its status as a Clearing 

Member, (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 as promptly as 

practicable after giving notice to OCC. 

Thus, withdrawal from clearing 

membership is the only means by which 

a Clearing Member currently can limit 

its liability for replenishing the Clearing 

Fund. 

b. Proposed Changes to Assessment 

Powers 

OCC proposes to amend Section 6 of 

Article VIII of OCC’s By-Laws to make 

three primary modifications regarding 

its existing authority to assess 

proportionate charges against Clearing 

Members’ contributions to the Clearing 

Fund. First, the proposal introduces an 

automatic minimum fifteen calendar 

day ‘‘cooling-off’’ period that begins 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3247 

19After a cooling-off period has ended, the 

occurrence of any event described in clauses (i) 

through (iv) of Article VIII, Section 5(a) of OCC’s 

By-Laws that results in a proportionate charge 

against the Clearing Fund would trigger a new 

cooling off period, and thusly, a cap of 200% of 

each Clearing Member’s then-required contribution 

would again apply. 

20This assumes that the proportionate charge 

resulted in the Clearing Member’s actual Clearing 

Fund contribution dropping below the amount of 

its required contribution (i.e., that the Clearing 

Member did not have excess above its required 

contribution that was sufficient to cover the amount 

of the proportionate charge allocated to such 

Clearing Member). 

21Rule 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. 

when a proportionate charge is assessed 

by OCC against Clearing Members’ 

Clearing Fund contributions. While the 

cooling-off period will 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 in one or 

more proportionate charges against the 

Clearing Fund, the cooling-off period 

shall 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 a cooling-off period, each 

Clearing Member would have its 

aggregate liability to replenish the 

Clearing Fund capped 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. Once the 

cooling-off period ends, any remaining 

losses or expenses suffered by OCC as 

a result of any event described in 

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

Section 5(a) of OCC’s By-Laws that 

occurred during such cooling-off period 

could not be charged against the 

amounts Clearing Members have 

contributed to replenish the Clearing 

Fund upon the expiration of the 

cooling-off period.19

Second, in connection with the 

cooling-off period, the proposal would 

extend 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 and would modify the 

obligations of such a terminating 

Clearing Member for closing-out and 

transferring its remaining open 

positions. Specifically, to effectively 

terminate its status as a Clearing 

Member and not be liable for 

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 fails 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 under Article VIII, 

Section 6 of OCC’s By-Laws and 

therefore it would remain subject to the 

obligation to replenish the Clearing 

Fund after the end of the cooling-off 

period. 

Third, the proposal would clarify the 

distinction between ‘‘replenishment’’ of 

the Clearing Fund and a Clearing 

Member’s obligation to answer 

‘‘assessments.’’ In this context, the term 

‘‘replenish’’ (and its variations) shall to 

refer to a Clearing Member’s standing 

duty, following any proportionate 

charge against the Clearing Fund, to 

return its Clearing Fund contribution to 

the amount required from such Clearing 

Member for the month in question.20

The term ‘‘assessment’’ (and its 

variations) shall refer to the amount, 

during any cooling-off period, that a 

Clearing Member would be required to 

contribute to the Clearing Fund in 

excess of the amount of the Clearing 

Member’s pre-funded required Clearing 

Fund contribution. 

Proposed Addition of Ability To 

Request Voluntary Payments 

OCC proposes to add new Rule 1009, 

which will 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 

2211,21 OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default. 

Under new Rule 1009, OCC will initiate 

a call for voluntary payments by issuing 

a ‘‘Voluntary Payment Notice’’ inviting 

all non-defaulting Clearing Members to 

make payments to the Clearing Fund in 

addition to any amounts they are 

otherwise required to contribute 

pursuant to Rule 1001. The Voluntary 

Payment Notice would specify the terms 

applicable to any voluntary payment, 

including but not limited to, that any 

voluntary payment may not be 

withdrawn once made, that no Clearing 

Member shall be obligated to make a 

voluntary payment and that OCC shall 

retain full discretion to accept or reject 

any voluntary payment. Rule 1009 

specifies that if OCC subsequently 

recovers from the defaulted Clearing 

Member or the estate(s) of the defaulted 

Clearing Member(s), OCC would seek to 

compensate first from such recovery all 

non-defaulting Clearing Members that 

made voluntary payments (and if the 

amount recovered from the defaulted 

Clearing Member(s) is less than the 

aggregate amount of voluntary 

payments, non-defaulting 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). 

Proposed Addition of Ability To 

Conduct Voluntary Tear-Ups 

OCC proposes to add new Rule 1111, 

which, in relevant part, will 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. 

While Risk Committee approval is not 

needed to commence a voluntary tearup, the Risk Committee would be 

responsible for determining the 

appropriate scope of each voluntary 

tear-up. To ensure OCC retains 

sufficient flexibility to effectively 

deploy this tool in an extreme stress 

event, proposed Rule 1111(c) is drafted 

to provide the Risk Committee with 

discretion to determine the appropriate 


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22Notwithstanding the discretion that would be 

afforded by the text of proposed Rule 1111(c), OCC 

anticipates that the scope of voluntary tear-ups 

likely would be dictated by the cleared contracts 

remaining in the portfolio(s) of the defaulted 

Clearing Member(s). 

23Since OCC does not know the identities of 

Clearing Members’ customers, OCC would depend 

on each Clearing Member to notify its customers 

with positions in scope of the Voluntary Tear-Up 

of the opportunity to participate in such tear-up. 

24 In general, 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). 

25OCC anticipates that it would determine the 

date on which to initiate Partial Tear-Ups by 

monitoring its remaining financial resources against 

the potential exposure of the remaining 

unauctioned positions from the portfolio(s) of the 

defaulted Clearing Member(s). 

26 In order to effect re-allocation of the losses, 

costs or expenses imposed upon the holders of tornup positions, OCC expects that after it has 

completed its tear-up process and re-established a 

matched book, holders of both voluntarily torn-up 

and mandatorily torn-up positions would be 

provided with a limited opportunity to re-establish 

positions in the contracts that were voluntarily or 

mandatorily extinguished. After the expiration of 

such period, OCC would seek to collect the 

information on the losses, costs or expenses that 

had been imposed on the holders of torn-up 

positions. Based on the information collected, OCC 

would determine whether it can reasonably 

determine the losses, costs and expenses 

sufficiently to re-allocate such amounts. 

27Since OCC does not know the identities of 

Clearing Members’ customers, OCC would depend 

on each Clearing Member to notify its customers 

with positions in scope of the Partial Tear-Up of the 

possibility of tear-up. 

scope of each voluntary tear-up.22 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 shall (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. 

Once the Risk Committee has 

determined the scope of the Voluntary 

Tear-Up, OCC will initiate the call for 

voluntary tear-ups by issuing a 

‘‘Voluntary Tear-Up Notice.’’ The 

Voluntary Tear-Up Notice shall inform 

all non-defaulting Clearing Members of 

the opportunity to participate in a 

Voluntary Tear-Up.23 The Voluntary 

Tear-Up Notice would specify the terms 

applicable to any voluntary tear-up, 

including but not limited to, that no 

Clearing Member or customers of a 

Clearing Member shall be obligated to 

participate in a voluntary tear-up and 

that OCC shall retain full discretion to 

accept or reject any voluntary tear-up. 

OCC 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.24

Instead, OCC has determined that its 

tear-up process—for both Voluntary 

Tear-Ups as well as Partial Tear-Ups— 

should 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 haircutting gains.25

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 

torn-up positions at the assigned TearUp Price without forcing a reduction in 

the amount unpaid gains on such 

positions. The proposed changes would 

provide OCC with two separate and 

non-exclusive means of equitably reallocating the losses, costs or expenses 

imposed upon the holders of torn-up 

positions as a result of the tear-up(s). 

First, the proposed changes to Article 

VIII would provide OCC discretion to 

use remaining Clearing Fund 

contributions to re-allocate losses 

imposed on non-defaulting Clearing 

Members and customers from such tearup(s). Second, Rule 1111(a) would 

provide that if OCC subsequently 

recovers from the defaulted Clearing 

Member or 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 tore-up 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.26 If the 

amount recovered is less than the 

aggregate amount of Voluntary Tear-Up, 

each non-defaulting Clearing Member 

and non-defaulting 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. 

With respect to Voluntary Tear-Ups, 

new Rule 1111(h) would clarify that no 

action or omission by OCC pursuant to 

and in accordance Rule 1111 shall 

constitute a default by OCC. 

Proposed Addition of Ability To 

Conduct Partial Tear-Ups 

OCC proposes to add new Rule 1111, 

which, in relevant part, will provide the 

Board with discretion to extinguish the 

remaining 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 hereinafter collectively 

referred to as ‘‘Partial Tear-Ups’’). Like 

the determination for Voluntary TearUps, the Risk Committee shall 

determine the appropriate scope of each 

Partial Tear-Up and such determination 

shall (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. Once the Risk 

Committee has determined the scope of 

the Partial Tear-Up, OCC will initiate 

the Partial Tear-Up process by issuing a 

‘‘Partial Tear-Up Notice.’’ The Partial 

Tear-Up Notice shall (i) identify the 

Remaining Open Positions and Related 

Open Positions designated for tear-up, 

(ii) identify the open positions of nondefaulting Clearing Members and nondefaulting customers that will be subject 

to Partial Tear-Up (such positions, 

‘‘Tear-Up Positions’’), (iii) specify the 

termination price (‘‘Partial Tear-Up 

Price’’) for each position to be torn-up, 

and (iv) list the date and time as of 

which the Partial Tear-Up will occur.27

With regard to the date and time of a 

Partial Tear-Up, Rule 1111(d) specifies 

that the Risk Committee shall set the 

date and time. With regard to the Partial 

Tear-Up Price, OCC anticipates that it is 

likely to use the last established end-ofday settlement price, in accordance with 

its existing practices concerning pricing 

and valuation. However, given that it is 

not possible to know in advance the 

precise circumstances that would cause 


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28 In relevant part, subpart (c) reads as follows: 

‘‘In determining a close-out amount, the 

Corporation may consider any information that it 

deems relevant, including, but not limited to, any 

of the following: (1) Prices for underlying interests 

in recent transactions, as reported by the market or 

markets for such interests; (2) quotations from 

leading dealers in the underlying interest, setting 

forth the price (which may be a dealing price or an 

indicative price) that the quoting dealer would 

charge or pay for a specified quantity of the 

underlying interest; (3) relevant historical and 

current market data for the relevant market, 

provided by reputable outside sources or generated 

internally; and (4) values derived from theoretical 

pricing models using available prices for the 

underlying interest or a related interest and other 

relevant data. Amounts stated in a currency other 

than U.S. Dollars shall be converted to U.S. Dollars 

at the current rate of exchange, as determined by 

the Corporation. A position having a positive closeout value shall be an ‘asset position’ and a position 

having a negative close-out value shall be a ‘liability 

position.’ ’’ 

29For the avoidance of doubt, the special charge 

would be distinct and separate from a Clearing 

Member’s obligation to satisfy Clearing Fund 

assessments, and therefore, would not be subject to 

the aforementioned assessment cap in the amount 

of 200% of a Clearing Member’s then-required 

contribution to the Clearing Fund. 

OCC to conduct a tear-up, Rule 1111(f) 

has been drafted to allow OCC to 

exercise reasonable discretion, if 

necessary, in establishing the Partial 

Tear-Up Price by some means other than 

its existing practices concerning pricing 

and valuation. Specifically, Rule 1111(f) 

would require that OCC, in exercising 

any such discretion, would act in good 

faith and in a commercially reasonable 

manner to adopt methods of valuation 

expected to produce reasonably accurate 

substitutes for the values that would 

have been obtained from the relevant 

market if it were operating normally, 

including but not limited to the use of 

pricing models that use the market price 

of the underlying interest or the market 

prices of its components. Rule 1111(f) 

further specifies that OCC may consider 

the same information set forth in 

subpart (c) of Section 27, Article VI of 

OCC’s By-Laws.28

The scope of any Partial Tear-Up will 

be determined in accordance with Rule 

1111(e). With respect to the 

extinguishment of Remaining Open 

Positions, OCC will designate Tear-Up 

Positions in identical Cleared Contracts 

and Cleared Securities on the opposite 

side of the market and in an aggregate 

amount equal to that of the Remaining 

Open Positions. OCC will only 

designate Tear-Up Positions in the 

accounts of non-defaulting Clearing 

Members (inclusive of such Clearing 

Members’ customer accounts) with an 

open position in the applicable Cleared 

Contract or Cleared Security and of nondefaulted customers of a defaulted 

Clearing Member. Tear-Up Positions 

shall be designated and applied by OCC 

on a pro rata basis across all the 

identical positions in Cleared Contracts 

and Cleared Securities on the opposite 

side of the market in the accounts of 

non-defaulted Clearing Members and 

non-defaulted customers (including the 

non-defaulted customers of defaulted 

Clearing Members). 

Rule 1111(e)(iii) provides that every 

Partial Tear-Up position is 

automatically terminated upon and with 

effect from the Partial Tear-Up Time, 

without the need for any further step by 

any party to such Cleared Contract or 

Cleared Security, and that upon 

termination, either OCC or the relevant 

Clearing Member (as the case may be) 

shall be obligated to pay the other the 

applicable Partial Tear-Up Price. Rule 

1111(e)(iii) further provides that the 

corresponding open position shall be 

deemed terminated at the Partial TearUp Price. 

Rule 1111(g) provides that to the 

extent losses imposed upon nondefaulting Clearing Members and nondefaulting customers resulting from a 

Partial Tear-Up can reasonably be 

determined, the Board may elect to reallocate such losses among all nondefaulting Clearing Members through a 

special charge to all non-defaulting 

Clearing Members in an amount 

corresponding to each such nondefaulting Clearing Member’s 

proportionate share of the variable 

amount of the Clearing Fund at the time 

such Partial Tear-Up is conducted.29

With respect to Partial Tear-Ups, new 

Rule 1111(h) would clarify that no 

action or omission by OCC pursuant to 

and in accordance Rule 1111 shall 

constitute a default by OCC. 

Expected Effect on and Management of 

Risk 

OCC believes that the proposed 

changes would reduce the nature and 

level of risk presented to OCC in three 

primary ways: (i) By providing greater 

certainty regarding what financial 

resources will be available to OCC after 

a proportionate charge is assessed; (ii) 

by providing additional tools by which 

to allocate credit losses in excess of 

OCC’s available financial resources; and 

(iii) by enhancing OCC’s ability to reestablish a matched book. First, OCC 

believes the imposition of a 200% cap 

on OCC’s assessment powers during any 

cooling-off period provides Clearing 

Members with greater certainty 

regarding their maximum liability with 

respect to the Clearing Fund during 

extreme stress events, which in turn, 

facilitates Clearing Members’ 

management of their own risks, and to 

the extent applicable, regulatory capital 

considerations. Further, OCC believes 

that extending the window for Clearing 

Member withdrawal following a 

proportionate charge to be equivalent 

with the cooling-off period would afford 

a Clearing Member a more reasonable 

period in which to evaluate whether the 

withdrawal from clearing membership 

would be necessary to cap its liability 

for proportionate charges at 200% of its 

then-required Clearing Fund 

contributions. With this change, OCC 

believes the increased predictability 

would help it to more reliably 

understand the amount of Clearing 

Fund contributions that will likely be 

available to it after a proportionate 

charge is assessed. Second, the 

introduction of rules to allow for 

voluntary payments, Voluntary TearUps and Partial Tear-Ups would provide 

OCC with three distinct tools that could 

be used to allocate any credit losses 

OCC may face in excess of collateral and 

other resources available to OCC. 

Finally, in the event that OCC believes 

its obligations and liabilities arising 

from remaining positions in the 

portfolio of a defaulted Clearing 

Member may exceed its remaining 

available financial resources, the 

proposed changes ultimately would 

enable OCC to extinguish those 

positions, thereby re-establishing a 

matched book. 

The risks of a Partial Tear-Up are 

extremely remote; nonetheless, OCC 

believes that the express authority to 

conduct a Partial Tear-Up may be 

viewed as increasing Clearing Members’ 

and customers’ exposure to an extreme 

stress scenario. As explained above, the 

proposed Partial Tear-Up authority is 

consistent with regulatory requirements, 

as well as with the expectations of CCPs 

of various international organizations. 

OCC further believes that its proposed 

Partial Tear-Up authority strikes an 

appropriate balance between seeking to 

protect the interests of Clearing 

Members and customers and the need to 

have appropriate tools to stabilize a 

systemically important financial market 

utility and minimize the risk of 

disruption to the broader financial 

system. To address the potential impact 

of a Partial Tear-Up on Clearing 

Members and customers, OCC has 

proposed two tools that would enable it 

to equitably re-allocate the losses, costs 

and fees imposed upon holders of tornup positions. 

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 


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3250 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 

30 12 U.S.C. 5461(b). 

31 12 U.S.C. 5464(a)(2). 

32 12 U.S.C. 5464(b). 

33 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. 

34 12 U.S.C. 5464(b)(1) and (4). 

35 17 CFR 240.17Ad–22(e)(3)(ii). 

36 Indeed, the OCC’s separately filed recovery and 

orderly wind-down plan identifies OCC’s 

assessment powers, ability to call for voluntary 

payments, ability to call for Voluntary Tear-Ups and 

ability to impose Partial Tear-Ups among its 

‘‘Recovery Tools.’’ OCC has filed a proposed rule 

change with the Commission in connection with 

this proposal. See SR–OCC–2017–021. 

37 17 CFR 240.17Ad–22(e)(3)(ii). 

38 17 CFR 240.17Ad–22(e)(3)(ii). 

39 17 CFR 240.17Ad–22(e)(v)(viii). 

40Rule 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. 

41Rule 1111(g), which would provide the Board 

authority to equitably re-allocate losses, costs and 

fees directly imposed as a result of a Partial TearUp among all non-defaulting Clearing Members 

through a special charge, would serve as a 

discretionary tool to redistribute the credit losses 

allocated through Partial Tear-Up. 

42 17 CFR 240.17Ad–22(e)(v)(viii). 

43 17 CFR 240.17Ad–22(e)(4)(ix). 

things, promoting uniform risk 

management standards for systemically 

important financial market utilities and 

strengthening the liquidity of 

systemically important financial market 

utilities.30 Section 805(a)(2) of the 

Clearing Supervision Act 31 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 32 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.33 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.34

Recovery and Orderly Wind-Down 

In relevant part, Rule 17Ad– 

22(e)(3)(ii) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . plan[ ] 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.’’ 35 As 

stated above, each of the proposed 

changes is designed to provide OCC 

with tools to address the risks OCC 

might confront in a recovery and orderly 

wind-down scenario.36 Consistent with 

the requirements of Rule 17Ad– 

22(e)(3)(ii), the proposed tools would 

enable OCC to better address the risks 

of liquidity shortfalls and credit losses 

resulting from a Clearing Member 

default or certain other loss events and, 

if necessary, to ultimately re-establish a 

matched book in a recovery or orderly 

wind-down scenario.37 In this context, 

the proposed changes serve as a critical 

component of OCC’s recovery and 

orderly wind-down plan. As a result, in 

OCC’s view, the proposed changes are 

consistent with the requirements of Rule 

17Ad–22(e)(3)(ii) as to the recovery and 

orderly wind-down plan.38

Allocation of Credit Losses Above 

Available Resources 

In relevant part, Rule 17Ad– 

22(e)(4)(viii) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [a]ddress[ ] 

allocation of credit losses the [CCA] may 

face if its collateral and other resources 

are insufficient to fully cover its credit 

exposures . . .’’ 39 The proposed 

changes would provide OCC with three 

distinct tools that could be used to 

allocate any credit losses OCC may face 

in excess of collateral and other 

resources available to OCC. First, new 

Rule 1009 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 

2211,40 OCC may not have sufficient 

resources to satisfy its obligations and 

liabilities resulting from such default. 

Second, new Rule 1111 would establish 

a framework by which non-defaulting 

Clearing Members and non-defaulting 

customers of Clearing Members could be 

given an opportunity to participate in 

Voluntarily Tear-Ups 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. 

Finally, new Rule 1111 also would 

provide the Board with discretion to 

mandatorily tear-up Remaining Open 

Positions and 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.41 In OCC’s view, 

each of these tools could be deployed by 

OCC, if necessary, to allocate credit 

losses in excess of the collateral and 

other resources available to OCC, in 

accordance with Rule 17Ad– 

22(e)(4)(viii).42

Replenishment of Financial Resources 

Following a Default 

In relevant part, Rule 17Ad– 

22(e)(4)(ix) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [d]escrib[e] 

the [CCA’s] process to replenish any 

financial resources it may use following 

a default or other event in which use of 

such resources is contemplated.’’ 43

OCC’s Clearing Members have a 

standing obligation to replenish the 

Clearing Fund following any 

proportionate charge. The proposed 

changes would establish a rolling 

cooling-off period, triggered by the 

payment of a proportionate charge 

against the Clearing Fund, during which 

period the aggregate liability of a 

Clearing Member to replenish the 

Clearing Fund (inclusive of 

assessments) would be 200% of the 

Clearing Member’s required 

contribution as of the time immediately 

preceding the triggering proportionate 

charge. Compared to the current 

requirement under which a Clearing 

Member may cap its liability to 

proportionate charges at an additional 

100% of its then-required contribution, 

a Clearing Member would instead be 

permitted to cap its liability for 

proportionate charges at an additional 

200% of its then-required Clearing Fund 

contribution. 

OCC believes that the proposed 

approach improves predictability for 


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44Under the existing approach, it is less certain 

from OCC’s standpoint regarding whether Clearing 

Members would reasonably be able to cap their 

liability to proportionate charges within five 

business days. 

45Rule 603 provides that ‘‘[t]he Risk Committee 

may, from time to time, increase the amount of 

margin which may be required in respect of a 

cleared contract, open short position or exercised 

contract if, in its discretion, it determines that such 

increase is advisable for the protection of [OCC], the 

Clearing Members or the general public.’’ 

46OCC initially considered a fixed 15-calendar 

day cooling-off period; however, OCC concluded 

that a fixed 15-calendar day cooling-off period may 

increase the risks of successive or cascading 

Clearing Member defaults and may perversely 

incentivize Clearing Members to seek to withdraw 

from clearing membership. Through conversations 

with Clearing Members, OCC believes that these 

potentially disruptive consequences are mitigated 

by the proposed rolling cooling-off period. 

47 17 CFR 240.17Ad–22(e)(4)(ix). 

48 17 CFR 240.17Ad–22(e)(7)(ix). 

49 17 CFR 240.17Ad–22(e)(7)(ix). 

50 17 CFR 240.17Ad–22(e)(13). 

OCC and for Clearing Members 

regarding the size of Clearing Fund 

contributions that are likely to be 

subject to assessments for proportionate 

charges. Additionally, replacing the five 

business day withdrawal period with 

the withdrawal period commensurate 

with the cooling-off period (which, as 

proposed would be a minimum of 

fifteen calendar days) would give 

Clearing Members a more reasonable 

period in which to meet the wind-down 

and termination requirements necessary 

to cap their liability. OCC believes that 

this would afford them greater certainty 

regarding their maximum liability with 

respect to the Clearing Fund during 

extreme stress events, which in turn, 

facilitates Clearing Members’ 

management of their own risk 

management, and to the extent 

applicable, regulatory capital 

considerations. And OCC believes this 

increased predictability would also be 

beneficial to OCC by helping it to more 

reliably understand the amount of 

Clearing Fund contributions that will 

likely be available to it after a 

proportionate charge is assessed.44

OCC believes that the relative 

certainty provided by the proposed 

cooling-off period and 200% cap on 

assessments ultimately could reduce the 

risks of successive or ‘‘cascading’’ 

defaults, in which the financial 

demands on remaining non-defaulting 

Clearing Members to continually 

replenish OCC’s Clearing Fund (and 

similar guaranty funds at other CCPs to 

which such Clearing Members might 

belong) have the effect of further 

weakening such Clearing Members to 

the point of default. In this regard, the 

proposed changes are designed to 

provide OCC, Clearing Members and 

other stakeholders with sufficient time 

to manage the ongoing default(s) 

without further aggravating the extreme 

stresses facing market participants. 

OCC recognizes that the proposed 

changes would limit the maximum 

amount of Clearing Fund resources that 

could be available to OCC in an extreme 

stress scenario, which introduces the 

possibility, however remote, that the 

proposed 200% cap ultimately could be 

reached. If during any cooling-off period 

the amount of aggregate proportionate 

charges against the Clearing Fund 

approaches the 200% cap, the amount 

remaining in the Clearing Fund may no 

longer be sufficient to comply with the 

applicable minimum regulatory 

financial resources requirements in the 

CCAs. In any such event, OCC’s existing 

authority under Rule 603 would permit 

OCC to call on participants for 

additional initial margin, which could 

ensure that OCC’s minimum financial 

resources remain in excess of applicable 

CCA requirements.45 OCC recognizes 

that the imposition of increased margin 

requirements could have an immediate 

pro-cyclical impact on participants (and 

consequential impacts on the broader 

financial system) that is potentially 

greater than the impact of replenishing 

the Clearing Fund. These risks would be 

limited to a specific extreme stress event 

and could be mitigated by certain 

factors. First, OCC, in coordination with 

its regulators, would carefully evaluate 

any potential increase in the context of 

then-existing facts and circumstances. 

Second, during the cooling-off period, 

Clearing Members and their customers 

will have the opportunity to reduce or 

rebalance their respective portfolios in 

order to mitigate their exposures to 

stress losses and initial margin 

increases. Finally, since initial margin is 

not designed to be subject to mutualized 

loss, the risk of loss faced by Clearing 

Members for amounts posted as 

additional margin would be 

substantially less than for 

replenishments of the Clearing Fund. 

Given the products cleared by OCC 

and the composition of its clearing 

membership, OCC has determined that 

a minimum 15-calendar day cooling-off 

period, rolling up to a maximum of 20 

calendar days, is likely to be a sufficient 

amount of time for OCC to manage the 

ongoing default(s) and take necessary 

steps in furtherance of stabilizing the 

clearing system. Further, through 

conversations with Clearing Members, 

OCC believes that the proposed coolingoff period is likely to be a sufficient 

amount for Clearing Members (and their 

customers) to orderly reduce or 

rebalance their positions, in an attempt 

to mitigate stress losses and exposure to 

potential initial margin increases as they 

navigate the stress event. Through 

conversations with Clearing Members, 

OCC also believes that the proposed 

cooling-off period is likely to be a 

sufficient amount for certain Clearing 

Members to orderly close-out their 

positions and transfer customer 

positions as they withdraw from 

clearing membership. OCC believes the 

proposed cooling-off period, coupled 

with the other proposed changes to 

OCC’s assessment powers, is likely to 

provide Clearing Members with an 

adequate measure of stability and 

predictability as to the potential use of 

Clearing Fund resources, which OCC 

believes removes the existing incentive 

for Clearing Members to withdraw 

following a proportionate charge.46

In light of the foregoing, OCC believes 

that the proposed changes would 

enhance and strengthen its process to 

replenish the Clearing Fund following a 

default or other event in which use of 

the Clearing Fund is contemplated, in 

accordance with Rule 17Ad– 

22(e)(4)(ix).47

Replenishment of Liquid Resources 

In relevant part, Rule 17Ad– 

22(e)(7)(ix) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [d]escrib[e] 

the [CCA’s] process to replenish any 

liquid resources that the clearing agency 

may employ during a stress event.’’ 48

Since the use any part of the cash 

portion of OCC’s Clearing Fund would 

constitute a depletion of one of OCC’s 

liquid resources, OCC’s assessment 

power, discussed above, is the primary 

means of replenishing the Clearing 

Fund cash that OCC used to address the 

stress event. For the same reasons stated 

above, OCC believes that the proposed 

changes enhance and strengthen its 

process to replenish the Clearing Fund, 

as necessary, following a default or 

other stress event in which the Clearing 

Fund is used, and therefore, OCC views 

the proposed changes as consistent with 

Rule 17Ad–22(e)(7)(ix).49

Timely Action To Contain Losses 

In relevant part, Rule 17Ad–22(e)(13) 

requires that each CCA ‘‘establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to . . . [e]nsure the 

[CCA] has the authority and operational 

capacity to take timely action to contain 

losses and liquidity demands and 

continue to meet its obligations . . .’’ 50

The proposed changes would provide 

OCC with the authority to call for 

Voluntary Tear-Ups and OCC’s Board 


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3252 Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 

51 17 CFR 240.17Ad–22(e)(13). 

52 17 CFR 240.17Ad–22(e)(23)(i). 

53 17 CFR 240.17Ad–22(e)(13). 

54 17 CFR 240.17Ad–22(e)(23)(ii). 

55 17 CFR 240.17Ad–22(e)(23)(ii). 

with the discretion to impose Partial 

Tear-Ups, which would provide OCC 

with authority necessary to extinguish 

certain losses (and attendant liquidity 

demands) thereby potentially enabling 

OCC to continue to meet its remaining 

obligations to participants. As designed, 

Voluntary Tear-Ups and Partial TearUps would be initiated on a date 

sufficiently in advance of the 

exhaustion of OCC’s financial resources 

such that OCC is expected to have 

adequate resources remaining to cover 

the amount it must pay to extinguish the 

positions of Clearing Members and 

customers without haircutting gains. 

Accordingly, OCC believes that its 

authority and capacity to conduct a 

Partial Tear-Up should be timely, 

relative to the adequacy of OCC’s 

remaining financial resources. Finally, 

OCC believes it has the operational and 

systems capacity sufficient to support 

the proposed changes, and OCC’s 

policies and procedures will be updated 

accordingly to reflect the existence of 

these new tools. As a result, OCC 

believes that the proposed changes 

conform to the relevant requirements in 

Rule 17Ad–22(e)(13).51

Public Disclosure of Key Aspects of 

Default Rules 

In relevant part, Rule 17Ad– 

22(e)(23)(i) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [p]ublicly 

disclos[e] all relevant rules and material 

procedures, including key aspects of its 

default rules and procedures.’’ 52 As 

stated above, each of the tools discussed 

herein are contemplated to be deployed 

by OCC if an extreme stress event has 

placed OCC into a recovery or orderly 

wind-down scenario, and therefore, the 

tools discussed herein constitute key 

aspects of OCC’s default rules. By 

incorporating the proposed changes into 

OCC’s Rules and By-Laws, as further 

supplemented by the discussion in 

OCC’s public rule filing, OCC believes 

that proposed changes would conform 

to the relevant requirements in Rule 

17Ad–22(e)(23)(i).53

Sufficient Information Regarding the 

Risks, Fees and Costs of Clearing 

In relevant part, Rule 17Ad– 

22(e)(23)(ii) requires that each CCA 

‘‘establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to . . . [p]rovid[e] 

sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 

incur by participating in the covered 

clearing agency.’’ 54 The proposed 

changes would clearly explain to 

Clearing Members and market 

participants that an extreme stress 

scenario could result in the use—and 

theoretically the exhaustion—of OCC’s 

financial resources, inclusive of OCC’s 

proposed assessment powers. Proposed 

changes to Section 6, Article VIII of 

OCC’s By-Laws would explain Clearing 

Members’ replenishment obligation and 

liability for assessments. The proposed 

changes also would clearly explain, 

through proposed Rules 1009 and 1111, 

that as OCC nears the exhaustion of its 

assessment powers, Clearing Members 

may be asked for voluntary payments 

and, if necessary, Clearing Members and 

customers may be asked to participate 

in a Voluntary Tear-Up and/or subject to 

a Partial Tear-Up. Proposed Rules 

1009(b) and 1111(a)(ii) also would make 

clear that Clearing Members that made 

voluntary payments and Clearing 

Members and customers whose 

tendered positions were extinguished in 

the Voluntary Tear-Up would be 

prioritized in the distribution of any 

recovery from the defaulted Clearing 

Member(s). Proposed changes to Article 

VIII would clarify that the Clearing 

Fund contributions remaining after OCC 

has conducted a Voluntary Tear-Up or 

Partial Tear-Up could be used to 

compensate the non-defaulting Clearing 

Members and non-defaulting customers 

for the losses, costs or fees imposed 

upon them as a result of such Voluntary 

Tear-Up or Partial Tear-Up. Proposed 

Rule 1111(g) would make clear that, 

following a Partial Tear-Up, OCC’s 

Board may seek to equitably re-allocate 

losses, costs and fees directly imposed 

as a result of a Partial Tear-Up among 

all non-defaulting Clearing Members 

through a special charge. By 

incorporating the proposed changes into 

OCC’s Rules and By-Laws, as further 

supplemented by the discussion in 

OCC’s public rule filing, OCC believes 

that is has provided sufficient 

information to enable participants to 

identify and evaluate the risks, fees, and 

other material costs they could incur by 

participating OCC, consistent with the 

requirements in Rule 17Ad– 

22(e)(23)(ii).55

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–2017–809 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–2017–809. 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 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 15 / Tuesday, January 23, 2018 / Notices 3253 

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_

809.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–2017–809 and should 

be submitted on or before February 13, 

2018. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–01070 Filed 1–22–18; 8:45 am] 

BILLING CODE 8011–01–P 

SMALL BUSINESS ADMINISTRATION 

[Disaster Declaration #15230 and #15231; 

Arizona Disaster Number AZ–00050] 

Administrative Declaration 

Amendment of Disaster for the State of 

Arizona 

AGENCY: U.S. Small Business 

Administration. 

ACTION: Amendment 1. 

SUMMARY: This is an amendment of the 

Administrative declaration of a disaster 

for the State of Arizona dated 08/03/ 

2017. 

Incident: Post-fire Flooding from 

Monsoon Storms. 

Incident Period: 07/19/2017 through 

09/30/2017. 

DATES: Issued on 01/11/2018. 

Physical Loan Application Deadline 

Date: 10/02/2017. 

Economic Injury (EIDL) Loan 

Application Deadline Date: 05/03/2018. 

ADDRESSES: Submit completed loan 

applications to: U.S. Small Business 

Administration, Processing and 

Disbursement Center, 14925 Kingsport 

Road, Fort Worth, TX 76155. 

FOR FURTHER INFORMATION CONTACT: A. 

Escobar, Office of Disaster Assistance, 

U.S. Small Business Administration, 

409 3rd Street SW, Suite 6050, 

Washington, DC 20416, (202) 205–6734. 

SUPPLEMENTARY INFORMATION: The notice 

of an Administrative declaration for the 

State of ARIZONA, dated 08/03/2017, is 

hereby amended to establish the 

incident closing date as 09/30/2017. 

All other information in the original 

declaration remains unchanged. 

(Catalog of Federal Domestic Assistance 

Number 59008) 

Dated: January 11, 2018. 

Linda E. McMahon, 

Administrator. 

[FR Doc. 2018–01163 Filed 1–22–18; 8:45 am] 

BILLING CODE 8025–01–P 

OFFICE OF THE UNITED STATES 

TRADE REPRESENTATIVE 

Notice of Proposed Changes to the 

Slate of Industry Trade Advisory 

Committees 

AGENCY: Office of the United States 

Trade Representative. 

ACTION: Notice and request for 

comments. 

SUMMARY: The United States Trade 

Representative (Trade Representative) 

and the Secretary of Commerce 

(Secretary) plan to establish a new fouryear charter term for the Industry Trade 

Advisory Committees (ITACs) beginning 

in February 2018. As part of the rechartering process, the Secretary and the 

Trade Representative are proposing 

changes to the current slate of ITACs 

and invite interested parties to submit 

their view on these changes. 

DATES: The deadline for submission of 

written comments is February 5, 2018 at 

midnight EST. 

ADDRESSES: Submit comments 

electronically via email to 

FRNCommentsITAC@trade.gov. 

FOR FURTHER INFORMATION CONTACT: 

Gregory M. Walters, Assistant United 

States Trade Representative for 

Intergovernmental Affairs and Public 

Engagement at Gregory.M.Walters@

ustr.eop.gov or (202) 395–2558. You can 

find additional information about the 

ITACs on the International Trade 

Administration website at 

www.trade.gov/itac. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 135 of the Trade Act of 1974, 

as amended (19 U.S.C. 2155), 

establishes a private-sector trade 

advisory system to ensure that U.S. 

trade policy and trade negotiation 

objectives adequately reflect U.S. 

commercial and economic interests. 

Section 135(c)(2) (19 U.S.C. 2155(c)(2)) 

directs the President to establish 

sectoral or functional trade advisory 

committees as appropriate, comprised of 

representatives of all industry, labor, 

agricultural, and services interests 

(including small business interests) in 

the sector or functional area. These 

committees provide detailed policy and 

technical advice, information, and 

recommendations regarding trade 

barriers, negotiation of trade 

agreements, and implementation of 

existing trade agreements affecting 

industry sectors, and perform other 

advisory functions relevant to U.S. trade 

policy matters as requested. In 

organizing such committees, the Trade 

Representative and the relevant 

Secretary are to consult with interested 

private organizations and to consider 

‘‘(i) patterns of actual or potential 

competition between United States 

industry and agriculture and foreign 

enterprise in international trade, (ii) the 

character of the nontariff barriers and 

other distortions affecting such 

competition, (iii) the necessity for 

reasonable limits on the number of such 

advisory committees, (iv) the necessity 

that each committee be reasonably 

limited in size, and (v) in the case of 

each sectoral committee, that the 

product lines covered by each 

committee be reasonably related.’’ 

Pursuant to this authority, the 

Secretary and the Trade Representative 

established the ITACs to provide 

detailed policy and technical advice, 

information, and recommendations to 

the Secretary and the Trade 

Representative on trade policy matters 

including: (1) Negotiating objectives and 

bargaining positions before entering into 

trade agreements; (2) the impact of the 

implementation of trade agreements on 

the relevant sector; (3) matters 

concerning the operation of any trade 

agreement once entered into; and (4) 

other matters arising in connection with 

the development, implementation, and 

administration of the trade policy of the 

United States. The nonpartisan, 

industry input provided by the ITACs is 

important in developing unified trade 

policy objectives and positions when 

the United States negotiates and 

implements trade agreements. The 

ITACs address market-access problems, 

trade barriers, tariffs, discriminatory 

foreign procurement practices, and 

information, marketing, and advocacy 

needs of their industry sector. With 


sradovich on DSK3GMQ082PROD with NOTICES