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[Federal Register Volume 89, Number 232 (Tuesday, December 3, 2024)]
[Notices]
[Pages 95878-95891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28257]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101754; File No. SR-OCC-2024-011]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change, as Modified by Partial 
Amendment No. 1, by The Options Clearing Corporation Concerning Its 
Stock Loan Programs

November 26, 2024.

I. Introduction

    On August 22, 2024, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2024-011 pursuant to Section 19(b) of the 
Securities Exchange Act of 1934

[[Page 95879]]

(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder. The proposed rule 
change would address limitations in the structure of OCC's Stock Loan/
Hedge (``Hedge'') Program and Market Loan Program (together, the 
``Stock Loan Programs'') by creating the framework for a single, 
enhanced program designed to support current and future needs. On 
September 3, 2024, OCC filed a partial amendment (``Partial Amendment 
No. 1'') to the proposed rule change.\3\ The Commission published a 
notice for public comment on the proposed rule change, as modified by 
Partial Amendment No. 1 (hereafter ``the Proposed Rule Change''), in 
the Federal Register on September 10, 2024.\4\ The Commission has 
received no comments regarding the Proposed Rule Change. This order 
approves the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Partial Amendment No. 1, OCC corrected an error in 
Exhibit 5A to SR-OCC-2024-011 without changing the substance of the 
proposed rule change. Partial Amendment No. 1 does not materially 
alter the substance of the proposed rule change or raise any novel 
regulatory issues.
    \4\ Securities Exchange Act Release No. 100930 (Sept. 4, 2024), 
89 FR 73466 (Sept. 10, 2024) (File No. SR-OCC-2024-011) (``Notice of 
Filing'').
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II. Description of the Proposed Rule Change

    OCC has historically operated two stock lending programs, the Hedge 
Program and Market Loan Program, which, together, accounted for about 
0.02% of OCC's total volume in 2023.\5\ In its capacity as a central 
counterparty in administering these programs, OCC becomes the lender to 
every borrower and the borrower to every lender and thus guarantees the 
return of the full value of cash collateral to the Borrowing Clearing 
Member and the return of the Loaned Stock (or value of that Loaned 
Stock) to the Lending Clearing Member. OCC also offers additional 
guarantees under the Market Loan Program, including dividend equivalent 
payments and rebate payments. OCC's Rules and By-Laws govern OCC's 
novation of cleared stock loan transactions and provide for processes 
around stock loan initiation, recordkeeping, returns and recalls, and 
risk management around stock loans of suspended Clearing Members.
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    \5\ Historical volume is available at https://www.theocc.com/market-data/market-data-reports/volume-and-open-interest/historical-volume-statistics.
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    OCC's current Hedge Program requires a certain set of processes 
among balancing and reconciliation of transactions. The Market Loan 
Program, by comparison, does not require the same processes because of 
the difference in how transactions are initiated in that program. A 
recent survey of Clearing Members participating in the Stock Loan 
programs \6\ indicates that most firms have a significant spend for 
stock loan post-trade and reconciliation processing.\7\ Based on such 
survey responses, OCC believes that a service that can provide 
operational efficiencies and further reduce manual processing and 
operational risk would be well received.\8\ Additionally, the Hedge and 
Market Loan Programs differ in their treatment of Canadian Clearing 
Members. Specifically, a Canadian Clearing Member may participate in 
the Hedge Program, but not the Market Loan Program because of rules 
related to certain tax withholding obligations. Separately, OCC has 
recognized that its current aggregate position-level recordkeeping 
practices regarding these stock loan programs could be better aligned 
with the current industry practice of contract-level recordkeeping.\9\
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    \6\ OCC provided survey results as confidential Exhibit 3B to 
File No. SR-OCC-2024-011.
    \7\ Notice of Filing, 89 FR 73471, n.31.
    \8\ Id.
    \9\ See Notice of Filing, 89 FR 73467-68. (``OCC aggregates all 
stock loan positions and stock borrow positions of a Clearing Member 
relating to the same Eligible Stock for reporting and margin 
calculation purposes. OCC separately identifies stock loan and stock 
borrow positions resulting from each of the Stock Loan Programs, and 
such positions are not fungible with positions resulting from the 
other program. Position aggregation in both Stock Loan Programs is a 
legacy practice and does not follow industry-standard book-keeping 
practices. Because of position aggregation, certain industry 
standard post-trade activity must be performed bilaterally away from 
OCC, such as re-rate transactions that change the rebate rate on an 
individual loan.'')
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    OCC has expressed a desire to consolidate the Hedge Program and 
Market Loan Program at some point in the future.\10\ The immediate 
proposal is designed to support that initiative by making changes to 
align the Hedge Program and Market Loan Program as well as changes to 
address limitations across both Stock Loan Programs, such as aligning 
to the industry practice of contract-level record keeping. 
Specifically, OCC proposes to (i) align the Rules for and support 
transactions under both Stock Loan Programs through contract-level 
recordkeeping, revisions regarding re-matching matched book positions 
in suspension across Stock Loan Programs, and revisions regarding mark-
to-market settlement accounts; (ii) conform the terms of Market Loans 
cleared by OCC more closely to the provisions most commonly included in 
stock loan transactions executed under standard loan market documents, 
and provide a uniform guaranty of terms across Market Loans, regardless 
of how those Market Loans are initiated under the enhanced program; and 
(iii) clarify and amend processes around the participation of Canadian 
Clearing Members and other types of Clearing Members in the Stock Loan 
Programs. Separately, OCC proposes to reorganize, restate, and 
consolidate provisions of its By-Laws and Rules governing the Stock 
Loan Programs.
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    \10\ Notice of Filing, 89 FR 73469-70. OCC intends to eventually 
decommission the Hedge Program through a phased program, after which 
the Market Loan Program would become OCC's single Stock Loan 
Program. The immediate proposal, however, does not contemplate the 
removal of provisions supporting the Hedge Program from OCC's rules.
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    In proposing the immediate changes, OCC expressed the view that its 
current technology modernization project (``Renaissance'') presents an 
opportunity to address limitations in the structure of OCC's Stock Loan 
Programs and enhance OCC's stock loan services to support current and 
future needs.\11\
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    \11\ See Notice of Filing, 89 FR 73466. Further detail on 
Renaissance is available at https://www.theocc.com/company-information/occ-transformation/clearing-risk-and-data-changes. 
Renaissance includes the replacement of its current clearance and 
settlement system (``ENCORE'') with a streamlined operational 
framework for clearance and settlement (``Ovation''). See Notice of 
Filing, 89 FR 73466, n. 6. The Proposed Rule Change is not legally 
dependent on the planned technology changes.
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A. Limitations of OCC's Current Stock Loan/Hedge and Market Loan 
Programs

1. Position Aggregation
    Within both Stock Loan programs, OCC maintains records of aggregate 
positions, rather than following the industry practice of contract-
level recordkeeping. OCC calculates margin by aggregating stock loan 
and borrow positions for the same Eligible Stock. However, stock loans 
of the same Eligible Stock are not fungible between programs. As a 
result, all post-trade activity for Hedge Loan positions is performed 
bilaterally between the original counterparties. For example, the 
original counterparty Clearing Members to Hedge Program loans must 
resolve dividend payments or distributions bilaterally, away from OCC. 
This process of position aggregation complicates margin calculation and 
bookkeeping, and ultimately increases OCC's operational risk.
2. Offset and Re-Matching of Matched-Book Positions
    Hedge Loan Clearing Members often maintain ``Matched-Book 
Positions,'' meaning they hold an account with a

[[Page 95880]]

stock loan position to one Hedge Clearing Member as well as a borrow 
position to another Hedge Clearing Member for the same or fewer shares. 
If a Hedge Clearing Member with a matched book defaults, OCC may re-
match the loan and borrow positions to other Hedge Loan Clearing 
Members to avoid price dislocation from manually buying in and selling 
out of the offsetting positions of the defaulting Hedge Clearing 
Member. However, such re-matching is not currently supported separately 
in the Market Loan Program, and thus the loan and borrow positions of a 
defaulting Hedge Clearing Member cannot be re-matched to a Market Loan 
Clearing Member.
3. Stock Loan Initiation
    Under the Hedge Program, Prospective Lending and Borrowing Clearing 
Members first negotiate terms bilaterally before sending them to the 
Depository Trust Company (``DTC'') for settlement, and DTC then sends a 
specified number of shares and amount of cash collateral to OCC for 
clearing and guarantee of performance.\12\ This process adds complexity 
to balancing and reconciliation under the current Hedge Program.\13\
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    \12\ OCC currently limits settlement of daily mark-to-market of 
cash collateral to the Clearing Member's firm account or combined 
Market-Makers' account. See OCC Rule 2201(a).
    \13\ See Notice of Filing, 89 FR 73467. On the other hand, 
Market Loan transactions match on an electronic platform called a 
Loan Market. Then the Loan Market sends the two separate linked 
instructions to DTC detailing what stock and cash collateral should 
move between accounts at OCC.
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4. Scope of OCC's Guaranty
    OCC guarantees the return of the collateral and borrowed stock of 
both Hedge Program and Market Loan Program loans. However, for Market 
Loan Program transactions, OCC also provides a limited guaranty of 
substitute dividend and rebate payments based on instructions from the 
Loan Market based on the amount of margin collected. OCC does not offer 
the same guaranty for loans made under the Hedge Program, which creates 
operational complexity.
5. Collateralization Rate
    As part of clearing, OCC marks-to-market payments for cleared stock 
loans on a daily basis. The payments are made between Clearing Members 
based on the value of the loaned securities. However, the loans are 
marked-to-market differently depending on whether they originated from 
the Hedge Program or the Market Loan Program. In the Hedge Program, 
loans are collateralized 100 or 102 percent, and the preferred rounding 
is dependent on the bilateral Master Securities Loan Agreement 
(``MSLA'') between the original counterparties. In the Market Program, 
all loans are collateralized 102 percent, rounding to the nearest 
dollar. In both programs, settlements are generally combined and netted 
against other OCC settlement obligations, and Clearing Member positions 
are factored into that Clearing Member's overall margin and guaranty 
fund contribution.
6. Dividends and Distributions
    OCC ordinarily processes Market Loan Program dividend equivalent 
payments through DTC's Dividend Service. If, however, a Loan Market 
notifies OCC that the dividend or distribution for a particular Market 
Loan is not tracked by DTC's Dividend Service (or if OCC uses its 
discretion to remove a Market Loan from the DTC Dividend Service), the 
dividend equivalent payments are made through OCC's cash settlement 
system the day after the expected payment date. For such dividend 
payments, the Loan Market calculates the amount outside of DTC's 
Dividend Service, and for non-cash dividends and distributions, the 
Loan Market may set an equivalent cash settlement value for OCC to 
administer. As part of clearing, OCC guarantees dividend equivalent 
payments from a defaulting Clearing Member, but only to the extent OCC 
has collected margin equal to such dividend equivalent according to the 
instructions from the Loan Market. Additionally, OCC currently has no 
responsibility to verify the accuracy of the Loan Market's calculation.
7. Termination of Stock Loans
    Again, because of the differences in stock loan origination, OCC 
handles stock loan terminations differently depending on whether they 
are Hedge Loans or Market Loans. Hedge Loans are terminated through DTC 
when: (1) a Borrowing Clearing Member instructs DTC to transfer a 
specified quantity of Loaned Stock to the Lending Clearing Member in 
exchange for payment of the settlement price from the Lending Clearing 
Member, or (2) the Lending Clearing Member terminates all or part of 
the loan with the Borrowing Clearing Member. Initiating returns through 
DTC for the Hedge Program can break positions if the return 
transactions are not coded properly.
    As with dividend distributions, Market Loans are terminated via 
instruction from a Clearing Member through the Loan Market to recall or 
return Loaned Stock. The Loan Market then instructs OCC, OCC validates 
the request, and OCC sends a pair of orders to DTC to initiate the 
transfer.
    Where a Clearing Member under either program fails to return the 
stock or pay the settlement amount, the other counterparty may choose 
to execute a ``buy-in'' or ``sell-out'' of the Loaned Stock. Neither of 
the current Stock Loan Programs enables OCC to administer buy-ins or 
sell-outs. After execution of the buy-in/sell-out, the initiating 
Clearing Member provides notice to OCC and its counterparty for Hedge 
Loans and to the Loan Market for Market Loans. Termination is complete 
once OCC records the termination.
8. Canadian Clearing Members
    Canadian Clearing Members may participate in the Hedge Program if 
they appoint CDS Clearing and Depository Services Inc. (``CDS'') to act 
as agent with DTC and the National Securities Clearing Corporation 
(``NSCC'') to provide cross-border clearance and settlement with U.S. 
counterparties. Canadian Clearing Members cannot participate in the 
Market Loan Program.
    Canadian Hedge Clearing Members are subject to additional 
restrictions to participate in OCC's Hedge Program. Normally, federal 
tax rules impose a 30% withholding on ``dividend equivalent'' payments 
to non-U.S. persons for certain derivatives that reference U.S. 
equities. OCC has no current tax withholding or reporting obligations 
for Canadian Hedge Clearing Members, because substitute dividend 
payments are handled bilaterally between Hedge Clearing Members. 
Consequently, OCC requires that Canadian Hedge Clearing Members 
establish that their activity will not result in the imposition of 
taxes or withholding, and they are prohibited from entering into 
transactions that would impose taxes or withholding.

B. Proposed Changes to OCC's Stock Loan Program Framework

1. Consolidation of the Stock Loan Programs
    OCC proposes to consolidate its Stock Loan Programs into a single 
stock loan program over the course of three phases. This Proposed Rule 
Change covers the first and second phases. The third phase is not part 
of this Proposed Rule Change and would require a separate filing with 
the Commission.
    The first phase would (1) amend the rules related to the Market 
Loan Program to allow it to eventually become OCC's single stock loan 
program, and (2) update the Hedge Program and Market Loan Program to 
align with the implementation of

[[Page 95881]]

Ovation, OCC's new system for clearance and settlement. Such changes 
include contract-level recordkeeping, re-matching matched book 
positions in suspension across both Stock Loan Programs, and expanding 
bilaterally-negotiated Market Loans. These changes are designed to 
facilitate and encourage Hedge Clearing Members to submit new bilateral 
stock loan transactions through the Market Loan Program.\14\ Hedge 
Clearing Members would be required to provide the appropriate 
documentation and certifications, similar to those required of Market 
Loan Clearing Members, and to submit to certification testing before 
utilizing the Market Loan program.\15\
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    \14\ Based on a survey of all Clearing Members who participate 
in OCC's Stock Loan Programs (provided as confidential Exhibit 3B to 
File No. SR-OCC-2024-011), members have expressed interest in being 
able to have, for example, the rebate amounts calculated, settled, 
and guaranteed by OCC--an expansion of services that necessarily 
would be achieved by the migration from the Hedge Program to the 
Market Loan Program. See Notice of Filing, 89 FR 73470, n.30. OCC 
indicated that it anticipates that Clearing Members will be 
motivated to migrate activity to the Market Loan Program because of 
the expansion of such services and OCC's expanded guarantee under 
the Market Loan Program. See Notice of Filing, 89 FR 73470.
    \15\ OCC is not proposing to require business expansions for 
Hedge Clearing Members, because they already are approved for stock 
loan activity, and the business expansion for Market Loan Program 
participation aims to verify proper subscription through a Loan 
Market, which would no longer be necessary to participate in the 
Market Loan Program.
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    During the second phase, OCC will announce that it will no longer 
accept new loans through the Hedge Program, but will continue to 
support existing Hedge Loans until they naturally terminate. To 
facilitate this change, OCC proposes to adopt new Rule 2213(e)(2), 
which would authorize OCC to stop accepting new Hedge Loans. 
Additionally, OCC proposes to maintain its existing authority to 
terminate outstanding Hedge Loans upon two business days' written 
notice to Clearing Members based on several enumerated reasons, one of 
which is OCC's impending termination of this line of business.\16\ 
Under proposed Rule 2213(e)(2), OCC's Chief Executive Officer or Chief 
Operating Officer would be authorized to approve the decision for OCC 
to cease accepting new Hedge Loans based on factors including, but not 
limited to, the number of participants that are able to conduct 
business under the Market Loan Program, the amount of transactions 
flowing through the Market Loan Program, the proportion of loan 
balances between the Stock Loan/Hedge Program and the Market Loan 
Program, and feedback from members about when they expect to be ready 
to migrate fully to the Market Loan Program. OCC is not proposing to 
remove the rules related to the Hedge Program at this time.\17\
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    \16\ The relevant authority to terminate existing loans comes 
from Section 2(c) of Article XXI of OCC's By-Laws. OCC proposes to 
move the text of that section of its By-Laws to new Rule 2213(e)(1) 
as part of the broader reorganization described herein.
    \17\ OCC proposes, however, to amend its Rules to avoid 
ambiguity by using ``Hedge Loan'' instead of ``Stock Loan'' when 
referring to Stock Loans under the Hedge Program, unless in 
reference to Stock Loans under either of the Stock Loan Programs, 
consistent with the current definition of that term in Article I of 
the By-Laws. See Notice of filing, 89 FR 73470.
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2. Proposed Changes Across Both Stock Loan Programs
    a. Contract-Level Recordkeeping. As stated in Section II.A.1, 
above, OCC currently aggregates stock loan and borrow positions for the 
same Eligible Stock, which is not the industry standard of contract-
level recordkeeping. To alleviate inaccuracies and, at times, lack of 
information in OCC's bookkeeping practices, OCC proposes to eliminate 
this legacy practice. Under the new contract-based approach, each stock 
loan position or stock borrow position would be a distinct contract 
recorded in each Clearing Member account. Every new recorded loan will 
generate a new stock borrow position and stock loan position for the 
number of shares lent and borrowed. By maintaining stock loan positions 
and stock borrow positions at the contract level, OCC would be able to 
record additional terms, such as (a) rebate rate; (b) whether the 
rebate rate is a fixed or a floating value (and if floating the 
interest rate benchmark); and (c) end date, if it is a term loan. 
Clearing Members would not be required to submit such additional terms. 
OCC would assume that no such terms exist, unless otherwise directed by 
its Clearing Members. OCC believes that contract-level recordkeeping 
would allow Clearing Members to see more precisely the contracts with 
shares lent by lender and borrower.\18\
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    \18\ See Notice of filing, 89 FR 73477.
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    This contract-level recordkeeping would be implemented in OCC's 
rules by proposed amendments to Article XXI, Section 2 (Hedge Program) 
and Article XXIA, Section 5 (Market Loan Program) of OCC's By-Laws, 
retained portions of which would migrate to become OCC Rules 2203 and 
2206A, respectively. Under these proposed revisions, OCC would delete 
the rules requiring the aggregation of positions and eliminate text 
providing that OCC shall identify stock loan and stock borrow positions 
resulting from Hedge Loans separately from positions resulting from 
Market Loans. Because OCC proposes to eliminate position aggregation 
altogether, the latter prohibition against aggregating positions across 
programs would no longer be relevant.
    As noted above, the proposed contract-level recordkeeping would 
allow OCC to record additional terms at the contract level. 
Specifically, OCC proposes to change Article XXI, Section 2(b) and 
Article XXIA, Section 5(a) of OCC's By-Laws \19\ to allow Clearing 
Members to provide additional terms beyond those already required by 
the rules.\20\ The proposed changes regarding such optional terms, 
which are not associated with OCC's guaranty (i.e., rebate rate and 
interest rate benchmark with respect to Hedge Loans, and loan term with 
respect to both Hedge Loans and Market Loans), would not impose any 
additional obligations on OCC. Rather, the proposed changes would 
facilitate the optional inclusion of additional terms between the 
parties that survive OCC's novation and would be recorded in OCC's 
system for the Clearing Member's convenience.\21\
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    \19\ OCC proposes to move Article XXI, Section 2(b) and Article 
XXIA, Section 5(a) of its By-Laws to new Rules 2203(d)(2)(A) and 
2206A(b)(2)(E), respectively, without changes other than those 
explicitly described in the Notice of Filing.
    \20\ OCC is not proposing to change the required terms already 
defined in its rules (e.g., identification of Eligible Stock, number 
of shares loaned, amount of collateral received, identity of lending 
and borrowing Clearing Members).
    \21\ Id.
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    To further accommodate contract-level recordkeeping, OCC proposes 
the following conforming changes:
     Current Interpretation and Policy .01 to OCC Rules 2201 
and 2201A (i.e., proposed OCC Rules 2206(b) and 2206A(d)), which 
concern the transfer of stock loan positions or stock borrow positions 
between Clearing Member accounts, would be amended to delete the phrase 
``all or any portion of'' as it relates to stock loan or stock borrower 
positions, and add the text ``provided, that any such transfer will 
result in the transfer of all shares related to the relevant stock loan 
position or stock borrow position.'' Accordingly, any transfer of a 
stock loan position or stock borrow position, each representing an 
individual contract, would be for all shares that are the subject of 
the contract.
     Current Interpretation and Policy .02 to OCC Rule 2201 
(i.e., proposed OCC Rule 2206(c)(1)), which concerns how OCC would 
apply Hedge Loan return instructions received from DTC to a Clearing 
Member's default account,

[[Page 95882]]

would be modified to eliminate the ability of Clearing Members to 
designate OCC accounts in DTC delivery orders. Instead, returns of 
shares will be reflected in the Clearing Member's default account. To 
support the shift to contract-level recordkeeping, OCC also would add 
proposed OCC Rule 2206(c)(2), which would provide that returns will 
decrease the number of shares borrowed beginning with the oldest Hedge 
Loan between the Borrowing Clearing Member and the Lending Clearing 
Member on OCC's books and records. If the return exhausts the oldest 
Hedge Loan, OCC would decrement to the next oldest.
     Current Interpretation and Policy .02 to OCC Rule 2201A 
(i.e., proposed OCC Rule 2206A(e)), which concerns how Market Loan 
return instructions would be applied to a Clearing Member's accounts, 
would be amended to reflect that, if there are insufficient shares in 
the account designated by the delivery order submitted to OCC, or in 
the default account if the delivery order did not specify an account, 
OCC would reject the return instruction rather than fulfill the return 
to the extent of the shares in the designated or default account, as 
applicable. If an account was designated in the delivery order, OCC 
would fulfill the return based only on that account and would reject 
the return instruction if sufficient shares were not available in that 
account rather than applying shares in the default account to cover the 
excess.
     Current OCC Rule 2209A(a)(2) (i.e., proposed OCC Rule 
2216A(a)(5)), which concerns the termination of Market Loans upon 
receipt of end-of-day information from DTC concerning return or recall 
delivery orders, would be amended to delete the phrase ``and reduce the 
respective Clearing Member's open stock loan and stock borrow positions 
accordingly,'' which refers to adjustments required for aggregated 
stock loan and stock borrow positions. OCC would also remove the phrase 
``the end of the day'' with respect to the stock loan activity files it 
receives from DTC because OCC receives and processes such information 
from DTC throughout the business day.
    b. Aligning Mark-to-Market Settlement Accounts. As described above, 
in Section II.A.3, OCC currently limits settlement of daily mark-to-
market of cash collateral to the Clearing Member's firm account or 
combined Market-Makers' account. OCC proposes to change its rules such 
that cash settlement would occur in the account in which the stock loan 
or stock borrow position is held, to reflect changes in the stock loan 
market that facilitate fully paid for lending programs, which have 
developed over the last two decades to allow customers to earn returns 
on their portfolios by allowing their broker to lend their shares.\22\
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    \22\ See Notice of filing, 89 FR 73478.
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    The proposed change would align mark-to-market cash settlements 
with positions by deleting current OCC Rules 2201(a)(iii) and 
2201A(a)(iii), as relocated to proposed OCC Rules 2207(a)(1)(C) and 
2207A(a)(1)(C). The text of these provisions currently requires 
Clearing Members to provide OCC with standing instructions to identify 
the Clearing Member's firm accounts or combined Market-Makers' account 
from which mark-to-market payments are to be made. However, these 
provisions would not be necessary under the Proposed Rule Change 
because OCC would settle the mark-to-market payments in whichever 
account the stock loan or stock borrow position is held. OCC also would 
amend current Rules 2204(a) and 2204A(a), the relevant portions of 
which would be renumbered as proposed Rules 2209(a) and 2209A(a), 
respectively, to provide that any mark-to-market payment shall be made 
in the account in which the Hedge Loan or Market Loan is held.
    OCC proposes to delete the last clause to Interpretation and Policy 
.04 to Rule 1104, which concerns the use of a Liquidating Settlement 
Account to satisfy mark-to-market obligations arising from a suspended 
Clearing Member's stock loan or borrow positions in customers' 
accounts. That clause provides for the use of the Liquidating 
Settlement Account, notwithstanding that such mark-to-market payments 
may settle in another account under current Rules 2201(a) and 2201A(a). 
This clarifying clause would no longer be relevant because of the 
alignment of settlement with the accounts in which the positions are 
held.\23\
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    \23\ Id.
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    c. Simplifying Mark-to-Market Accounts. As a further update to 
mark-to-market settlement accounts and to help facilitate OCC's planned 
switch from loan aggregation to contract-level recordkeeping, OCC 
proposes to change its mark-to-market calculation to focus on the 
change to the contract value of a Clearing Member's Stock Loans. 
Currently, the mark-to-market calculation focuses on the value of the 
loaned shares of stock by taking the quantity of stock that is on loan 
each morning and marking it to a closing price each night. Quantities 
of stock that correspond to new loans put on during the day are also 
marked to the end-of-day closing price.
    Now, OCC proposes to amend current Rules 2204 and 2204A, to be 
renumbered as proposed Rules 2209 and 2209A, respectively. Proposed OCC 
Rules 2209(b) and 2209A(b) would provide that the mark-to-market 
payment will be the amount necessary to cause the amount of Collateral 
to be equal to the Collateral requirement applicable to the Stock Loan. 
For Hedge Loans, the Collateral requirement is either 100 or 102 
percent of the mark-to-market value of the Loaned Stock, depending on 
which percentage the parties selected when initiating the Hedge Loan, 
as described in Section II.A.5., above. For Market Loans, as described 
below in Section II.B.3.c., the Collateral requirement would be fixed 
at 102 percent of the value of the Loaned Stock, which is the 
collateralization for all Market Loans currently.
    d. Re-Matching Matched Book Positions in Suspension Across Stock 
Loan Programs. As stated above, in Section II.A.2., OCC's current 
framework does not contemplate the re-matching of Matched-Book 
Positions across OCC's Stock Loan Programs in the event of a Clearing 
Member default. The Proposed Rule Change would extend OCC's authority 
to close out and re-establish the Matched-Book Positions of a suspended 
Clearing Member to the Market Loan Program and would allow re-matching 
in suspension across the Hedge and Market Loan Programs. Under the 
current OCC Rule 2212, OCC has authority to terminate Matched-Book 
Positions by offset and re-matching with other Clearing Members. OCC 
proposes to extend its re-matching authority and allow for re-matching 
across programs by inserting proposed OCC Rule 2219A, which would be 
similar in structure and content to current OCC Rule 2212.
    Proposed OCC Rule 2219A(a) would provide that, in the event that a 
suspended Clearing Member has Matched-Book Positions within the Hedge 
or Market Loan Programs, OCC will, upon notice to affected Clearing 
Members, close out the suspended Clearing Member's Matched-Book 
Positions to the greatest extent possible by (1) the termination by 
offset of stock loan and stock borrow positions that are Matched-Book 
Positions in the suspended Clearing Member's account(s) and (2) OCC's 
re-matching in the order of priority in paragraph (c) of proposed OCC 
Rule 2219A of stock borrow positions for the same number of shares in 
the same Eligible Stock maintained in a designated account of a 
Matched-Book Borrowing Clearing

[[Page 95883]]

Member against a stock loan position for the same number of shares in 
the same Eligible Stock maintained in a designated account of a 
Matched-Book Lending Clearing Member. Under proposed OCC Rule 2219A(b), 
as under current OCC Rule 2212(b), the Matched-Book Borrowing Clearing 
Member and Matched-Book Lending Clearing Member would not be required 
to issue instructions to DTC to terminate the relevant stock loan and 
stock borrow positions or to initiate new stock loan transactions to 
reestablish such positions, because the affected positions would be re-
matched without requiring the transfer of securities against the 
payment of settlement prices.
    Proposed OCC Rule 2219A(c), as under current OCC Rule 2212(c), 
would provide that OCC shall make reasonable efforts to re-match 
Matched-Book Borrowing Clearing Members with Matched-Book Lending 
Clearing Members that maintain MSLAs executed between them, based upon 
information provided by Clearing Members to OCC on an ongoing basis. 
Proposed OCC Rule 2219A(c) would further provide that OCC shall be 
entitled to rely on, and shall have no responsibility to verify, the 
MSLA records provided by Clearing Members and on record as of the time 
of re-matching. Proposed Rule OCC 2219A(c)(1) through (13), which would 
mirror current OCC Rule 2212(d), would require that the termination by 
offset and re-matching be done using a matching algorithm in which the 
Matched-Book Positions of the suspended Clearing Member are first 
terminated by offset and then the affected Matched-Book Borrowing 
Clearing Members and Matched-Book Lending Clearing Members are re-
matched in order of priority based first upon whether the re-matched 
Clearing Members have an existing MSLA between them or, in the case of 
Anonymous Market Loans, can be kept anonymous by re-matching with a 
Matched-Book Position that is another Anonymous Market Loan initiated 
through the same Loan Market.\24\
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    \24\ OCC indicated that this algorithmic process would limit the 
number of returns that may be initiated for re-matching that results 
in Disclosed Market Loans between parties who have not executed an 
MSLA. See Notice of Filing, 89 FR 73479.
---------------------------------------------------------------------------

    Under this proposed matching algorithm, OCC would first select the 
largest stock loan or stock borrow position regarding a Disclosed 
Market Loan for a given Eligible Stock from the suspended Clearing 
Member's Matched-Book Positions. These selected positions would then be 
re-matched with the largest available stock borrow or stock loan 
position regarding a Disclosed Market Loan for the selected Eligible 
Stock for which a MSLA exists between a Matched-Book Borrowing Clearing 
Member and a Matched-Book Lending Clearing Member. OCC would repeat 
this process until all potential re-matching between Matched-Book 
Borrowing Clearing Members and Matched-Book Lending Clearing Members 
with MSLAs is completed for positions within the Hedge Program.
    Simultaneously, OCC would perform the same re-matching process 
within the Market Loan Program for (i) Matched-Book Positions that are 
Disclosed Market Loans for which a MSLA exists between a Matched-Book 
Borrowing Clearing Member and a Matched-Book Lending Clearing Member, 
and (ii) Matched-Book Positions that are Anonymous Market Loans 
initiated through the same Loan Market. After re-matching to the extent 
possible within the Market Loan Program based on manner of initiation 
and trade source, OCC would proceed to re-match Matched-Book Positions 
within the Market Loan Program for which an MSLA exists between a 
Matched-Book Borrowing Clearing Member and a Matched-Book Lending 
Clearing Member, regardless of whether the Matched-Book Position was 
part of a Disclosed Market Loan or Anonymous Market Loan.
    After matching Matched-Book Positions to the extent possible 
between borrowers and lenders with existing MSLAs in both the Hedge 
Program and the Market Loan Program, OCC would then select the largest 
remaining stock loan or stock borrow positions for a given Eligible 
Stock regardless of whether the position is a Hedge Loan or a Market 
Loan, and re-match it with the largest available stock borrow or stock 
loan position for the selected Eligible Stock in the other Stock Loan 
Program for which an MSLA exists between the lenders and borrowers in 
the other Stock Loan Program, regardless of whether the Market Loan 
selected or matched is a Disclosed Market Loan or Anonymous Market 
Loan. OCC would repeat this process until it has rematched all Matched-
Book Positions to the extent possible between parties to existing MSLAs 
between the two Stock Loan Programs.
    After re-matching among lenders and borrowers with existing MSLAs, 
OCC proposes to repeat the process for all remaining Matched-Book 
Positions for which MSLAs do not exist between the lenders and 
borrowers. OCC would first complete such rematching to the extent 
possible within each program. The re-matching process would then be 
repeated for all remaining Matched-Book Positions across the Stock Loan 
Programs for which MSLAs do not exist between the lenders and 
borrowers. Remaining positions that are not able to be rematched either 
within or across programs would then be closed out pursuant to the 
rules governing close-out of Hedge Loans or Market Loans, as 
applicable.
    Under proposed OCC Rule 2219A(d), as under current OCC Rule 
2212(e), in the event Borrowing and Lending Clearing Members are re-
matched through this algorithmic process, the pre-defined terms and 
instructions established by the Lending Clearing Member would govern 
the re-matched positions pursuant to proposed OCC Rule 2207 for Hedge 
Loans or proposed Rule 2207A for Market Loans. For Matched-Book 
Positions re-matched across programs, the resulting re-matched loan 
would be a Hedge Loan. If the re-matched positions were Anonymous 
Market Loans, the resulting Loan would be an Anonymous Market Loan. 
However, if one of the positions was a Disclosed Market Loan or the 
positions were Anonymous Market Loans initiated through different Loan 
Markets, the resulting loan would be a Disclosed Market Loan. Going 
forward, such a Disclosed Market Loan would be deemed to have been 
initiated through OCC, which would facilitate re-matching within the 
Market Loan Program for parties who are not subscribers to a Loan 
Market. Pursuant to proposed OCC Rule 2219A(j), the re-matched Clearing 
Members may choose to execute an MSLA or close out the re-matched 
positions in accordance with proposed OCC Rules 2213 or 2216A, as 
applicable.
    Under proposed OCC Rule 2219A(e), which corresponds to the second 
sentence of current OCC Rule 2212(e), any change in Collateral 
requirements arising from a change in the terms of stock loan or stock 
borrow positions between a Lending Clearing Member and Borrowing 
Clearing Member with re-matched positions would be included in the 
calculation of the mark-to-market payment obligations on the stock loan 
business day following the completion of the positions adjustments as 
set forth in proposed OCC Rule 2219A(f). Under proposed OCC Rule 
2219A(f), which reflects current OCC Rule 2212(f), the termination by 
offset and re-matching of positions would be complete upon OCC 
finishing all position adjustments in the accounts of the suspended 
Clearing Member and the Borrowing Clearing Members and Lending Clearing 
Members with re-matched positions,

[[Page 95884]]

and the applicable systems reports are produced and provided to the 
Clearing Members showing the transactions.
    Under proposed OCC Rules 2219A(g) through (i), from and after the 
time OCC has completed the position adjustments as set forth above in 
proposed OCC Rule 2219A(f), the suspended Clearing Member would have no 
further obligations under the By-Laws and Rules with respect to such 
positions. However, a Borrowing Clearing Member with re-matched stock 
borrow positions would remain obligated as a Borrowing Clearing Member 
and a Lending Clearing Member with re-matched stock loan positions 
would remain obligated as a Lending Clearing Member. Furthermore, upon 
notification that OCC has completed the termination by offset and re-
matching of stock loan and borrow positions, the suspended Clearing 
Member and Borrowing/Lending Clearing Members with re-matched positions 
would be required to promptly make any necessary bookkeeping entries at 
DTC to ensure the accuracy and efficacy of those stock loan terms not 
governed by OCC's By-Laws and Rules. Under proposed OCC Rule 2219A(j), 
as under current OCC Rule 2212(j), Borrowing/Lending Clearing Members 
that have been re-matched would be required to work in good faith to 
either (i) reestablish any terms, representations, warranties, and 
covenants not covered by the By-Laws and Rules (e.g., establish an 
MSLA) or (ii) terminate the re-matched stock loan or borrow positions 
in the ordinary course pursuant to OCC Rules 2213 or 2216A, as 
applicable, as soon as reasonably practicable. Current OCC Rule 2212, 
which concerns re-matching in suspension for the Hedge Program, would 
be deleted and replaced with proposed OCC Rule 2217, with a cross-
reference to proposed OCC Rule 2219A.
3. Market Loan Program Enhancements
    a. Expansion of Bilaterally Negotiated Market Loans. The current 
Market Loan Program, as described in Section II.A.3. above, allows for 
the acceptance of electronic messages from the Loan Market for new 
loans and returns. OCC proposes to expand the program to allow the 
acceptance of bilaterally negotiated loans submitted directly from 
Clearing Members or their third-party service providers. As proposed, 
after a new loan or return is affirmed, OCC would instruct DTC to 
settle the transaction using OCC's DTC account, or the account of the 
lender, borrower, or Appointed Clearing Member. The proposal would 
allow for two separate avenues for submitting loans: either through a 
Loan Market or through the direct submission of bilaterally negotiated 
Loans to OCC. As proposed, the scope of OCC's guaranty and post-trade 
processing for all transactions would be uniform, in contrast to the 
current scope of guarantee, as described in Section II.A.4., above. 
Under the proposal, counterparties to bilaterally negotiated contracts 
submitted to the Market Loan Program would remain paired in OCC's 
system for purposes of recalls, returns, and contract modifications, as 
they are under the current Hedge Program. In OCC's view, allowing 
automated submission of transactions to OCC prior to DTC settlement, 
combined with OCC's control of the settlement process, would help 
reduce the burden and risks associated with the balancing and 
reconciliation under the current Hedge Program.\25\
---------------------------------------------------------------------------

    \25\ See Notice of Filing, 89 FR 73471.
---------------------------------------------------------------------------

    OCC would update its Rules to facilitate the proposed expansion of 
the Market Loan Program to allow for direct submission of bilaterally 
negotiated stock loans. For example, definitions of ``Anonymous Market 
Loan'' and ``Disclosed Market Loan'' would be added to OCC Rule 101 to 
accommodate the fact that certain proposed Rules would apply 
differently to Loans matched anonymously through a Loan Market and 
Loans initiated bilaterally, whether through a Loan Market or with OCC 
directly. Anonymous Market Loans would be defined as those initiated 
through a Loan Market and for which the identities of the Lending 
Clearing Member and Borrowing Clearing Member are not disclosed to each 
other. Disclosed Market Loans would be defined to include either those 
Market Loans (i) initiated through a Loan Market and for which the 
identities of the Lending Clearing Member and Borrowing Clearing Member 
are disclosed to each other, or (ii) initiated directly between the 
Lending Clearing Member and Borrowing Clearing Member away from a Loan 
Market such that the identities of the Lending Clearing Member and 
Borrowing Clearing Member are disclosed to each other.
    The proposal further would amend OCC Rule 2202A (Initiation of 
Market Loans), where the newly renumbered OCC Rule 2202A(a)(1), 
currently OCC Rule 2202A(a)(i), would add that, in addition to 
initiation through a Loan Market, a Market Loan may be initiated when a 
Lending Clearing Member and Borrowing Clearing Member send details of a 
stock loan between the two Clearing Members directly to OCC. Proposed 
OCC Rule 2202A(h) would provide that a Market Loan may be either an 
Anonymous Market Loan or a Disclosed Market Loan.
    OCC also would amend current Article XXIA, Section 5 of OCC's By-
Laws (Maintaining Stock Loan and Stock Borrow Positions in Accounts), 
which would become OCC Rule 2206A. Specifically, a new sentence would 
be added to the beginning of Rule 2206A that would introduce the 
concept of ``matched pairs'' to remain consistent with the definition 
of ``Hedge Loan.'' \26\ The sentence would read, ``Each Market Loan 
will be maintained on the books and records of the Corporation as a 
unique matched pair of contracts with one such contract being between 
the Lending Clearing Member and the Corporation as borrower and the 
second such contract being between the Corporation as Lender and the 
Borrowing Clearing Member.'' \27\ OCC stated that this clarifying 
sentence would ensure that the original counterparties to such a 
Disclosed Market Loan remain paired in OCC system, notwithstanding 
OCC's novation.\28\ Proposed OCC Rule 2206A, Paragraph (a) additionally 
would provide that the identities of the Lending Clearing Member and 
Borrowing Clearing Member would be elements identified for stock loan 
positions and stock borrow positions resulting from Disclosed Market 
Loans.
---------------------------------------------------------------------------

    \26\ See proposed OCC Rule 101.H(1), which is originally By-Law 
Article XXIA, Section 1.D.(2), and was proposed to be deleted from 
the By-Laws and relocated to the Rules. (``The term ``Hedge Loan'' 
means a matched pair of securities contracts for the loan of 
Eligible Stock made through the Stock Loan/Hedge Program, with one 
such securities contract being between the Lending Clearing Member 
and the Corporation as the borrower and the second such securities 
contract being between the Corporation as the lender and the 
Borrowing Clearing Member.'').
    \27\ Proposed OCC Rule 2206A(a).
    \28\ See Notice of Filing, 89 FR 73471.
---------------------------------------------------------------------------

    Apart from the initiation process for bilateral Market Loans, OCC 
would amend its Rules regarding the accommodation of direct submission 
of other types of post-trade transactions for which the Rules currently 
rely on actions taken by a Loan Market. The first paragraph of current 
OCC Rule 2209A(a) (Termination of Market Loans) would be reflected in 
the newly renumbered OCC Rule 2216A(a)(1) and the newly created Rule 
2214A (Modifications) and would provide that termination or 
modification of a Market Loan, respectively, may be initiated either 
through a Loan Market or OCC, depending on the way in which the Loan 
was initiated. Such instructions would be made through the Loan Market 
for Anonymous Market Loans;

[[Page 95885]]

through OCC for Disclosed Market Loans initiated through OCC directly; 
and through either the Loan Market or OCC for Disclosed Market Loans 
initiated through a Loan Market. The definitions of ``Recall'' and 
``Return,'' as migrated from the By-Laws to OCC Rule 101, also would be 
amended to reflect the separate channels for initiating such a 
transaction.\29\
---------------------------------------------------------------------------

    \29\ See proposed OCC Rules 101.R(2) and (5), which are, 
respectively, By-Law Article XXIA, Section 1.R.(2) and (3), and were 
proposed to be deleted from the By-Laws and relocated to the Rules. 
(For example, ``The term `recall,' as used in respect of any Market 
Loan, means the process by which the Lending Clearing Member may 
initiate the termination of the Market Loan, or any portion thereof, 
by submitting a notice to the applicable Loan Market or the 
Corporation, as applicable, calling for the return of all or any 
portion of the Loaned Stock.'' (emphasis added)).
---------------------------------------------------------------------------

    OCC would make other conforming changes to the text of the Rules to 
reflect the submission of bilaterally negotiated loans directly to OCC. 
Throughout the Rules governing the Market Loan Program, OCC would 
remove references to ``matching'' or ``matched'' transactions (i.e., 
matched through a Loan Market) to reflect that Market Loan transactions 
could also be initiated bilaterally, either through a Loan Market or 
directly with OCC. The definition of ``Market Loan Program,'' as 
migrated from Section 1 of Article I of the OCC By-Laws to OCC Rule 
101, would be amended to recognize that Market Loans may be initiated 
either through a Loan Market or through direct submission of 
bilaterally negotiated Loans to OCC.
    b. Recognition of Additional/Supplementary MSLA Terms. The Proposed 
Rule Change would allow OCC to recognize supplementary or additional 
terms under an MSLA between the counterparties to such bilaterally 
negotiated transactions submitted under the Market Loan Program, as 
OCC's Rules currently recognize under the Hedge Program. Because 
parties to a bilaterally negotiated stock loan transaction typically 
execute an MSLA, OCC's current Rule 2202(b) allows Hedge Clearing 
Members to establish and maintain additional terms under an MSLA that 
are not extinguished through OCC's novation, provided that the 
additional terms are not inconsistent with OCC's By-Laws or Rules. Such 
additional or supplementary terms may include a term structure or fees 
for buy-in transactions, for example. Under the proposal, OCC would add 
the same provision allowing additional or supplementary terms (so long 
as they are not inconsistent with the By-Laws and Rules) to the Market 
Loan Program in proposed OCC Rule 2202A(b)(2)(E).\30\ As described 
above, in Section II.B.2.b., OCC indicated that the recognition of 
MSLAs within the Market Loan Program also would facilitate the re-
matching of Matched Book Positions in suspension because OCC would give 
priority to re-matching counterparties with existing MSLAs, both when 
re-matching within and across the Stock Loan Programs.\31\
---------------------------------------------------------------------------

    \30\ See proposed OCC Rule 2202A(b)(2)(E). (``[W]ith respect to 
Disclosed Market Loans, the terms of the original stock loan (other 
than terms that establish congruence) and the representations, 
warranties and covenants made by each of the parties to the original 
stock loan under the Master Securities Loan Agreement or any other 
agreements with respect to the original stock loan shall (1) to the 
extent that they are inconsistent with the By-Laws and Rules of the 
Corporation, be eliminated from the pair of congruent contracts 
constituting the Market Loan and replaced by applicable By-Laws and 
Rules of the Corporation, and (2) to the extent that they are not 
inconsistent with the By-Laws and Rules of the Corporation, remain 
in effect as between such parties to the original stock loan, but 
shall not impose any additional obligations on the Corporation.'')
    \31\ See Notice of Filing, 89 FR 73471-72.
---------------------------------------------------------------------------

    c. Collateral and Mark-to-Market Pricing. To further facilitate the 
submission of bilaterally negotiated Market Loans directly to OCC, the 
Proposed Rule Change would set the collateral for all Market Loans at 
102 percent, which is the same rate at which Market Loans submitted 
through a Loan Market currently are collateralized. OCC Rule 2204A 
(Mark-to-Market Payments), which would become proposed OCC Rule 2209A, 
would be amended to provide in proposed paragraph (b) (Market-to-Market 
Payment Amount) that the collateralization rate for all Market Loans 
would be 102 percent, regardless of whether it was initiated through a 
Loan Market or submitted directly to OCC. Current text in OCC Rule 
2204A, providing that the collateralization rate shall be set by the 
relevant Loan Market, would then be deleted, because it would no longer 
be accurate. OCC also would delete the part of the definition of the 
term ``Collateral'' in Article XXIA of the OCC By-Laws, as migrated to 
OCC Rule 101, that references setting the collateralization rate by the 
relevant Loan Market, to maintain consistency and avoid confusion. 
According to OCC, fixing the collateral at 102 percent not only would 
assist in preserving compatibility between OCC's cleared offerings and 
the standard practices for over-the-counter (``OTC'') uncleared stock 
loans (as well as with OCC's current practice within the Market Loan 
Program), but also reduce complexity in OCC's risk management process 
by establishing a single rate across all Market Loans.\32\
---------------------------------------------------------------------------

    \32\ See Notice of Filing, 89 FR 73472. OCC previously 
contemplated fixing the collateralization rate at 100 percent, 
considering that its guaranty would replace the additional 
collateral needed to protect Lenders from counterparty default risk. 
However, in a survey of all Clearing Members who participate in 
OCC's Stock Loan Programs (provided as confidential Exhibit 3B to 
File No. SR-OCC-2024-011), most were opposed to that idea and 
preferred that the rate be fixed at 102 percent because, in part, 
the loss of the additional two percent in collateral would 
materially reduce the income lenders earn by investing the cash 
collateral, which is one of the reasons lenders choose to lend their 
shares. Id.
---------------------------------------------------------------------------

    The Proposed Rule Change would further align the Market Loan 
Program with the Hedge Program by allowing Clearing Members submitting 
Market Loans directly to OCC to select the default rate at which mark-
to-market payments would be rounded up to the nearest level, which is 
the current practice for Hedge Loans, as described in Section II.A.5., 
above. Under the proposal, OCC Rule 2201A (Instructions to the 
Corporation) would become proposed OCC Rule 2207A, and would provide 
that the default rate is one of the standing instructions that Market 
Loan Clearing Members must submit with respect to Market Loans 
submitted directly to OCC.\33\ The Lending Clearing Member's default 
rate would govern the Market Loan if there is a difference between the 
default rates of a Borrowing Clearing Member and a Lending Clearing 
Member. OCC indicated that allowing the same flexibility in the Market 
Loan Program as currently exists in the Hedge Program would support 
Clearing Members in synchronizing cash flows between cleared and OTC 
stock loan transactions.\34\
---------------------------------------------------------------------------

    \33\ OCC indicated that rounding rates for Market Loans 
submitted through a Loan Market would not change. See Notice of 
Filing, 89 FR 73472.
    \34\ See id.
---------------------------------------------------------------------------

    d. Cancellation of Pending Transactions. As proposed, OCC would 
modify its Rules that concern the cancellation of pending transactions 
to accommodate the submission of cancellation instructions by Clearing 
Members, in addition to such submissions made by a Loan Market. This 
change is designed to bolster OCC's ability to accept bilaterally 
negotiated contracts in the Market Loan Program.\35\ To that end, OCC 
proposes to amend current OCC Rule 2202A(a)(ii), which allows a Loan 
Market to instruct OCC to disregard a previously reported matched 
transaction that is pending settlement at DTC, after which OCC 
instructs DTC to cancel the previously issued delivery order. The 
current OCC Rule 2202A(a)(ii) also provides that, upon

[[Page 95886]]

confirmation that DTC has processed such cancellation instructions, the 
related matched transaction is deemed null and void and given no 
effect; but also clarifies that OCC has no obligation to any Market 
Loan Clearing Member in acting pursuant to a Loan Market's instruction 
to disregard a previously reported transaction. OCC would amend OCC 
Rule 2202A(a)(ii), which would be renumbered as proposed OCC Rule 
2202A(a)(2), to permit a Market Loan Clearing Member to submit a 
cancellation instruction for a pending transaction directly to OCC for 
bilaterally negotiated transactions submitted under the Market Loan 
Program.
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

    OCC would add a new OCC Rule 2215A (Cancellation of Pending 
Instructions) to address the cancellation of pending post-trade 
instructions, other than cancellation of loan initiation under current 
OCC Rule 2202A. Under current OCC Rule 2202A, Hedge Clearing Members 
are able to cancel return instructions or recall instructions pending 
with DTC, and Market Loan Clearing Members likewise may cancel pending 
transactions by issuing a cancellation instruction to the Loan Market, 
which may then instruct OCC to disregard a previously reported 
transaction. The newly proposed OCC Rule 2215A would allow members that 
submit bilaterally negotiated Market Loans to issue cancellation 
instructions directly to OCC, as they do now to DTC and the Loan 
Market, thus further aligning the Stock Loan Programs.\36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    e. Transaction Affirmation. Currently, Market Loan Program 
transactions are matched when a Loan Market sends them to OCC. To help 
assure that the same matched status applies to loans submitted directly 
to OCC, the Proposed Rule Change would establish a transaction 
affirmation process. Regarding new loans, counterparties would be 
required to affirm the transaction details prior to OCC submitting the 
new loan to DTC for settlement and OCC would reject new loans that are 
not affirmed by the time that it stops accepting instructions for the 
day. Proposed OCC Rule 2202A(a)(1) would describe this process in 
detail, providing that a Market Loan is initiated when (i) the Loan 
Market sends details of a stock loan transaction to OCC or (ii) a 
Lending Clearing Member and Borrowing Clearing Member send details to 
OCC of a stock loan transaction between them and such details are 
either matched by OCC or affirmed by the Clearing Members, as 
applicable.
    The Proposed Rule Change would allow a Lending Clearing Member to 
have the opportunity to affirm or reject the initiation of a return by 
a cut-off time on the same business day, so long as the Borrowing 
Clearing Member initiated a return within OCC's timeframe for 
submitting such an instruction on a stock loan business day. Proposed 
OCC Rule 2216A(a)(2) would describe an auto-affirmation process in 
detail, providing that any such returns pending after the cut-off time 
would be deemed affirmed and submitted to DTC for processing. OCC 
indicated that this approach would help balance a Lending Clearing 
Member's desire to have the opportunity to affirm or reject return 
instructions, while simultaneously addressing a Borrowing Clearing 
Member's concern that a delay in affirmation or allowing the 
transaction to pend indefinitely could have regulatory consequences for 
the Borrowing Clearing Member.\37\
---------------------------------------------------------------------------

    \37\ See Notice of Filing, 89 FR 73473.
---------------------------------------------------------------------------

    Unlike returns, recalls would not need to be affirmed under the 
Proposed Rule Change. Proposed OCC Rule 2216A(a)(3) would provide that, 
according to standard MSLA terms, a Borrowing Clearing Member will be 
deemed to have affirmed the initiation of a recall, provided that the 
Lending Clearing Member requested the return of the specific quantity 
of Loaned Stock no earlier than the standard settlement date that would 
apply to a purchase or sale of the Loaned Stock in the principal market 
of such Loaned Stock.
    Proposed OCC Rule 2214A(a) would be amended to add a new 
affirmation requirement to contract modifications. Specifically, 
contract modifications to the rebate rate, interest rate benchmark, or 
loan term submitted by either a Borrowing Clearing Member or Lending 
Clearing Member would not become effective until affirmed by both 
parties.
    Provisions in proposed OCC Rule 2216A, paragraphs (b)(2)(B) and 
(c)(2) would define the processes for buy-ins and sell-outs to 
alleviate some of the concerns surrounding termination of stock loans, 
as described in Section II.A.7., above. In particular, for Market Loans 
submitted directly to OCC, the Borrowing Clearing Member and Lending 
Clearing Member will be given the opportunity to affirm or reject a 
buy-in or sell-out, respectively, by a cut-off time specified by OCC on 
the stock loan business day the buy-in or sell-out transaction is 
received by OCC. If the Clearing Member does not affirm or reject the 
buy-in or sell-out by that time, OCC would deem the buy-in or sell-out 
to be complete if OCC determines that the Buy-In or Sell-Out Costs for 
the Loaned Stock initiated is more than the lowest market price and 
less than the highest market price for the Loaned Stock on the stock 
loan business day the buy-in or sell-out is submitted to OCC. 
Otherwise, the buy-in or sell-out would be rejected. This approach 
would be aligned with the buy-in and sell-out process under the current 
Hedge Program, in which any objection that the counterparty has with 
respect to the timeliness of the buy-in or sell-out, or the 
reasonableness of the Buy-In or Sell-Out Costs are matters that must be 
resolved away from OCC, and between the Lending Clearing Member and the 
Borrowing Clearing Member.\38\
---------------------------------------------------------------------------

    \38\ OCC clarified that it would not alter or eliminate the 
authority to permit Clearing Members to submit standing 
instructions, which currently exists under OCC Rule 2201A 
(Instructions to the Corporation), the applicable provision of which 
would be renumbered OCC Rule 2207A(a)(2). See Notice of Filing, 89 
FR 73473. OCC added that this existing authority would be 
facilitated by planned technology changes, which would support 
automatic affirmation based on system settings that could be 
selected by Clearing Members. When new loans are received, the 
system would check whether there is a standing instruction that 
applies to the new loan. If no instruction is found, then the new 
loan would be pended for affirmation. If a standing instruction 
applies, then OCC would follow that instruction as satisfaction of 
the affirmation requirement. Id.
---------------------------------------------------------------------------

    f. Cash Distributions. The Proposed Rule Change would allow OCC to 
calculate and effect cash entitlements, including dividends, 
distributions, and rebates, using its internal clearance and settlement 
system. Paragraphs (a)(ii) and (a)(iii) of current OCC Rule 2206A 
(Dividends and Distributions; Rebates) would be renumbered as proposed 
OCC Rule 2211A(b) and (c), and would provide that under OCC's 
proprietary clearance and settlement system, OCC shall assume 
responsibility for calculating the margin add-on collected with respect 
to dividend equivalent payments. As under the current OCC process, 
described in Section II.A.6., above, OCC would continue to effect 
dividend equivalent payments primarily through DTC's Dividend Service. 
However, as amended under the proposed OCC Rule 2211A(b), OCC would 
effect payments through its proprietary clearance and settlement system 
if (i) OCC determines that the dividend or distribution for a Market 
Loan is not tracked through DTC's dividend tracking service or (ii) if 
OCC has determined to remove a Market Loan from DTC's dividend tracking 
service. Consistent with current OCC Rules, OCC would continue to add 
non-cash dividends and distributions to the Loaned Stock if OCC 
determines that such dividends and distributions are

[[Page 95887]]

legally transferable and the transfer can be effected through DTC. 
However, the proposed changes to proposed OCC Rule 2211A(c) would 
clarify that the determination to fix a cash value for non-cash 
dividends and distributions not added to the Loaned Stock would lie 
with OCC, rather than the Loan Market. OCC contends that this change 
would eliminate OCC's reliance on the Loan Market for its margin add-on 
process and settlement of dividend equivalent payments,\39\ and, as 
such, OCC proposes to eliminate the limitations under current OCC Rule 
2206A, including the provision that OCC's guaranty is limited by the 
amount of margin OCC collected in reliance of the Loan Market's 
calculation.\40\
---------------------------------------------------------------------------

    \39\ See Notice of Filing, 89 FR 73473.
    \40\ OCC clarified that this change would not have any effect on 
OCC's margin methodology and that OCC would continue to collect a 
margin add-on for such cash distributions. See Notice of Filing, 89 
FR 73473-74.
---------------------------------------------------------------------------

    A new paragraph (d) would be added to proposed OCC Rule 2211A, 
addressing the rights of a Lending Clearing Member with respect to 
optional dividends, meaning those that a shareholder can elect to 
receive in cash, stock, or some combination of the two. Proposed OCC 
Rule 2211A(d) would provide that the Lending Clearing Member will have 
the right to elect an option only if it recalls the Loaned Stock in 
time to make such election. Otherwise, if the Lending Clearing Member 
does not recall the Loaned Stock, the Lending Clearing Member would be 
entitled to receive the default option set by the issuer of the Loaned 
Stock. OCC indicated that by adding paragraph (d) to proposed OCC Rule 
2211A, the proposed rule would match the Loan Market's current process 
for optional dividends and would help clarify OCC's approach to such 
optional dividends in the stock lending context in OCC Rules, which 
currently do not address the rights of a Lending Clearing Member with 
respect to optional dividends.\41\
---------------------------------------------------------------------------

    \41\ See Notice of Filing, 89 FR 73474.
---------------------------------------------------------------------------

    OCC also proposes to amend current OCC Rule 2206A(b), which would 
be renumbered as OCC Rule 2211A(e), to facilitate the calculation, 
collection, and payment of rebates under its internal clearance and 
settlement system. Currently, OCC Rule 2206A(b) provides that OCC 
generally will collect and pay rebate payments on a monthly basis as 
instructed by the Loan Market, with the rationale being that the Loan 
Market currently is responsible for rebate payment calculation, as it 
is with the calculation of dividend equivalent payments.\42\ However, 
proposed OCC Rule 2211A(e) would provide that OCC would assume 
responsibility for calculating the rebate payments under its internal 
clearance and settlement system. Paragraph (e) of proposed OCC Rule 
2211A would provide OCC the flexibility to calculate and effect 
collection and payment of rebate payments not just on a monthly basis, 
but also on each business day, with OCC indicating that this change 
would prepare it for if and when the stock loan industry transitions to 
daily, rather than monthly, collection of rebate payments.\43\
---------------------------------------------------------------------------

    \42\ Id.
    \43\ Id.
---------------------------------------------------------------------------

    g. Market Loan Modifications. To support OCC's move to the industry 
standard practice of contract-level recordkeeping, the Proposed Rule 
Change would add a new rule, proposed OCC Rule 2214A, regarding Market 
Loan modifications. Permissible modifications would be limited to the 
rebate rate, interest rate benchmark, or loan term. Modifications 
agreed to by the Market Loan Clearing Members over the life of a Market 
Loan would be accepted by OCC and maintained in OCC's books and records 
at the contract level.
    The channel through which modification requests would be processed 
would be determined by the manner in which the loan was initiated. For 
example, under proposed OCC Rule 2214A(b)(1), in the case of Anonymous 
Market Loans, modification requests must be submitted to the Loan 
Market through which the Market Loan was initiated, consistent with 
current practice. Proposed OCC Rule 2214A(b)(2)-(3) would extend this 
approach by providing that, in the case of Disclosed Market Loans 
initiated directly with OCC, modification requests must be submitted to 
OCC; or, in the case of Disclosed Market Loans initiated through a Loan 
Market, modification requests must be submitted either through the Loan 
Market or OCC. Proposed OCC Rule 2214A(c) would state that OCC shall 
update the relevant terms in its books and records if, as applicable, 
(i) the Loan Market notifies OCC that the parties agreed to the 
modification, or, (ii) with respect to Market Loans initiated directly 
through OCC, the parties provided OCC with matching or affirmed 
instructions. OCC would provide notice of the modified terms in the 
daily reports that OCC is required to make available to Market Loan 
Clearing Members under proposed OCC Rule 2210A.
    h. Buy-In Controls and Settlement Cycle. As stated above, in 
Section II.A.7., neither of the present Stock Loan Programs enables OCC 
to administer buy-ins of the Loaned Stock. OCC proposes to amend 
current OCC Rule 2209A, which would be renumbered as proposed OCC Rule 
2216A, to provide OCC with additional controls over the buy-in process 
for the recall of a Market Loan initiated by a Lending Clearing Member 
if the Borrowing Clearing Member fails to return the Loaned Stock in 
situations other than suspension of the Borrowing Clearing Member. 
Current OCC Rule 2209A provides that a Lending Clearing Member is 
entitled to initiate a buy-in if a recall transaction fails to settle 
by the Settlement Time on the first stock loan business day after 
submitting the recall. Also under OCC's current rules, the Borrowing 
Clearing Member may return the Loaned Stock up until the time that the 
Lending Clearing Member that initiated the return or recall provides 
written notice to the Loan Market that it has executed the buy-in or 
sell-out. OCC noted that such a process can lead to situations where 
the Borrowing Clearing Member is allowed to return the Loaned Stock 
during the period after the buy-in becomes permissible, but before the 
Lending Clearing Member executes the transaction and provides written 
notice.\44\
---------------------------------------------------------------------------

    \44\ See Notice of Filing, 89 FR 73474.
---------------------------------------------------------------------------

    To address such situations, proposed OCC Rule 2216A(b) would be 
amended to provide that, upon timely notice from the Lending Clearing 
Member that it intends to execute a buy-in after a Borrowing Clearing 
Member fails to return the Loan Stock following a recall transaction, 
OCC would prevent the Borrowing Clearing Member from returning the 
Loaned Stock while the Lending Clearing Member executes the buy-in. OCC 
would recognize the Borrowing Clearing Member's return of the Loaned 
Stock until the Lending Clearing Member provides such notice. The stock 
loan and stock borrow positions would then remain open until the 
Lending Clearing Member provides notice that the buy-in is complete.
4. Accommodating Canadian and Other Clearing Members
    a. Supporting Canadian Clearing Members. The Proposed Rule Change 
would allow Canadian Clearing Members to expand their participation 
beyond OCC's Hedge Program, which they currently are permitted to use, 
and into the Market Loan Program, while preventing certain transactions 
that could trigger tax withholding

[[Page 95888]]

obligations. To facilitate this expansion, OCC proposes to amend 
current Rules to recognize Canadian Clearing Members as potential 
participants in the Market Loan Program and address operational 
capabilities that will be required to support their participation. The 
proposal would revise paragraph (f) of OCC Rule 302 (Operational 
Capability) to include Canadian Clearing Members as members qualifying 
for participation in the Market Loan Program, including by providing 
these members the ability to settle transactions through a CDS sub-
account at the Depository, which they do under the Hedge Program today, 
as described in Section II.A.8., above. This same provision also would 
consolidate operational requirements for participation in the Hedge 
Program and the Market Loan Program so that the historical division 
between the programs does not impede the planned eventual decommission 
of the Hedge Program. As a further example, OCC would revise OCC Rule 
306A (Event-Based Reporting) to reflect that a Canadian Clearing 
Member's current obligation to provide OCC with prompt written notice 
if CDS has or likely will cease to act for that Canadian Clearing 
Member would extend to such members that participate in both Stock Loan 
Programs. OCC also proposes to replicate OCC Rule 2201(c), which 
concerns a Canadian Clearing Member's appointment of CDS for purposes 
of settling Hedge Loan delivery-versus-payment transactions, as 
proposed OCC Rule 2207A(c), to help ensure that the same requirements 
would apply to Canadian Clearing Members that participate in the Market 
Loan Program.
    In expanding the Market Loan Program to Canadian Clearing Members, 
OCC stated that it considered its ability to offer an expanded guaranty 
without incurring tax or withholding obligations on the associated 
payments that would be incurred under the expanded Market Loan 
Program.\45\ OCC stated that its current Rules, particularly OCC Rule 
202, already provide the framework for the expanded guaranty under the 
Market Loan Program, while balancing the need to avoid tax imposition 
triggers. OCC Rule 202 currently imposes obligations on Canadian 
Clearing Members to allow OCC to clear listed options transactions free 
from tax withholding obligations on dividend equivalent payments or 
deemed payments. OCC indicated that current OCC Rule 202 also would 
allow it to make substitute dividend payments to Canadian Clearing 
Members as Lending Clearing Members under the enhanced Market Loan 
Program without imposing tax or withholding obligations.\46\ OCC would 
report substitute dividend payments to the IRS using information 
provided by the Canadian Clearing Members, as OCC currently does for 
dividend equivalent payments or deemed payments to Canadian Clearing 
Members in connection with listed options transactions. Additionally, 
under current OCC Rule 202(b), OCC has the authority to prohibit or 
limit specific transactions with respect to non-U.S. members that may 
give rise to tax or withholding obligations, and OCC expects to 
continue to use that authority to impose certain limitations on the 
Market Loan activity of Canadian Clearing Members to address specific 
situations in which tax withholding obligations might otherwise arise, 
including limitations on transactions involving (i) Canadian underlying 
securities, (ii) Positive Rebate, and (iii) Negative Rebate. OCC Rule 
202(b)(5) also requires Canadian Clearing Members to indemnify OCC for 
any loss, liability or expense--including taxes and penalties--that it 
may sustain as a result of its failure to comply with requirements of 
OCC Rule 202(b).
---------------------------------------------------------------------------

    \45\ See Notice of Filing, 89 FR 73475. Specifically, under the 
expanded Market Loan Program, OCC would clear and settle the types 
of cash distributions, such as substitute dividend and rebate 
payments, that OCC does not guarantee under the Hedge Program and 
must be resolved bilaterally by Hedge Clearing Members, away from 
OCC. Id.
    \46\ See Notice of Filing, 89 FR 73475.
---------------------------------------------------------------------------

    As stated above, OCC is not proposing to change any part of OCC 
Rule 202, but OCC has indicated that it believes the current framework 
under OCC Rule 202 can be applied to the expansion of the Market Loan 
Program to Canadian Clearing Members, and could help OCC avoid tax or 
withholding obligations.\47\ Pursuant to OCC Rule 202(b), OCC would 
preclude a Canadian Clearing Member from executing Market Loan 
transactions as a Borrowing Clearing Member, whether on behalf of a 
customer or for its own account, for which the Loaned Stock is issued 
by a Canadian issuer because of tax withholding obligations under 
Canadian law for substitute dividend payments that would be owed by the 
Canadian Clearing Member in its capacity as the lender.\48\ In such a 
situation, the Borrowing Clearing Member would be precluded from 
initiating a Market Loan in its capacity as a Borrowing Clearing Member 
because the Canadian Clearing Member could not fulfill its obligation 
under OCC's Rules to provide a substitute dividend payment free from 
tax and withholding obligations.\49\
---------------------------------------------------------------------------

    \47\ Id.
    \48\ OCC understands that under Canadian law, the loan of a 
security issued by a Canadian company would be treated as a loan of 
the underlying shares for Canadian tax purposes. The substitute 
dividend paid by the Canadian Clearing Member as the Borrowing 
Clearing Member to OCC, in its capacity as the lender, would be a 
payment made by the Canadian Clearing Member, as a corporation, to 
OCC of a dividend payable on the underlying securities under 
subparagraph 260(8)(a)(ii) of the Income Tax Act (Canada), and the 
payment would be subject to Canadian withholding tax under 
subsection 212(2) of that act. See Notice of Filing, 89 FR 73475.
    \49\ OCC understands that no similar tax withholding obligation 
would exist for substitute dividend payments with respect to a 
Canadian underlying security made by OCC, in its capacity as the 
borrower, to a Canadian Clearing Member that was a Lending Clearing 
Member. See Notice of Filing, 89 FR 73475.
---------------------------------------------------------------------------

    With respect to positive and negative rebate payments, OCC also 
believes that current OCC Rule 202 would allow clearance and settlement 
of such payments to Canadian Clearing Members in connection with the 
expanded Market Loan Program without triggering tax withholding 
obligations. Although neither the Internal Revenue Code nor Internal 
Revenue Service (``IRS'') regulations specifically provide for the 
treatment of rebate payments, OCC believes that such rebate payments to 
Canadian Clearing Members would not trigger tax withholding 
obligations, because, not only would these members be considered 
qualified intermediaries and therefore exempt under U.S. tax law, but 
they also are required to be Qualified Intermediaries as a condition of 
membership under OCC Rule 202.\50\ OCC understands that rebate 
payments, whether positive or negative, to a Canadian Clearing Member 
in its capacity as a Qualified Intermediary, may be made by OCC free 
from withholding, consistent with treatment of dividend equivalent 
payments in connection with listed options

[[Page 95889]]

transactions.\51\ As with substitute dividends, OCC would add rebate 
payments for transactions in a Canadian Clearing Member's capacity as a 
Qualified Intermediary to the current reporting OCC submits to the IRS 
for dividend equivalent payments on listed options, based on 
information to be received from the Canadian Clearing Member pursuant 
to current OCC Rule 202(b)(3).
---------------------------------------------------------------------------

    \50\ OCC believes that Positive Rebate would be treated as 
interest for U.S. federal tax purposes because Positive Rebate 
compensates the Borrowing Clearing Member for the use of the cash 
collateral by the Lending Clearing Member, and would therefore 
constitute U.S.-source ``fixed or determinable annual or periodic 
income,'' or ``FDAPI,'' under section 1442 of the I.R.C. While U.S.-
source FDAPI generally is subject to a 30% U.S. withholding tax when 
paid to a foreign corporation, exemptions from withholding apply to 
(i) payments to a Qualified Intermediary in its capacity as an 
intermediary that has accepted primary withholding responsibility, 
and (ii) interest paid to a Canadian Clearing Member that qualifies 
for an exemption from withholding on interest under Article XI of 
the Convention Between the United States of America and Canada with 
Respect to Taxes on Income, October 16, 1980, as amended by 
subsequent Protocols (the ``Canada Treaty''). A Qualified 
Intermediary that has accepted primary withholding responsibility is 
exempt from U.S. federal withholding on payments from a withholding 
agent, including U.S.-source interest, received in its capacity as 
an intermediary. See Notice of Filing, 89 FR 73475-76.
    \51\ See Notice of Filing, 89 FR 73476.
---------------------------------------------------------------------------

    In the case of Positive Rebate payments on Market Loans initiated 
by a Canadian Clearing Member in its capacity as principal, OCC would 
require Canadian Clearing Members to demonstrate through annual 
certification and submission of underlying tax documents, pursuant to 
OCC Rule 202, that such payments are subject to exemption from U.S. 
withholding obligations under the Canada Treaty.\52\
---------------------------------------------------------------------------

    \52\ Article XI(1) of the Canada Treaty reduces the rate of 
withholding from 30% to zero for U.S.-source interest beneficially 
owned by a resident of Canada entitled to treaty benefits, provided 
that income is not attributable to a permanent establishment, within 
the meaning of the Canada Treaty, or effectively connected with a 
trade or business conducted in the United States. See Notice of 
Filing, 89 FR 73476.
---------------------------------------------------------------------------

    OCC understands that, because there is a risk that no exemption 
from U.S. tax withholding would apply to the payment of Negative Rebate 
to a Canadian Clearing Member outside its capacity as a Qualified 
Intermediary, OCC would limit Canadian Clearing Members from initiating 
Market Loans with a Negative Rebate as a Lending Clearing Member other 
than in its capacity as a Qualified Intermediary, pursuant to OCC Rule 
202(b), as further protection from potential tax liability.\53\ In 
addition, OCC would limit Canadian Clearing Members' ability to modify 
the rebate on a Market Loan to a Negative Rebate as a Lending Clearing 
Member other than in its capacity as a Qualified Intermediary.\54\
---------------------------------------------------------------------------

    \53\ See Notice of Filing, 89 FR 73476.
    \54\ Id.
---------------------------------------------------------------------------

    b. Provide for Appointed and Appointing Clearing Members. Under 
current OCC Rule 302, all participants in the Market Loan Program are 
required to be members of DTC. As stated above, in Section II.B.4.a, 
OCC would allow Canadian Clearing Members to settle Market Loan 
transactions through a CDS sub-account maintained at DTC as a way to 
extend the Market Loan Program to Canadian Clearing Members. In a 
similar manner, OCC proposes to build a framework of Appointing 
Clearing Members and Appointed Clearing Members so that the Market Loan 
Program would be available to new types of Clearing Members who are not 
necessarily members of DTC, given that OCC expanded its membership to 
different types of participants in 2023.\55\
---------------------------------------------------------------------------

    \55\ See Exchange Act Release No. 97439 (May 5, 2023), 88 FR 
30373, 30373 (May 11, 2023) (SR-OCC-2023-002).
---------------------------------------------------------------------------

    To make this accommodation, OCC proposes to revise current OCC 
Rules 101 and 302, as well as proposed OCC Rules 2202A, 2207A, and 
2216A. This accommodation would allow a Clearing Member participating 
in the Market Loan Program--the Appointing Clearing Member--to appoint 
an Appointed Clearing Member to make settlement of obligations arising 
from the initiation or termination of Market Loans. The approach would 
be similar to how current OCC Rule 901 allows for the operation of 
Appointed and Appointing Clearing Members with respect to delivery or 
receipt of underlying securities arising from the exercise of equity 
options and maturity of stock futures, or how current OCC Rule 2201 
allows Canadian Clearing Members to appoint CDS as its agent for 
purposes of effective delivery orders for stock loan and stock borrow 
transactions. Under the Proposed Rule Change, Clearing Members wishing 
to participate in the Market Loan Program would be able to forego 
membership at DTC and instead establish a relationship with an 
Appointed Clearing Member. To support this process, OCC would revise 
the definitions in current OCC Rule 101 for ``Appointed Clearing 
Member'' and ``Appointing Clearing Member'' to reference the initiation 
and termination of Market Loans. These definitions would refer to 
proposed Rule 2207A (Instructions to the Corporation), which would 
contain a paragraph providing the mechanism for such appointments. 
Proposed OCC Rules 2202A (Initiation of Market Loans) and 2216A 
(Termination of Market Loans) would also provide for OCC to submit 
delivery orders to the Depository's account for the Appointed Clearing 
Member in connection with the initiation or termination of a Market 
Loan, respectively.
5. By-Laws and Rules Reorganization and Restatement
    In consolidating the two stock loan programs, OCC proposes to move 
pertinent provisions out of its By-Laws and into its Rules to allow for 
a clearer and more transparent presentation of the details. OCC 
proposes to make clarifying, conforming, and organizational changes to 
OCC's By-Laws and Rules, and rule-filed policies that reference those 
By-Laws or Rules. OCC would reorganize, restate, and consolidate 
provisions of OCC's By-Laws governing the Stock Loan Programs into 
Chapter XXII (Hedge Program) and Chapter XXIIA (Market Loan Program) of 
OCC's Rules, as amended by this Proposed Rule Change. As part of these 
revisions, OCC would preserve the governance requirements concerning 
amendments to the stock loan-related By-Laws migrated to the Rules by 
amending Article XI, Section 2 of the OCC By-Laws.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\56\ Under the Commission's 
Rules of Practice, the ``burden to demonstrate that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \57\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78s(b)(2)(C).
    \57\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\58\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\59\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\60\
---------------------------------------------------------------------------

    \58\ Id.
    \59\ Id.
    \60\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

    After carefully considering the Proposed Rule Change, the 
Commission finds that the proposal is consistent with the requirements 
of the Exchange Act and the rules and regulations thereunder applicable 
to OCC. More specifically, the Commission finds that the proposal is 
consistent with Section

[[Page 95890]]

17A(b)(3)(F) of the Exchange Act,\61\ and Rules 17Ad-22(e)(21)(ii) \62\ 
and 17Ad-22(e)(1) \63\ thereunder, as described below.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78q-(b)(3)(F).
    \62\ 17 CFR 240.17Ad-22(e)(21)(ii).
    \63\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that a clearing agency's rules are designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions.\64\ Based on a review of the record, and for the reasons 
described below, the changes described above are consistent with 
promoting the prompt and accurate clearance and settlement of 
securities transactions and, to the extent applicable, derivative 
agreements, contracts, and transactions.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78q-(b)(3)(F).
---------------------------------------------------------------------------

    As discussed above, OCC's current Stock Loan Programs are limited 
in several ways due to their historical development on two separate 
pathways. For example, OCC does not currently record stock loan 
transactions in its books and records on a contract-level basis but 
instead uses position aggregation, which is not aligned to the current 
industry standard. Additionally, Hedge Program participants, unlike 
Market Loan Program participants, currently must first negotiate terms 
bilaterally before sending them to DTC for settlement, as well as 
address certain post-trade transactions bilaterally with each of their 
counterparties, away from OCC. This creates operational burdens and 
costs when Clearing Members must reconcile their internal records with 
OCC's position-based records on a daily basis. Finally, the treatment 
of Canadian and other types of Clearing Members participating in the 
Stock Loan Programs potentially raises tax liability issues under the 
current stock loan framework.
    The Proposed Rule Change would help address these concerns by, 
among other things, aligning the rules governing both of OCC's Stock 
Loan Programs with each other, thus streamlining the loan initiation, 
tracking, and termination processes for both programs. The Proposed 
Rule Change also would replace OCC's current practice of aggregating 
new stock loan positions and stock borrow positions for the same 
Clearing Member in the same Eligible Stock with contract-level 
accounting, consistent with current industry-standard bookkeeping 
practices. The Proposed Rule Change also would allow for the submission 
of bilaterally negotiated transactions in the Market Loan Program. 
Likewise, the Proposed Rule Change would conform the terms of Market 
Loans cleared by OCC more closely to the provisions most commonly 
included in stock loan transactions executed under standard loan market 
documents; provide a uniform guaranty of terms across Market Loans, 
regardless of how those Market Loans are initiated under the enhanced 
program; and support transactions under both Stock Loan Programs. The 
proposed changes also would allow re-matching of Matched-Book Positions 
in suspension across both loan programs, thus helping to manage stock 
loan transactions in the event of a Clearing Member default. Also, OCC 
would use its current Rules to facilitate equal treatment of Canadian 
Clearing Members participating in the Stock Loan Programs, as well as 
to prevent certain transactions that could trigger tax withholding 
obligations. OCC would similarly amend its Rules to build a framework 
of Appointing Clearing Members and Appointed Clearing Members so that 
the Market Loan Program would be available to new types of Clearing 
Members who are not necessarily members of DTC.
    Taken together, these proposed changes would aid in reducing 
existing frictions in the current stock loan program framework, both by 
ensuring the accuracy and consistency of information and contract terms 
that OCC receives rather than relying on a one-on-one reconciliation 
process with each participating Clearing Member, and by more precisely 
managing the rebates, dividends, and other information that OCC keeps 
on its books. The proposed changes would also broaden Canadian Clearing 
Member access, which would facilitate a transition away from the Hedge 
Program in the event that OCC proposes to decommission it in the 
future. By eliminating the current manual reconciliation process, the 
Proposed Rule Change also would help reduce participating Clearing 
Members' costs and operational burdens associated with that process. As 
a result, the Proposed Rule Change would aid in promoting the prompt 
and accurate clearance and settlement of securities transactions and, 
to the extent applicable, derivative agreements, contracts, and 
transactions.
    Accordingly, the changes proposed to the Stock Loan Programs are 
consistent with the requirements of Section 17A(b)(3)(F) of the 
Exchange Act.\65\
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(21)(ii) Under the Exchange Act

    Rule 17Ad-22(e)(21)(ii) under the Exchange Act requires, in part, 
that a covered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to be 
efficient and effective in meeting the requirements of its participants 
and the markets it serves.\66\ In adopting Rule 17Ad-22(e)(21), the 
Commission provided guidance that a covered clearing agency generally 
should consider in establishing and maintaining policies and procedures 
that address efficiency and effectiveness, including whether its design 
meets the needs of its participants and the market it serves.\67\
---------------------------------------------------------------------------

    \66\ 17 CFR 240.17Ad-22(e)(21)(ii).
    \67\ Securities Exchange Act Release No. 78961 (Sept. 28, 2016), 
81 FR 70786, 70841 (Oct. 13, 2016) (File No. S7-03-14) (``Standards 
for Covered Clearing Agencies'').
---------------------------------------------------------------------------

    As described in Section II.A., the historical development of the 
Market Loan and Hedge Programs resulted in two programs designed to 
clear similar products in different ways. The current form of the 
programs presents certain inefficiencies, such as the costly 
reconciliation processes related to the Hedge Program and lack of 
visibility into additional contract terms due to OCC's aggregate 
portfolio-level bookkeeping. Such inefficiencies, in turn, have 
resulted in costs and burdens to Clearing Members, who have expressed 
interest in the enhancements such as having the rebate amounts 
calculated, settled, and guaranteed by OCC. The alignment of rules 
governing the Hedge and Market Loan Programs, along with improvements 
to both programs described above (e.g., contract-level recordkeeping, 
expanded guaranty encompassing additional contract terms), help to 
address such inefficiencies to meet the needs of OCC's Clearing Members 
that participate in the Stock Loan Programs, and would reduce manual 
processing and the potential for stock loan transactions to be delayed 
or to fail. For example, while OCC continue to operate both the Hedge 
and Market Loan Programs, OCC would provide the same, uniform guaranty 
and post-trade processing for all transactions. By allowing for 
automated submission of transactions to OCC prior to DTC settlement and 
by controlling the settlement process, the Stock Loan Programs would 
help reduce the burden and risks currently associated with

[[Page 95891]]

balancing and reconciliation. Additionally, by fixing the collateral 
for Market Loans at a single rate of 102 percent consistent with member 
feedback, as described in Section II.B.3.c., OCC would reduce the 
complexity in its risk management of stock loan positions by 
establishing a single rate across all Market Loans.
    Accordingly, the changes proposed to the Stock Loan Programs are 
consistent with the requirements of Rule 17Ad-22(e)(21) under the 
Exchange Act.\68\
---------------------------------------------------------------------------

    \68\ 17 CFR 240.17Ad-22(e)(21)(ii).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(1) Under the Exchange Act

    Rule 17Ad-22(e)(1) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each 
aspect of its activities in all relevant jurisdictions.\69\ In adopting 
Rule 17Ad-22(e)(1), the Commission provided guidance that a covered 
clearing agency generally should consider in establishing and 
maintaining policies and procedures to address legal risk, including 
whether its rules, policies and procedures, and contracts are clear, 
understandable, and consistent with relevant laws and regulations.\70\
---------------------------------------------------------------------------

    \69\ 17 CFR 240.17Ad-22(e)(1).
    \70\ Standards for Covered Clearing Agencies, 81 FR 70802.
---------------------------------------------------------------------------

    As described above, in Section II.B.5., the proposed changes 
consolidate and reorganize provisions concerning the Stock Loan 
Programs that are scattered across two documents--both OCC's By-Laws 
and Rules--into a single location: OCC's Rules. The streamlining and 
consolidation of these provisions into OCC's Rules enhances their 
clarity, transparency, and consistency for Clearing Members and 
stakeholders who choose to participate in the Stock Loan Programs. More 
specifically, the incorporation of current Interpretations and Policies 
into the body of the Rules would enhance clarity and readability of the 
provisions concerning the Stock Loan Programs. Additionally, the global 
and administrative changes would apply consistent terms and numbering 
conventions, improve consistency of the text between similar Hedge 
Program and Market Loan Program rules, and remove duplicative 
provisions, thus increasing clarity, understandability, and 
consistency.
    Accordingly, the changes proposed to the Stock Loan Programs are 
consistent with the requirements of Rule 17Ad-22(e)(1) under the 
Exchange Act.\71\
---------------------------------------------------------------------------

    \71\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \72\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \72\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\73\ that the proposed rule change, as modified by Partial 
Amendment No. 1, (SR-OCC-2024-011) be, and hereby is, approved.
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\74\
---------------------------------------------------------------------------

    \74\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28257 Filed 12-2-24; 8:45 am]
BILLING CODE 8011-01-P
```