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[Federal Register Volume 89, Number 235 (Friday, December 6, 2024)]
[Notices]
[Pages 97127-97131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28548]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101792; File No. SR-OCC-2024-015]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change by The Options Clearing 
Corporation Concerning Modifications to Its Governance Documents To 
Align With Recently Adopted SEC Governance Rules

December 2, 2024.

I. Introduction

    On October 21, 2024, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC''), pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ 
a proposed rule change (the ``Proposed Rule Change'') to amend its 
governance documents as part of an effort to achieve compliance with 
recently adopted governance requirements \3\ and to make changes 
identified during OCC's annual review process. The Proposed Rule Change 
was published for comment in the Federal Register on October 31, 
2024.\4\ The Commission has not received any comments on the Proposed 
Rule Change. For the reasons discussed

[[Page 97128]]

below, the Commission is approving the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 98959 (Dec. 5, 
2023), 88 FR 84454 (Dec. 5, 2023) (File No. S7-21-22) (``SEC 
Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf.
    \4\ Securities Exchange Act Release No. 101444 (October 25, 
2024), 89 FR 86868 (October 31, 2024) (File No. SR-OCC-2024-015) 
(``Notice'').
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II. Description of the Proposed Rule Change

    OCC is registered with the Commission as a clearing agency for the 
purpose of clearing standardized equity options. The Proposed Rule 
Change amends OCC's Board of Directors Charter and Corporate Governance 
Principles (``Board Charter''), Governance and Nominating Committee 
(``GNC'') Charter, Risk Committee Charter, Technology Committee 
Charter, Compensation and Performance Committee (``CPC'') Charter, 
Regulatory Committee Charter, Audit Committee Charter, Fitness 
Standards, Third-Party Risk Management Framework, and Article III of 
OCC's By-Laws (together, ``governance documents''). OCC proposes such 
amendments in response to the new governance rules that apply to 
OCC.\5\ Specifically, OCC proposes changes to require that a majority 
of the Board and any Board-level committee are independent directors; 
establish policies and procedures to identify, mitigate, or eliminate 
conflicts of interest; and establish policies and procedures for 
monitoring and managing risks relating to third-party providers of core 
services. The amendments also make other conforming changes and 
typographical corrections.
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    \5\ See SEC Adopting Release.
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A. Board Charter and By-Laws

    OCC proposes to amend the Board Charter to provide that a majority 
of the Board and all Board-level committees be independent 
directors.\6\ As a conforming change, OCC would also remove references 
in the current Board Charter indicating that only the Audit Committee 
must be comprised of independent directors.
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    \6\ Under the amendments, such independence would need to meet 
the definition of that term in, and be determined in accordance with 
the requirements of, Rule 17Ad-25(a) under the Exchange Act. See 
Notice, 89 FR at 86869; Exhibit A (Board Charter) to File No. SR-
OCC-2024-015.
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    OCC proposes adding to the Board's mission an oversight role for 
service providers that provide core services to OCC. The oversight 
would be accomplished by overseeing senior management's review, risk 
assessment, and approval of agreements for service providers of core 
services, and by reviewing senior management's policies and procedures 
that govern relationships and manage risks for service providers of 
core services. The amendments to the Board Charter also would require 
the Board to evaluate certain of senior management's actions related to 
such service providers, including senior management's efforts to 
monitor identified material issues with, document weaknesses or 
deficiencies of, and remedy significant deterioration in performance of 
such service providers.
    The proposed changes to the Board Charter would remove statements 
indicating that a substantial portion of directors must be independent 
``of OCC and OCC's management,'' and instead state that the Board's 
policy is to require that a majority of directors be independent at all 
times. The proposed changes would also clarify the role of the GNC in 
selecting Exchange Directors, including a requirement that the GNC have 
a written evaluation process for Exchange Directors, and that the GNC 
will evaluate each Exchange Director before that director is elected by 
the Equity Exchange at each annual meeting of stockholders.
    OCC proposes adding the word ``additional'' before ``independence'' 
to describe independence criteria for the Audit Committee. The 
amendments would also detail specific requirements the Board would use 
to determine whether an individual director meets the definition of 
Public Director in the Board Charter and Article III of the By-Laws. 
Further proposed amendments to the Board Charter would require the 
Board to have at least five directors who are not an associated person 
or employee of an entity or entity affiliate that is registered or 
exempt from registration with the Commission or Commodity Futures 
Trading Commission. The current requirement that a Public Director must 
not be affiliated with any national securities exchange or association, 
designated contract market, futures commission merchant, or broker or 
dealer in securities would be removed.
    Finally, OCC proposes amending Article III, Section A of the By-
Laws to require the GNC to nominate for Public Director a non-
associated person or employee of an entity or entity affiliate that is 
registered or exempt from registration with the Commission or Commodity 
Futures Trading Commission before each annual meeting of stockholders 
where a Public Director is elected.

B. GNC Charter

    OCC proposes amending the GNC Charter to provide that at least a 
majority of the Committee must be comprised of independent directors. 
The proposed changes also require the Chair to be a Public Director who 
is also an independent director. Under the amendments, the GNC would be 
required to assist the Board in overseeing OCC's corporate governance 
processes, including evaluating Board candidates, to more closely align 
existing practice with rule text. This evaluation would include a new 
written process and a packet of materials containing background and 
other relevant information for all Board candidates. In addition, as 
part of the written evaluation process, the GNC would be required to 
identify, screen, and review individuals qualified to serve as 
Directors, and to document the outcome of the written evaluation 
process once completed.
    OCC also proposes eliminating from the GNC Charter the terms 
``Member Directors'' and ``Public Directors'' and instead using the 
term ``Directors.'' Under the amendments, the GNC would be required to 
specify fitness standards for serving as a director that are documented 
in writing and approved by the Board. When evaluating director 
nominees, the GNC would be required to consider the views of other 
stakeholders who may be affected by the decisions of the Board, other 
than owners and Clearing Members. Finally, the GNC would be required to 
review and advise the board on whether directors are independent, and 
annually recommend for Board approval the appointment of directors to 
Board committees and assignment of Committee Chairs.

C. Risk Committee Charter

    The proposed amendments to the Risk Committee Charter would require 
the GNC and the Board, in making their nominations, to take into 
consideration a broad array of market participants on risk management 
issues. The proposed amendments would also amend the Risk Committee 
Charter to provide that at least a majority of the Committee must be 
comprised of independent directors. Finally, the Risk Committee would 
be required to provide risk assessments to the Board for any service 
providers of core services.

D. Technology Committee Charter

    OCC proposes amending the Technology Committee Charter to provide 
that at least a majority of the Technology Committee must be comprised 
of independent directors.

E. Compensation and Performance Committee (``CPC'') Charter

    OCC proposes amending the CPC Charter to provide that at least a 
majority of the Committee must be comprised of independent directors. 
In addition, OCC proposes expanding the

[[Page 97129]]

description of the role of the CPC in overseeing OCC's human resources 
programs and requiring the CPC to oversee the development of human 
resources programs and policies, including talent acquisition, 
compensation performance management, diversity, equity, and inclusion 
programs, training and development, benefits, and succession planning 
for critical roles.

F. Regulatory Committee Charter

    OCC proposes amending the Regulatory Committee Charter to provide 
that at least a majority of the Committee must be comprised of 
independent directors. The Regulatory Committee Charter also would be 
amended to correct minor grammatical errors identified in OCC's annual 
review.

G. Audit Committee Charter

    OCC proposes amending the Audit Committee Charter to provide that 
at least a majority of the Audit Committee must be comprised of 
independent directors.

H. Fitness Standards

    OCC proposes amending its Fitness Standards to specify that, when 
considering nominees for election or appointment to the Board, the GNC 
must consider whether the individual would help demonstrate that the 
Board has diverse skills, knowledge, and experience and whether the 
individual understands and considers the views of stakeholders who may 
be affected by Board decisions other than OCC's owners and Clearing 
Members.
    OCC also proposes amending its Fitness Standards to align with the 
proposed changes to the description of Public Director and the proposed 
changes in OCC's Board Charter and By-Laws.Specifically, the proposed 
amendments would replace current language in the Fitness Standards 
prohibiting a director from having an affiliation with any national 
securities exchange, national securities association, designated 
contract market, futures commission merchant, or broker-dealer in 
securities with language precluding the director from being an 
associated person or employee of an exempt or registered entity or 
affiliate of the Commission or Commodity Futures Trading Commission, as 
described above. OCC also proposes adding that this requirement will 
not prevent a person from serving as a Public Director solely based on 
some other relationship with an entity described in the previous 
sentence.

I. Third-Party Risk Management Framework

    OCC proposes amending its Third-Party Risk Management Framework to 
require enhanced lifecycle management by OCC's management and Board for 
third-party service providers of core services. The amendments would 
require OCC's Management Committee, as part of the process for 
onboarding a service provider of core services, to evaluate and 
document risks related to the service agreement with the service 
provider, assess the risks, and submit its findings to the Board for 
review and approval prior to onboarding. OCC's Management Committee 
also would be required to conduct and report to the Board its 
evaluation of ongoing monitoring for service providers of core 
services. In addition, the Management Committee would be required to 
monitor service provider performance and: (i) remedy significant 
deterioration in services; (ii) address changing risks or material 
issues; or (iii) assess and document weaknesses or deficiencies if the 
risks or material issues cannot be remedied. The Management Committee 
would be required to report to the Board any action taken by senior 
management to remedy significant deterioration in performance of the 
service provider for core services or address material issues with the 
service provider for core services, or to assess and document 
deficiencies that cannot be remedied.
    Under the Proposed Rule Change, the Third-Party Risk Management 
Framework would be amended to provide that each OCC staff working group 
responsible for identifying and escalating risks throughout the third-
party relationship lifecycle will have a chair and designated 
Management Committee member responsible for identifying matters to be 
escalated to the Management Committee. The proposed changes would also 
add a definition of ``Service Provider for Core Services'' as a service 
provider for core services that directly supports the delivery of 
clearance or settlement functionality or any other material purpose on 
an going basis to OCC's business through a written agreement.
    In Section I, Executive Summary, the description of Exchange-
related risks would be broadened from those arising from ``Exchanges'' 
to those arising from ``Exchange Relationships.'' This definition would 
be moved from a footnote to section V, Definitions.
    In Section II, Risk Identification, OCC proposes expanding the 
definitions of both Information Technology and Security risks and Legal 
and Regulatory risks to include when third-parties are unable to 
safeguard OCC's systems and data. The proposed changes would also add 
as specifically identified Legal and Regulatory risks: (i) when a 
third-party fails to fulfill its obligations to OCC; (ii) when OCC 
fails to fulfill its obligations to a third-party; and (iii) when a 
third-party fails to comply with regulatory standards and protocols.
    In Section III, Relationship Lifecycle, OCC proposes changing the 
header to read ``Third-Party Relationship Cycle,'' and adding the 
language ``in compliance with agreement terms'' to clarify current risk 
management responsibilities relating to third-party off-boarding about 
off-boarding third-parties.
    In Section IV, Third-Party Relationship Management, the proposed 
changes would broaden the header from ``Exchanges'' to ``Exchange 
Relationships,'' as noted above. As part of OCC's current on-boarding 
process, OCC staff is required to present a summary of due diligence 
and on-boarding activities to OCC's Board. Under the Proposed Rule 
Change, OCC staff would present such summaries to the Management 
Committee as well as a summary of legal documents and requirements to 
the Board of Directors. OCC proposes inserting language to require the 
escalation of identified legals risks to the Legal Department. Further, 
OCC proposes replacing ``OCC Officer'' with ``authorized signatories'' 
to define who would be responsible for executing agreements that 
address control and business requirements. OCC proposes removing 
language from the Off-Boarding section to avoid the implication that 
OCC is authorized to limit connectivity with an Exchange only in the 
context of off-boarding an exchange. The Vendors section would be 
amended to require Information Technology personnel to review requests 
for on-boarding new technology vendors and verify that the vendors meet 
enterprise requirements. The Framework would be amended to clarify that 
agreements with vendors are required to be negotiated through the 
process outlined in OCC's Legal Services Policy. Lastly, references 
that Third-Party Risk Management personnel monitor vendors throughout 
the Section IV would be eliminated because it is the vendor 
relationship managers who are responsible for monitoring vendors; 
Third-Party Risk Management personnel gather information and escalate 
if necessary.
    In Definitions, Section V, the definition of ``Watch Level'' would 
be amended to add ``risk management'' to a list of events requiring a 
risk response.
    Finally, OCC proposes combining the Exchange Working Group and 
Vendor

[[Page 97130]]

Risk Working Group to create the Exchange and Vendor Working Group 
throughout the Third-Party Risk Management Framework. OCC also proposes 
making non-substantive conforming changes throughout for consistency.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act requires the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the Proposed Rule Change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\7\ 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.'' \8\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    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,\9\ 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.\10\ 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.\11\
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    \9\ Id.
    \10\ Id.
    \11\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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    After carefully considering the Proposed Rule Change, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, for the reasons given 
below, the Commission finds that the Proposed Rule Change is consistent 
with Section 17A(b)(3)(A) and (F) of the Act \12\ and Rules 17Ad-
22(e)(2) and 17Ad-25 thereunder.\13\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F) and 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-25.
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A. Consistency With Section 17A(b)(3) of the Act

    Section 17A(b)(3) of the Act requires, among other things, that OCC 
be so organized and has the capacity to be able to comply with the 
provisions of the Act and the rules and regulations thereunder,\14\ and 
that OCC's rules be designed to foster cooperation and coordination 
with persons engaged in the clearance and settlement of securities 
transactions.\15\ Based on review of the record, and for the reasons 
discussed below,\16\ OCC's changes are consistent with OCC being so 
organized and having the capacity to comply with the provisions of the 
Act and the rules and regulations thereunder and with fostering 
cooperation and coordination with persons engaged in the clearance and 
settlement of securities transactions. Accordingly, the Proposed Rule 
Change is consistent with the requirements of Sections 17A(b)(3)(A) and 
(F) of the Act.\17\
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    \14\ 15 U.S.C. 78q-1(b)(3)(A).
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ See infra Section III. B. (Consistency with Rule 17Ad-
22(e)(2) under the Act).
    \17\ 15 U.S.C. 78q-1(b)(3)(A) and 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2) Under the Act

    Rule 17Ad-22(e)(2) requires covered clearing agencies to, among 
other things, provide for governance arrangements that are clear and 
transparent,\18\ establish that the board of directors and senior 
management have appropriate experience and skills to discharge their 
duties and responsibilities,\19\ and specify clear and direct lines of 
responsibility.\20\ In adopting Rule 17Ad-22(e)(2), the Commission 
provided guidance that a covered clearing agency generally should 
consider in establishing and maintaining policies and procedures, 
including, in part, whether the board of directors contains suitable 
members with the appropriate skills and incentives to fulfill the 
board's multiple roles, and whether the board of directors should 
include non-executive board members.\21\
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    \18\ 17 CFR 240.17Ad-22(e)(2)(i).
    \19\ 17 CFR 240.17Ad-22(e)(2)(iv).
    \20\ 17 CFR 240.17Ad-22(e)(2)(v).
    \21\ Securities Exchange Act Release No. 78961 (Sept. 28, 2016), 
81 FR 70786, 70806 (Oct. 13, 2016) (File No. S7-03-14) (``Standards 
for Covered Clearing Agencies'').
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    OCC's proposed changes would strengthen OCC's written fitness 
standards for board nominees. Strengthening the criteria by which OCC 
evaluates both directors and nominees would help OCC review each 
nominee in the broader context of the diversity of skills, knowledge, 
experience, and perspectives of the Board. Additionally, the proposed 
changes would insert independence requirements across OCC's governance 
documents (e.g., Board and Board committee charters). An increased 
focus on director independence would help ensure that the members of 
OCC's board of directors have the appropriate incentives to fulfill the 
Board's roles. As a result, the proposed changes to fitness standards 
and as well as the broader changes across the governing documents are 
consistent with ensuring that OCC's board of directors contains members 
with the appropriate skills and incentives to discharge their duties.
    The proposed changes further detail the lines of responsibility for 
management of third-party providers of core services. For example, the 
amendments to the Third-Party Risk Management Framework described above 
would require the Management Committee to evaluate and document risks 
for on-boarding, ongoing monitoring, and off-boarding and submit those 
findings to the Board for review and approval. Moreover, the proposed 
changes described above detail how each working group will have a chair 
and designated member responsible for identifying matters for 
escalation to the Management Committee. Separately, the proposed 
changes more clearly articulate certain reporting and escalation lines 
such as the escalating legal risks related to Exchange Relationships to 
OCC's Legal Department, Information Technology's role in on-boarding 
new vendors, and consolidation of certain working groups. Taken 
together, these procedures establish clear and direct lines of 
responsibility.
    As described above, OCC proposes several changes to improve the 
clarity of its governance arrangements. For example, the proposed 
changes to the CPC Charter would, consistent with current practice, 
expand the description of the CPC's oversight role with regard to human 
resources at OCC. Similarly, OCC proposes to broaden the relationships 
contemplated in the Third-Party Risk Management Framework by replacing 
the references to ``Exchanges'' with references to ``Exchange 
Relationships,'' and to clarify the who can execute legal agreements by 
replacing a reference to ``OCC Officers'' with a reference to 
``authorized signatories.'' Separately, the proposed changes would 
clarify the situations in which OCC can limit connectivity with an 
Exchange and that

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risk management issues may be a basis for Watch Level-related 
responses.
    Based on the foregoing, the Proposed Rule Change is consistent with 
the requirements of Rule 17Ad-22(e)(2) under the Act.\22\
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    \22\ 17 CFR 240.17Ad-22(e)(2).
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C. Consistency With Rule 17Ad-25 Under the Act

    Rule 17Ad-25 requires, among other things, that covered clearing 
agencies establish: requirements that a majority of the board of 
directors \23\ and any committee \24\ with Board authority be 
independent directors \25\; a nominating committee, written evaluation 
process, fitness standards, and evaluation of the independence of 
nominees and directors \26\; and policies and procedures requiring that 
senior management evaluate and document risks and whether the risks can 
be managed for service providers of core services.\27\
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    \23\ 17 CFR 240.17Ad-25(b).
    \24\ 17 CFR 240.17Ad-25(e).
    \25\ 17 CFR 240.17Ad-25(a).
    \26\ 17 CFR 240.17Ad-25(c).
    \27\ 17 CFR 240.17Ad-25(i).
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    The changes described above require that OCC's Board, and each 
committee with Board authority be composed of a majority of independent 
directors, and that such independence is determined in accordance with 
Rule 17Ad-25. The proposed changes also contemplate a written processes 
for nominating, evaluating, and electing directors.
    The proposed changes revise the Board Charter and Third-Party Risk 
Management Framework to require that senior management review, approve, 
monitor, and remediate risks with service providers of core 
services.\28\ The proposed amendments also require that senior 
management perform ongoing monitoring of relationships with service 
providers of core services, and document whether the risks can be 
remedied, and to inform the Board of their evaluation. Further, the 
proposed changes articulate the Board's role in oversight of the 
management of service providers of core services through the reporting 
required of the Management Committee.
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    \28\ As described above, OCC's proposed changes include adopting 
a definition of Service Provider for Core Services within its rules.
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    Based on the foregoing, the Proposed Rule Change is consistent with 
the requirements of Rule 17Ad-25 under the Act.\29\
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    \29\ 17 CFR 240.17Ad-25.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act, 
and in particular, Sections 17A(b)(3)(A) and (F) of the Act \30\ and 
Rules 17Ad-22(e)(2) and 17Ad-25.\31\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ 17 CFR 240.17Ad-22(e)(2) and 17 CFR 240.17Ad-25.
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    It is Therefore Ordered pursuant to Section 19(b)(2) of the Act 
that the Proposed Rule Change (SR-OCC-2024-015) be, and hereby is, 
approved.\32\
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    \32\ In approving the Proposed Rule Change, the Commission 
considered the proposal's impacts on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28548 Filed 12-5-24; 8:45 am]
BILLING CODE 8011-01-P
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