Christopher J. Kirkpatrick
March 28, 2017
Page 5

participation in default management testing inures to the benefit of OCC’s obligations under
Core Principle G.

Public Information. OCC believes that implementing the proposed rule change will be
aligned with the requirement in Core Principle L that a DCO make information concerning the
rules and the operating and default procedures governing the clearing and settlement systems of
the DCO available to market participants." Proposed Rules 218(c) and (d) would be published
in OCC’s publicly available rules.

Opposing Views
No opposing views were expressed related to the rule amendments.
Notice of Pending Rule Certification
OCC hereby certifies that notice of this rule filing has been be given to Clearing

Members of OCC in compliance with Regulation 40.6(a)(2) by posting a copy of the submission
on OCC’s website concurrently with the filing of this submission.

v TUS.C. 7a-1(c)(2)(L)Gi).


Christopher J. Kirkpatrick
March 28, 2017
Page 4

provided guidance that clarifies that “[a] covered clearing agency may designate in its policies
and procedures that certain participants, or certain categories of participants, be designated for
participation in certain tests.”'? OCC’s key factors to determine which Clearing Members are
selected for participation in a given test of a default procedure are designed to provide flexibility
to OCC while also ensuring that the appropriate Clearing Members participate in tests relevant to
their business activities as relevant to OCC. Any Clearing Members designated to participate in
a test of OCC’s default procedures would be notified in advance and provided details concerning
the nature of such testing as the particular test plans are determined.

As stated above, OCC already conducts periodic default management testing and includes
certain Clearing Members in such testing under Rule 214(d). Accordingly, OCC believes the
proposed rule would have comparatively little impact on its Clearing Members relative to OCC’s
existing practice. As previously noted, the proposed rule is intended to establish clear authority
in accordance with Rule 17Ad-22(e)(13)'* for OCC to require Clearing Member participation in
default procedure testing.

OCC reviewed the derivatives clearing organization (“DCO”) core principles (“Core
Principles”) as set forth in the Act. During this review, OCC identified the following Core
Principles as potentially being impacted:

Participant and Product Eligibility. OCC believes that implementing the proposed rule
change will be consistent with the requirement in Core Principle C that participation and
membership requirements of each DCO be objective, publicly disclosed and permit fair and open
access.'> Proposed Rules 218(c) and (d) would publicly disclose the requirement for Clearing
Member participation in default management testing, as well as the key factors used by OCC in
the selection of participants for particular default management testing exercises.

Default Rules and Procedures. OCC believes that implementing the proposed rule
change will be aligned with the requirement in Core Principle G that a DCO ensure it may take
timely action to contain losses and liquidity pressures and continue to meet each of its
obligations as a DCO." Proposed Rules 218(c) and (d) would make clear that Clearing Members
are required to participate, if selected, in default management testing. OCC’s default
management tests are designed to ensure that OCC would be able to take timely action to contain
losses and liquidity pressures related to or arising from a default. Adopting a rule to ensure

products being auctioned and qualification to clear transactions in the asset class in which the
Clearing Member proposes to submit bids before inviting a bidder to participate in the auction.

5 Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786, 70830 (October
13, 2016).

a 17 CFR 240.17Ad-22(e)(13).
a5: TUS. Ta-1(c)(2)(C)Gii).
i 7 U.S.C. Ta-1(c)(2)(G)ii).


Christopher J. Kirkpatrick
March 28, 2017
Page 6

Certification

OCC hereby certifies that the rule set forth at Item | of the enclosed filing complies with
the Act and the CFTC’s regulations thereunder.

Should you have any questions regarding this matter, please do not hesitate to contact me.

Sincerely,

err Re

Justin W. Byrne
Vice President, Regulatory Filings

Enclosure


occ

March 28, 2017

VIA ELECTRONIC MAIL
Christopher J. Kirkpatrick

Office of the Secretariat

Commodity Futures Trading Commission
Three Lafayette Centre

1155 21% Street, N.W.

Washington, DC 20581

Re: Rule Filing SR-OCC-2017-003 Rule Certification
Dear Secretary Kirkpatrick:

Pursuant to Section Sc(c)(1) of the Commodity Exchange Act, as amended (“Act”), and
Commodity Futures Trading Commission (“CFTC”) Regulation 40.6, enclosed is a copy of the
above-referenced rule filing submitted by The Options Clearing Corporation (“OCC”). The date
of implementation of the rule is at least 10 business days following receipt of the rule filing by
the CFTC or the date the proposed rule is approved by the Securities and Exchange Commission
(“SEC”) or otherwise becomes effective under the Securities Exchange Act of 1934 (the
“Exchange Act”). This rule filing has been, or is concurrently being, submitted to the SEC under
the Exchange Act.

In conformity with the requirements of Regulation 40.6(a)(7), OCC states the following:

Explanation and Analysis

On September 28, 2016 the SEC adopted amendments to Rule 17Ad-22' and added new
Rule 17Ad-22(e)(13)? pursuant to Section 17A of the Securities Exchange Act of 1934? and the
Payment, Clearing, and Settlement Supervision Act of 2010 (Payment, Clearing and Settlement
Supervision Act”) to require that a “covered clearing agency,” as defined by Rule 17Ad-
22(a)(5),° has the authority and operational capacity, among other things, to require that
participants, and other stakeholders when practicable, participate in the review and testing of the

' 17 CFR 240.17Ad-22.

2 17 CFR 240.17Ad-22(e)(13).
3 15 U.S.C. 78q-1.

4 12 U.S.C. 5461 et. seq.

5 17 CFR 240.17Ad-22(a)(5).

701 Bth Street NW, Suite 630, Washington, DC 20001 202.756.1972 www.theocc.com


Christopher J. Kirkpatrick
March 28, 2017
Page 2

covered clearing agency’s default procedures (collectively, the new and amended rules are herein
referred to as “CCA” rules). Specifically, Rule 17Ad-22(e)(13) requires that a covered clearing
agency establish, implement, maintain and enforce written policies and procedures reasonably
designed to:

Ensure the covered clearing agency has the authority and operational capacity to take
timely action to contain losses and liquidity demands and continue to meet its obligations
by, at a minimum, requiring the covered clearing agency’s participants and, when
practicable, other stakeholders to participate in the testing and review of its default
procedures, including any close-out procedure, at least annually and following material
changes thereto.®

OCC meets the definition of a covered clearing agency and is therefore subject to the
requirements of the CCA rules, including Rule 17Ad-22(e)(13).’

Current Practice

As a matter of current practice, OCC already involves certain of its Clearing Members in
testing of OCC’s default management procedures. Article V of OCC’s By-Laws sets forth
OCC’s initial membership requirements. Pursuant to Interpretation and Policy .02(b) of Article
V, Section 1 of OCC’s By-Laws, an applicant must demonstrate that it is operationally capable
of, among other things, participating in applicable default management activities as required by
OCC and in accordance with applicable laws and regulations.*

Once an applicant becomes a Clearing Member, Chapter II of OCC’s Rules also sets
forth operational requirements that address default management procedure testing. In particular,
OCC Rule 214(d) requires Clearing Members to maintain certain operational capabilities as a
continuing obligation of participating in OCC as a Clearing Member. This includes “the ability
to participate in default management activities, including auctions, as may be required by the
Corporation and in accordance with applicable laws and regulations.”®

As contemplated by Interpretation and Policy .02(b) of Article V, Section J and Rule
214(d), OCC already conducts periodic default management testing, which includes the
participation of certain Clearing Members.

£ 17 CFR 240.17Ad-22(e)(13).

, Id.

G See OCC By-Laws Article V, Section 1, Interpretation and Policy .02(b).
° See OCC Rule 214(d).


Christopher J. Kirkpatrick
March 28, 2017
Page 3

Proposed Rules 218(c) and (d)

To comply with certain requirements in Rule 17Ad-22(e)(13) that the SEC recently
adopted as part of the CCA rules, OCC is proposing to implement Rules 218(c) and (d) to
establish a requirement that Clearing Members participate periodically in testing of OCC’s
default procedures, including any close-out procedures. Proposed Rules 218(c) and (d) would
make clear, consistent with the CCA rules, OCC’s right to designate Clearing Members that are
required to participate in default procedure testing and require designated Clearing Members to
comply with the default procedure testing within specified timeframes.

OCC maintains a Default Management Policy (“Policy”) that also addresses its default
procedure testing requirements. Specifically, the Policy notes, among other things, that OCC’s
default management testing will occur on at least an annual basis, or more frequently if a
material change is made to OCC’s default management procedures or as may be deemed
necessary by OCC’s internal “Default Management Working Group.”"? In addition, the Policy
provides that certain Clearing Members would be required to participate in OCC’s default
management testing, consistent with proposed Rules 218(c) and (d).

Proposed Rules 218(c) and (d) would establish flexible and transparent key factors that
OCC would use to determine which Clearing Members are required to participate in default
management testing. Proposed Rules 218(c) and (d) would require OCC to use the key factors to
select Clearing Members that, taken as a whole, OCC determines are the minimum necessary for
the maintenance of fair and orderly markets, the promotion of robust risk management, the
support of stability of the broader financial system and the protection investors and the public
interest. OCC’s key factors in determining which Clearing Members will be selected for testing
in any given testing event would include but not be limited to: (i) suitability of business activities
and anticipated impact on resources;'' (ii) historical open interest and volume in asset classes,
where appropriate;!? and (iii) participation in previous tests. In adopting the CCA rules, the SEC

The “Default Management Working Group” is a staff-level working group chaired by the Vice
President of Default Management and composed of staff from other OCC departments involved
in default management testing.

OCC’s Clearing Members vary in their size, capacity, and participation in OCC’s services from
large, active members to smaller members that may not participate in certain services or may
have less resources, personnel, or capacity to engage in default procedure testing at a given time.
Consequently, OCC needs to preserve reasonable flexibility in considering the suitability of
business activities and anticipated impact on resources of a Clearing Member considered for
Participation in a particular default management testing exercise. OCC notes, however, that this
in no way abrogates a Clearing Member's obligations to maintain the minimal operational
capabilities, including the ability to participate in default management activities, as required by
OCC's rules. See, e.g., OCC Rule 214(d).

be See, e.g., OCC Rule 1104.02(d), noting that in a default scenario OCC will pre-qualify certain
potential bidders in an auction based on, among other things, demonstrated activity in the