Notice of proposed change pursuant to the Payment, Clearing, and Settlement Act of 2010

Section 806(e)(1) * Section 806(e)(2) *

Security-Based Swap Submission pursuant

to the Securities Exchange Act of 1934

Section 3C(b)(2) *

Exhibit 2 Sent As Paper Document Exhibit 3 Sent As Paper Document

has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.

19b-4(f)(6)

19b-4(f)(5)

Provide a brief description of the action (limit 250 characters, required when Initial is checked *).

(Name *)

NOTE: Clicking the button at right will digitally sign and lock

this form. A digital signature is as legally binding as a physical 

signature, and once signed, this form cannot be changed.

Vice President, Regulatory Filings

(Title *)

Date 03/28/2017

Provide the name, telephone number, and e-mail address of the person on the staff of the self-regulatory organization

prepared to respond to questions and comments on the action.

Title * Vice President, Regulatory Filings

Contact Information

19b-4(f)(4)

19b-4(f)(2)

19b-4(f)(3)

Extension of Time Period

for Commission Action *

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 19b-4

Withdrawal

Fax (312) 322-6280

Justin Last Name *

Filing by

Pilot

Options Clearing Corporation

2017 - * 003

Amendment No. (req. for Amendments *)

File No.* SR - 

Byrne

jbyrne@theocc.com

Telephone * (202) 971-7238

E-mail *

First Name *

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, 

Initial * Amendment * Section 19(b)(3)(A) * Section 19(b)(3)(B) *

Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934

Description

Proposed rule change by The Options Clearing Corporation concerning the requirement for Clearing Members to

participate in default management testing.

Justin Byrne, jbyrne@theocc.com

By Justin W. Byrne

Section 19(b)(2) *

19b-4(f)(1)

Required fields are shown with yellow backgrounds and asterisks.

Page 1 of * 26

 OMB APPROVAL

OMB Number: 3235-0045

Estimated average burden

hours per response............38

Rule

Date Expires *
If the self-regulatory organization is amending only part of the text of a lengthy

proposed rule change, it may, with the Commission's permission, file only those

portions of the text of the proposed rule change in which changes are being made if

the filing (i.e. partial amendment) is clearly understandable on its face. Such partial

amendment shall be clearly identified and marked to show deletions and additions. 

Partial Amendment

Add Remove View

The self-regulatory organization may choose to attach as Exhibit 5 proposed changes

to rule text in place of providing it in Item I and which may otherwise be more easily

readable if provided separately from Form 19b-4. Exhibit 5 shall be considered part

of the proposed rule change. 

Exhibit 5 - Proposed Rule Text

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

For complete Form 19b-4 instructions please refer to the EFFS website.

Copies of any form, report, or questionnaire that the self-regulatory organization

proposes to use to help implement or operate the proposed rule change, or that is

referred to by the proposed rule change.

Exhibit Sent As Paper Document

Exhibit 4 - Marked Copies

Add Remove View

Exhibit 3 - Form, Report, or Questionnaire

Add Remove

View

Exhibit 2 - Notices, Written Comments, 

Transcripts, Other Communications

Add Remove

View

Exhibit 1 - Notice of Proposed Rule Change *

Add 

Form 19b-4 Information *

Exhibit 1A- Notice of Proposed Rule

Change, Security-Based Swap Submission, 

or Advance Notice by Clearing Agencies *

Add Remove View

Remove

Add Remove

The full text shall be marked, in any convenient manner, to indicate additions to and

deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit 

the staff to identify immediately the changes made from the text of the rule with which

it has been working.

View

The self-regulatory organization must provide all required information, presented in a

clear and comprehensible manner, to enable the public to provide meaningful

comment on the proposal and for the Commission to determine whether the proposal

is consistent with the Act and applicable rules and regulations under the Act. 

View

Exhibit Sent As Paper Document

The Notice section of this Form 19b-4 must comply with the guidelines for publication

in the Federal Register as well as any requirements for electronic filing as published 

by the Commission (if applicable). The Office of the Federal Register (OFR) offers

guidance on Federal Register publication requirements in the Federal Register

Document Drafting Handbook, October 1998 Revision. For example, all references to

the federal securities laws must include the corresponding cite to the United States

Code in a footnote. All references to SEC rules must include the corresponding cite

to the Code of Federal Regulations in a footnote. All references to Securities

Exchange Act Releases must include the release number, release date, Federal

Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]

-xx-xx). A material failure to comply with these guidelines will result in the proposed

rule change being deemed not properly filed. See also Rule 0-3 under the Act (17

CFR 240.0-3)

The Notice section of this Form 19b-4 must comply with the guidelines for publication

in the Federal Register as well as any requirements for electronic filing as published 

by the Commission (if applicable). The Office of the Federal Register (OFR) offers

guidance on Federal Register publication requirements in the Federal Register

Document Drafting Handbook, October 1998 Revision. For example, all references to 

the federal securities laws must include the corresponding cite to the United States

Code in a footnote. All references to SEC rules must include the corresponding cite

to the Code of Federal Regulations in a footnote. All references to Securities

Exchange Act Releases must include the release number, release date, Federal

Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]

-xx-xx). A material failure to comply with these guidelines will result in the proposed

rule change, security-based swap submission, or advance notice being deemed not 

properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3)

Copies of notices, written comments, transcripts, other communications. If such

documents cannot be filed electronically in accordance with Instruction F, they shall be

filed in accordance with Instruction G.

Add Remove View

Required fields are shown with yellow backgrounds and asterisks.
File No. SR-OCC-2017-003

Page 3 of 26

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

Form 19b-4

Proposed Rule Change 

by

THE OPTIONS CLEARING CORPORATION

Pursuant to Rule 19b-4 under the

Securities Exchange Act of 1934
File No. SR-OCC-2017-003

Page 4 of 26

Item 1. Text of the Proposed Rule Change

This proposed rule change by The Options Clearing Corporation (“OCC”) would 

implement OCC Rules 218(c) and (d), which are designed to comply with the requirement in 

Rule 17Ad-22(e)(13)1 that, at a minimum, OCC require its Clearing Members to participate in 

the testing and review of OCC’s default procedures, including any close-out procedures. 

Consistent with the requirement in Rule 17Ad-22(e)(13),2 OCC’s default management testing 

would occur at least annually and following material changes to OCC’s default management 

procedures.

Material proposed to be added to OCC’s Rules as currently in effect is underlined and 

material proposed to be deleted is enclosed in bold brackets. All terms with initial capitalization 

that are not otherwise defined herein have the same meaning as set forth in the OCC By-Laws 

and Rules.3 

THE OPTIONS CLEARING CORPORATION

RULES

* * *

CHAPTER II

Miscellaneous Requirements

* * *

Operational and Default Management Testing

 1 17 CFR 240.17Ad-22(e)(13).

2 Id.

3 OCC’s By-Laws and Rules can be found on OCC’s public website: 

http://optionsclearing.com/about/publications/bylaws.jsp.
File No. SR-OCC-2017-003

Page 5 of 26

RULE 218. 

(a) – (b) [No Change]

(c) The Corporation shall periodically designate Clearing Members required to participate 

in default management testing by using key factors to select designees that the Corporation 

reasonably determines are, taken as a whole, 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. Such key factors will 

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.

(d) Upon advance notification that a Clearing Member has been designated to participate 

in default management testing as described in subparagraph (c) above, the Clearing Member shall 

be required to fulfill, within the time frames established by the Corporation, certain testing 

requirements (the scope of such testing to be determined by the Corporation in its sole discretion) 

and related reporting requirements (such as reporting the test results to the Corporation in a manner 

specified by the Corporation) that may be imposed by the Corporation.

* * *

Item 2. Procedures of the Self-Regulatory Organization

The proposed rule change was approved for filing with the Commission by OCC’s Board 

of Directors (“Board”) at a meeting held on February 24, 2017.

Questions should be addressed to Justin Byrne, Vice President, Regulatory Filings, at 

(202) 971-7238.

Item 3. Self-Regulatory Organization’s Statement of the

Purpose of, and Statutory Basis for, the Proposed Rule Change

A. Purpose

Background
File No. SR-OCC-2017-003

Page 6 of 26

On September 28, 2016 the Commission adopted amendments to Rule 17Ad-224 and 

added new Rule 17Ad-22(e)(13)5 pursuant to Section 17A of the Securities Exchange Act of 

19346 and the Payment, Clearing, and Settlement Supervision Act of 2010 (“Payment, Clearing 

and Settlement Supervision Act”)7 to require that a “covered clearing agency,” as defined by 

Rule 17Ad-22(a)(5),8 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 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.9

 4 17 CFR 240.17Ad-22.

5 17 CFR 240.17Ad-22(e)(13).

6 15 U.S.C. 78q-1.

7 12 U.S.C. 5461 et. seq.

8 17 CFR 240.17Ad-22(a)(5).

9 17 CFR 240.17Ad-22(e)(13).
File No. SR-OCC-2017-003

Page 7 of 26

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).10

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.11

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.”12

As contemplated by Interpretation and Policy .02(b) of Article V, Section 1 and Rule 

214(d), OCC already conducts periodic default management testing, which includes the 

participation of certain Clearing Members.

Proposed Rules 218(c) and (d)

 10 Id.

11 See OCC By-Laws Article V, Section 1, Interpretation and Policy .02(b).

12 See OCC Rule 214(d). 
File No. SR-OCC-2017-003

Page 8 of 26

To comply with certain requirements in Rule 17Ad-22(e)(13) that the Commission 

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.”13 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 

 13 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.
File No. SR-OCC-2017-003

Page 9 of 26

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;

14 (ii) historical open interest and volume in asset classes, 

where appropriate;15 and (iii) participation in previous tests. In adopting the CCA rules, the 

Commission 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.”16 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.

 14 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).

15 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 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.

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

(October 13, 2016). 
File No. SR-OCC-2017-003

Page 10 of 26

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)17 for OCC to require Clearing Member participation in 

default procedure testing.

B. Statutory Basis

OCC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of 

the Securities Exchange Act of 1934, as amended (the “Act”)18 because the proposed change 

would foster cooperation and coordination with persons engaged in the clearance and settlement 

of securities transactions by expressly establishing in OCC’s Rules that Clearing Members must 

participate in default procedure testing, which, in turn, would help to ensure that if OCC’s 

default procedures are activated, they would function as intended. OCC believes that the 

proposed rule change is also consistent with Rule 17Ad-22(e)(13)19 because it would require 

Clearing Members to participate in the testing of OCC’s default procedures, including any closeout procedures, which testing would occur at least annually and following any material changes 

to OCC’s default management procedures.

OCC also believes that Clearing Members will benefit by having proposed Rules 218(c) 

and (d) clearly state their obligation to participate in default procedure testing if designated, as 

required under the CCA rules. Moreover, OCC believes that this legal framework would 

 17 17 CFR 240.17Ad-22(e)(13).

18 15 U.S.C. 78q-1(b)(3)(F).

19 17 CFR 240.17Ad-22(e)(13).
File No. SR-OCC-2017-003

Page 11 of 26

promote consistency with Rule 17Ad-22(e)(1)20 by ensuring that OCC has a well-founded, 

clear, transparent and enforceable legal basis regarding default management procedure testing.

The proposed rule change is not inconsistent with the existing rules of OCC, including 

any other rules proposed to be amended.

Item 4. Self-Regulatory Organization’s Statement on Burden on Competition

OCC does not believe that the proposed rule change would impose any burden on 

competition that is not necessary or appropriate in furtherance of the purposes of the Exchange 

Act.21 Proposed Rules 218(c) and (d) would expressly establish OCC’s authority to require 

Clearing Members to participate in particular default management procedure testing exercises. 

However, OCC does not believe that such a requirement – which is minimally necessary for 

compliance with Rule 17Ad-22(e)(13)22 – imposes any burden on competition among Clearing 

Members, let alone any burden greater than necessary or appropriate in furtherance of the 

purposes of the Act. To begin, proposed Rules 218(c) and (d) would not impose disparate 

operational requirements on Clearing Members because all Clearing Members are required to 

have sufficient minimum capabilities to participate in OCC’s default management procedure 

testing process. Further, the process for selecting Clearing Member participants would be 

designed to ensure that Clearing Members would participate in tests that are relevant to their 

business activities, consistent with OCC’s current practice. Finally, OCC believes that the 

limited, periodic use of Clearing Member resources in default management testing exercises 

would not affect the ability of a selected Clearing Member to continue to operate its business as 

 20 17 CFR 240.17Ad-22(e)(1).

21 15 U.S.C. 78-q1(b)(3)(I). 

22 17 CFR 240.17Ad-22(e)(13).
File No. SR-OCC-2017-003

Page 12 of 26

it otherwise would. Accordingly, OCC believes the responsibilities associated with testing 

participation would be equitably distributed such that no Clearing Member(s) would face any 

burden on competition more than is necessary or appropriate in furtherance of the purposes of 

the Act and that the proposed rule change is therefore consistent with the requirements of the Act 

applicable to clearing agencies.

Item 5. Self-Regulatory Organization’s Statement on Comments on the Proposed

Rule Change Received from Members, Participants, or Others

Written comments were not and are not intended to be solicited with respect to the proposed 

rule change, and none have been received. 

Item 6. Extension of Time Period for Commission Action

OCC does not consent to an extension of the time period specified in Section 19(b)(2) of 

the Act.23 

Item 7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for

Accelerated Effectiveness Pursuant to Section 19(b)(2) or Section 19(b)(7)(D)

Pursuant to Section 19(b)(3)(A)24 and Rule 19b-4(f)(6)25 thereunder, the proposed rule 

change is filed for immediate effectiveness because it does not (i) significantly affect the 

protection of investors or the public interest; (ii) impose any significant burden on competition; 

and (iii) by its terms would not become operative for 30 days after the date of the filing, or such 

shorter time as the Commission may designate.26 Additionally, OCC has given the Commission 

 23 15 U.S.C. 78s(b)(2).

24 15 U.S.C. 78s(b)(3)(A).

25 17 CFR 240.19b-4(f)(6).

26 As stated above, as a matter of current practice, OCC already involves certain of its 

Clearing Members in testing of OCC’s default management procedures. Moreover, Rule 

17Ad-22(e)(13) requires that, at a minimum, OCC require its clearing members to 

participate in the testing and review of OCC’s default procedures.
File No. SR-OCC-2017-003

Page 13 of 26

written notice of its intent to file the proposed rule change, along with a brief description and text 

of the proposed rule change, at least five business days prior to the date of filing of the proposed 

rule change, or such shorter time as designated by the Commission.

The proposed rule change would not significantly affect the protection of investors or the 

public interest because, as described above, OCC already conducts periodic default management 

testing and includes certain Clearing Members in such testing, in accordance with Interpretation 

and Policy .02(b) of Article V, Section 1 of OCC’s By-Laws and Rule 214(d). Proposed Rules 

218(c) and (d) would only modify OCC’s rules to clearly articulate the requirement that Clearing 

Members must participate periodically in testing of OCC’s default management procedures. The 

proposed rule change would not impose any significant burden on competition because, as 

described above, OCC believes the responsibilities associated with testing participation would be 

nominal and infrequent and would be equitably distributed among Clearing Members by OCC

using certain key factors, including but not limited to participation in previous tests. 

OCC requests that the Commission waive the 30-day operative delay contained in Rule 

19b-4(f)(6)(iii)27 so that the proposal may become operative immediately upon filing. As noted 

above, the proposed rule change is not intended to substantively alter OCC’s default 

management procedure testing, but is instead intended to amend OCC’s rules to clearly articulate 

the requirement that Clearing Members must participate in testing of OCC’s default management 

procedures. OCC believes that the prompt implementation of these changes would be consistent 

with the public interest and the protection of investors.

At any time within 60 days of the filing of this proposed rule change, the Commission 

summarily may temporarily suspend such rule change if it appears to the Commission that such 

 27 17 CFR 240.19b-4(f)(6)(iii).
File No. SR-OCC-2017-003

Page 14 of 26

action is necessary or appropriate in the public interest, for the protection of investors, or 

otherwise in furtherance of the purposes of the Act.28

Item 8. Proposed Rule Change Based on Rules of Another Self-Regulatory 

Organization or of the Commission

Not applicable.

Item 9. Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act

Not applicable.

Item 10. Advance Notices Filed Pursuant to Section 806(e) of 

the Payment, Clearing and Settlement Supervision Act

Not applicable.

Item 11. Exhibits

Exhibit 1A. Completed notice of the proposed rule change for publication in 

the Federal Register.

 28 Notwithstanding its immediate effectiveness, implementation of this rule change will be 

delayed until this change is deemed certified under CFTC Regulation §40.6. 
File No. SR-OCC-2017-003

Page 15 of 26

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, The Options 

Clearing Corporation has caused this filing to be signed on its behalf by the undersigned 

hereunto duly authorized.

THE OPTIONS CLEARING CORPORATION

By:____________________________________

Justin W. Byrne

Vice President, Regulatory Filings
File No. SR-OCC-2017-003

Page 16 of 26

EXHIBIT 1A

SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-[_______________]; File No. SR-OCC-2017-003) 

March 28, 2017

Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and 

Immediate Effectiveness of Proposed Rule Change Concerning the Requirement for Clearing 

Members to Participate in Operation Testing 

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 

19b-4 thereunder2 notice is hereby given that on March 28, 2017, The Options Clearing 

Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) the 

proposed rule change as described in Items I, II and III below, which Items have been prepared 

primarily by OCC. The Commission is publishing this notice to solicit comments on the proposed 

rule change from interested persons.

I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule

Change

This proposed rule change by OCC codifies the requirement for Clearing Members to 

participate in default management testing.

II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the 

Proposed Rule Change

In its filing with the Commission, OCC included statements concerning the purpose of and 

basis for the proposed rule change and discussed any comments it received on the proposed rule

change. The text of these statements may be examined at the places specified in Item IV below. 

OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant

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

2 17 CFR 240.19b-4.
File No. SR-OCC-2017-003

Page 17 of 26

aspects of these statements. All terms with initial capitalization that are not otherwise defined 

herein have the same meaning as set forth in the OCC By-Laws and Rules.3

(A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the

Proposed Rule Change

1. Purpose

Background

On September 28, 2016 the Commission adopted amendments to Rule 17Ad-224 and 

added new Rule 17Ad-22(e)(13)5 pursuant to Section 17A of the Securities Exchange Act of 

19346 and the Payment, Clearing, and Settlement Supervision Act of 2010 (“Payment, Clearing 

and Settlement Supervision Act”)7 to require that a “covered clearing agency,” as defined by 

Rule 17Ad-22(a)(5),8 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 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 

 3 OCC’s By-Laws and Rules can be found on OCC’s public website: 

http://optionsclearing.com/about/publications/bylaws.jsp.

4 17 CFR 240.17Ad-22.

5 17 CFR 240.17Ad-22(e)(13).

6 15 U.S.C. 78q-1.

7 12 U.S.C. 5461 et. seq.

8 17 CFR 240.17Ad-22(a)(5).
File No. SR-OCC-2017-003

Page 18 of 26

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.9

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).10

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.11

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 

 9 17 CFR 240.17Ad-22(e)(13).

10 Id.

11 See OCC By-Laws Article V, Section 1, Interpretation and Policy .02(b).
File No. SR-OCC-2017-003

Page 19 of 26

to participate in default management activities, including auctions, as may be required by the 

Corporation and in accordance with applicable laws and regulations.”12

As contemplated by Interpretation and Policy .02(b) of Article V, Section 1 and Rule 

214(d), OCC already conducts periodic default management testing, which includes the 

participation of certain Clearing Members.

Proposed Rules 218(c) and (d)

To comply with certain requirements in Rule 17Ad-22(e)(13) that the Commission 

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.”13 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). 

 12 See OCC Rule 214(d). 

13 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.
File No. SR-OCC-2017-003

Page 20 of 26

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;

14 (ii) historical open interest and volume in asset classes, 

where appropriate;15 and (iii) participation in previous tests. In adopting the CCA rules, the 

Commission 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.”16 OCC’s key factors to determine which Clearing 

 14 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).

15 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 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.

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

(October 13, 2016). 
File No. SR-OCC-2017-003

Page 21 of 26

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)17 for OCC to require Clearing Member participation in 

default procedure testing.

2. Statutory Basis

OCC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of 

the Act18 because the proposed change would foster cooperation and coordination with persons 

engaged in the clearance and settlement of securities transactions by expressly establishing in 

OCC’s Rules that Clearing Members must participate in default procedure testing, which, in 

turn, would help to ensure that if OCC’s default procedures are activated, they would function 

as intended. OCC believes that the proposed rule change is also consistent with Rule 17Ad22(e)(13)19 because it would require Clearing Members to participate in the testing of OCC’s 

 17 17 CFR 240.17Ad-22(e)(13).

18 15 U.S.C. 78q-1(b)(3)(F).

19 17 CFR 240.17Ad-22(e)(13).
File No. SR-OCC-2017-003

Page 22 of 26

default procedures, including any close-out procedures, which testing would occur at least 

annually and following any material changes to OCC’s default management procedures.

OCC also believes that Clearing Members will benefit by having proposed Rules 218(c) 

and (d) clearly state their obligation to participate in default procedure testing if designated, as 

required under the CCA rules. Moreover, OCC believes that this legal framework would 

promote consistency with Rule 17Ad-22(e)(1)20 by ensuring that OCC has a well-founded, 

clear, transparent and enforceable legal basis regarding default management procedure testing.

The proposed rule change is not inconsistent with the existing rules of OCC, including 

any other rules proposed to be amended.

(B) Clearing Agency’s Statement on Burden on Competition

OCC does not believe that the proposed rule change would impose any burden on 

competition that is not necessary or appropriate in furtherance of the purposes of the Exchange 

Act.21 Proposed Rules 218(c) and (d) would expressly establish OCC’s authority to require 

Clearing Members to participate in particular default management procedure testing exercises. 

However, OCC does not believe that such a requirement – which is minimally necessary for 

compliance with Rule 17Ad-22(e)(13)22 – imposes any burden on competition among Clearing 

Members, let alone any burden greater than necessary or appropriate in furtherance of the 

purposes of the Act. To begin, proposed Rules 218(c) and (d) would not impose disparate 

operational requirements on Clearing Members because all Clearing Members are required to 

have sufficient minimum capabilities to participate in OCC’s default management procedure 

 20 17 CFR 240.17Ad-22(e)(1).

21 15 U.S.C. 78-q1(b)(3)(I). 

22 17 CFR 240.17Ad-22(e)(13).
File No. SR-OCC-2017-003

Page 23 of 26

testing process. Further, the process for selecting Clearing Member participants would be 

designed to ensure that Clearing Members would participate in tests that are relevant to their 

business activities, consistent with OCC’s current practice. Finally, OCC believes that the 

limited, periodic use of Clearing Member resources in default management testing exercises 

would not affect the ability of a selected Clearing Member to continue to operate its business as 

it otherwise would. Accordingly, OCC believes the responsibilities associated with testing 

participation would be equitably distributed such that no Clearing Member(s) would face any 

burden on competition more than is necessary or appropriate in furtherance of the purposes of 

the Act and that the proposed rule change is therefore consistent with the requirements of the Act 

applicable to clearing agencies.

(C) Clearing Agency’s Statement on Comments on the Proposed Rule Change

Received from Members, Participants or Others

Written comments were not and are not intended to be solicited with respect to the 

proposed rule change, and none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Pursuant to Section 19(b)(3)(A) of the Act,

23 and Rule 19b-4(f)(6)24 thereunder, the 

proposed rule change is filed for immediate effectiveness because it does not: (i) significantly 

affect the protection of investors or the public interest; (ii) impose any significant burden on 

competition; and (iii) by its terms would not become operative for 30 days after the date of the 

filing, or such shorter time as the Commission may designate.25

 23 15 U.S.C. 78s(b)(3)(A).

24 17 CFR 240.19b-4(f)(6).

25 OCC has requested that the Commission waive the 30-day operative delay contained in 

Rule 19b-4(f)(6)(iii) so that the proposal may become operative immediately upon filing. 

As noted herein, the proposed rule change is not intended to alter OCC’s default 
File No. SR-OCC-2017-003

Page 24 of 26

At any time within 60 days of the filing of the proposed rule change, the Commission 

summarily may temporarily suspend such rule change if it appears to the Commission that such 

action is necessary or appropriate in the public interest, for the protection of investors, or 

otherwise in furtherance of the purposes of the Act. 26

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning 

the foregoing, including whether the proposed rule change is consistent with the Act. 

Comments may be submitted by any of the following methods:

Electronic Comments:

• Use the Commissions Internet comment form (http://www.sec.gov/rules/sro.shtml); or

• Send an e-mail to rule-comments@sec.gov. Please include File Number SR-OCC2017-003 on the subject line. 

Paper Comments:

• Send paper comments in triplicate to Secretary, Securities and

Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2017-003. This file number should be 

included on the subject line if e-mail is used. To help the Commission process and review your 

comments more efficiently, please use only one method. The Commission will post all 

comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of

 

management testing procedures, but is designed to clarify that Clearing Members are 

required to participate in default management testing exercises, if selected. OCC believes 

that the prompt implementation of these changes would be consistent with the public 

interest and the protection of investors.

26 Notwithstanding its immediate effectiveness, implementation of this rule change will be 

delayed until this change is deemed certified under CFTC Regulation §40.6.
File No. SR-OCC-2017-003

Page 25 of 26

the submission, all subsequent amendments, all written statements with respect to the proposed 

rule change that are filed with the Commission, and all written communications relating to the

proposed rule change between the Commission and any person, other than those that may be

withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for

website viewing and printing in the Commission's Public Reference Room, 100 F Street, N.E., 

Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. 

Copies of such filing also will be available for inspection and copying at the principal office of OCC

and on OCC’s website at

http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_003.pdf

All comments received will be posted without change; the Commission does not edit 

personal identifying information from submissions. You should submit only information that

you wish to make available publicly. 
File No. SR-OCC-2017-003

Page 26 of 26

All submissions should refer to File Number SR-OCC-2017-003 and should be submitted 

on or before [insert date 21 days from publication in the Federal Register].

For the Commission by the Division of Trading and Markets, pursuant to delegated

Authority.

27

Robert W. Errett

Deputy Secretary

Action as set forth recommended herein

APPROVED pursuant to authority delegated by

the Commission under Public Law 87-592.

For: Division of Trading and Markets

By:________________________________

Print Name:_________________________

Date:______________________________

 27 17 CFR 200.30-3(a)(12).