[Federal Register Volume 87, Number 100 (Tuesday, May 24, 2022)]
[Notices]
[Pages 31596-31598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-11061]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94938; File No. SR-OCC-2022-005]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change by the Options Clearing 
Corporation Concerning Revisions to OCC's Partial Tear-Up Rules

May 18, 2022.

I. Introduction

    On March 22, 2022, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2022-005 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to amend OCC's 
rules regarding OCC's payment obligations and the allocation of losses 
related to the use of Partial Tear-Up (defined below) as a recovery 
tool.\3\ The Proposed Rule Change was published for public comment in 
the Federal Register on April 7, 2022.\4\ The Commission received one 
comment regarding the Proposed Rule Change.\5\ 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\ See Notice of Filing infra note 4, 87 FR at 20495.
    \4\ Securities Exchange Act Release No. 94583 (Apr. 1, 2022), 87 
FR 20495 (Apr. 7, 2022) (File No. SR-OCC-2022-005) (``Notice of 
Filing'').
    \5\ The comment on the Proposed Rule Change is available at 
https://www.sec.gov/comments/sr-occ-2022-005/srocc2022005.htm.
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II. Background <SUP>6</SUP>
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    \6\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    As a covered clearing agency, OCC is required to establish policies 
and procedures reasonably designed to manage its credit exposures and 
liquidity risk.\7\ However, a Clearing Member default may result in 
losses or shortfalls that exceed OCC's routine risk managemet tools. To 
address such credit losses or liquidity shortfalls, OCC has established 
tools to to re-establish a matched book and to allocate uncovered 
losses following the default of a Clearing Member.\8\ One such tool, 
``Partial Tear-Up,'' is a process designed to return OCC to a matched 
book by extinguishing positions that remain open after OCC has 
attempted one or more auctions.\9\ OCC Rule 1111(e) sets forth the 
process for determining and terminating Partial Tear-Up positions.
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    \7\ See generally, 17 CFR 240.17Ad-22(e)(4) and (e)(7).
    \8\ Securities Exchange Act Release No. 83916 (Aug. 23, 2018), 
83 FR 44076 (Aug. 29, 2018) (File No. SR-OCC-2017-020).
    \9\ See supra note 8, 83 FR at 44079.
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    When it initially proposed Rule 1111(e) in 2018, OCC noted that the 
Partial Tear-Up process would be initiated only if OCC determined that 
potential losses from remaining positions of the defaulting member 
would exceed OCC's financial resources.\10\ OCC further stated that, in 
order for OCC to maintain its ability to meet obligations to non-
defaulting members, the process was designed to be initiated in advance 
of exhausting OCC's financial resources.\11\ OCC also acknowledged that 
the process may be used to allocate losses if OCC's resources are 
insufficient to pay the Partial Tear-Up Price.\12\ Rule 1111(e)(iii) 
currently provides that when the Partial Tear-Up process is used to 
allocate losses, each Clearing Member will receive a pro rata payment 
based on OCC's remaining resources and an unsecured claim against OCC 
for the difference between the pro rata amount received and the Partial 
Tear-Up Price.
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    \10\ Securities Exchange Act Release No. 82351 (Dec. 19, 2017), 
82 FR 61107, 61111 (Dec. 26, 2017) (File No. SR-OCC-2017-020).
    \11\ Id.
    \12\ Id.
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    An unsecured claim issued pursuant to Rule 1111(e) provides a 
mechanism for OCC to compensate Clearing Members that receive a pro 
rata payment, when warranted by particular circumstances (e.g., when 
funds are subsequently recovered from a defaulted Clearing Member or 
the estate of the defaulted Clearing Member). However, OCC Rules do not 
currently describe a specific payment obligation for these claims. OCC 
states that the Proposed Rule Change is intended to provide clarity 
regarding the nature of the claim issued following a Partial Tear-Up. 
More specifically, the revisions to Rule 1111(e) would add the 
following details about the claim: (i) A Clearing Member receiving a 
pro rata payment following a Partial Tear-Up will have a claim for the 
value of the difference between the pro rata amount received and the 
Partial Tear-Up Price; and (ii) such a claim shall be an unsecured 
claim on any recovery from a suspended or defaulted Clearing Member (or 
from the estate of a suspended or defaulted Clearing Member). OCC 
believes that clarifying the nature of the claim arising out of Rule 
1111(e) would, in turn, clarify that such claims would not provide a 
basis for Clearing Members to trigger the close-out netting process 
under Article VI, Section 27 of OCC's By-Laws.\13\
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    \13\ OCC By-Laws Art. VI, Section 27(a)(i), regarding default or 
insolvency of OCC, requires OCC to notify various stakeholders if 
OCC fails to comply with an undisputed obligation to pay money or 
deliver property to a Clearing Member for a period of thirty days 
from the date that OCC receives notice from the Clearing Member of 
the past due obligation. See Notice of Filing supra note 4, 87 FR at 
20495.
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    In proposing to adopt Partial Tear-Up as a recovery tool, OCC 
proposed a mechanism for re-allocating losses for non-defaulting 
Clearing Members arising out of Partial Tear-Up.\14\ OCC Rule 1111(g) 
currently provides OCC's Board of Directors (the ``Board'') with 
discretionary authority to levy a special charge against remaining non-
defaulting Clearing Members for the purpose of re-allocating the 
losses, costs, and fees imposed on holders of torn-up positions. 
Currently, Rule 1111 does not impose any ex ante limit on the amount of 
any discretionary special charge that could be levied by the Board. 
Following the adoption of OCC Rule 1111, OCC received a letter from the 
Futures Industry Association (``FIA'') requesting that OCC limit the 
amount of the Rule 1111(g) Board-levied special charge to the amount of 
a Clearing Member's required contribution to the Clearing Fund.\15\ 
Upon consideration of this request, OCC proposes to amend Rule 1111(g) 
to cap the amount of the special charge levied under the rule to the 
amount of the Clearing Member's required contribution to the Clearing 
Fund at the time of the special charge.

[[Page 31597]]

According to OCC, the purpose of this change is to provide Clearing 
Members with a firm ex ante limit that would improve their ability to 
measure, monitor and manage their potential exposure to OCC.\16\
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    \14\ Securities Exchange Act Release No. 82351 (Dec. 19, 2017), 
82 FR 61107, 61112 (Dec. 26, 2017) (File No. SR-OCC-2017-020).
    \15\ The letter OCC received from the FIA has been provided as 
Exhibit 3A to File No. SR-OCC-2022-005.
    \16\ See Notice of Filing supra note 4, 87 FR at 20495.
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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.\17\ 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 17A(b)(3)(F) of the Exchange Act \18\ as described in detail 
below.
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    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
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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, in general, to 
protect investors and the public interest.\19\ Based on its review of 
the record, and for the reasons described below, the Commission 
believes that the proposed changes to Rule 1111(e) and (g) are 
consistent with being organized to protect investors and the public 
interest.
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
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    With the proposed revisions to Rule 1111(e), OCC codifies critical 
details about the nature of a Clearing Member's claim resulting from 
the Partial Tear-Up process, including the specific value of the claim 
(e.g., the value of the difference between the pro rata amount received 
and the Partial Tear-Up Price) and the source of funds that the claim 
would draw upon (e.g., an unsecured claim on any recovery from a 
suspended or defaulted Clearing Member, or from the estate of a 
suspended or defaulted Clearing Member). These details provide Clearing 
Members with material information regarding their potential claims, and 
provide greater visibility to Clearimg Members on how open claims from 
the partial tear-up process would be honored. In particular, the 
revisions remove any ambiguity that could cause Clearing Members to 
believe that OCC would default if it fails to pay an unsecured claim 
issued by a Clearing Member as a result of the Partial Tear-Up process, 
because revised Rule 1111(e) would place appropriate responsibility for 
the unsecured claim on the suspended or defaulted Clearing Member. As 
such, the Commission believes that these revisions to Rule 1111(e) are 
consistent with being organized to protect investors and the public 
interest.
    With the proposed revisions to Rule 1111(g), OCC codifies a 
specific limit to the amount of special charge that the Board would 
potentially levy on each non-defaulting Clearing Member. This revision 
indicates to non-defaulting Clearing Members that such special charges 
are not unlimited in nature, and provides non-defaulting Clearing 
Members with the assurance to manage and monitor their potential 
exposures to OCC with fewer concerns on whether or not they could cover 
their exposures successfully. As such, the Commission believes that 
these revisions to Rule 1111(e) are also consistent with the protection 
of investors and the public interest.
    In response to the Notice of Filing,\20\ the Commission received a 
comment opposing the proposal on the basis that it would increase 
investor risk by shifting the responsibility of covering default-
related liability from OCC to individual investors.\21\ The Commission 
disagrees with this assertion, as the Proposed Rule Change provides 
further information to Clearing Members on the nature and amount of 
Partial Tear-Up claims. In particular, the Proposed Rule Change 
indicates that unsecured claims issued by a Clearing Member as a result 
of the Partial Tear-Up process are the responsibility of the defaulted 
or suspended Clearing Member, thus removing the risk of an unintended 
OCC wind-down due to Clearing Members initiating a close-out netting 
under Article XI, Section 27 of OCC's By-Laws. The Proposed Rule Change 
also provides further information to non-defaulting Clearing Members on 
the nature and amount of Board-levied special charges. As such, the 
revisions would in fact support the goals of the Partial Tear-Up 
process, which are to account for the exposures of non-defaulting 
Clearing Members and place responsibility on suspended or defaulted 
Clearing Members where due--the opposite of what the comment is 
asserting.
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    \20\ See Notice of Filing supra note 4, 87 FR at 20495.
    \21\ The comment on the Proposed Rule Change is available at 
https://www.sec.gov/comments/sr-occ-2022-005/srocc2022005.htm.
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    The Commission believes, therefore, that the proposal to revise 
Rule 1111(e) and (g) is consistent with the requirements of Section 
17A(b)(3)(F) of the Exchange Act.\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(23) Under the Exchange Act

    Rule 17Ad-22(e)(23)(ii) under the Exchange Act requires that a 
clearing agency must establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide sufficient 
information to enable participants to identify and evaluate the risks, 
fees, and other material costs they incur by participating in the 
covered clearing agency.\23\ Based on its review of the record, and for 
the reasons described below, the Commission believes that the proposed 
changes to Rule 1111(e) and (g) are consistent with the requirements of 
Rule 17Ad-22(e)(23)(ii).
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    \23\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    By revising Rule 1111(e) to codify critical details on the nature 
of a Clearing Member's claim resulting from the Partial Tear-Up 
process, including the specific value of the claim (e.g., the value of 
the difference between the pro rata amount received and the Partial 
Tear-Up Price) and the source of funds that the claim would be against 
(e.g., an unsecured claim on any recovery from a suspended or defaulted 
Clearing Member, or from the estate of a suspended or defaulted 
Clearing Member), OCC provides critical information that Clearing 
Members may use to better evaluate the nature and amount of their 
claims resulting from the Partial Tear-Up process. Similarly, the 
1111(g) revisions codify a specific limit to the amount of special 
charge that the Board would potentially levy on each non-defaulting 
Clearing Member. Non-defaulting Clearing Members may use this 
additional information to better evaluate the nature and amount of the 
special charges. As such, the Commission believes that the Rule 1111(e) 
and (g) revisions are consistent with providing sufficient information 
to enable participants to identify and evaluate the risks, fees, and 
other material costs incurred with participation in the covered 
clearing agency.
    The Commission believes, therefore, that the proposal to revise 
Rule 1111(e) and (g) is consistent with the requirements of Rule 17Ad-
22(e)(23)(ii) under the Exchange Act.\24\
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    \24\ Id.

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[[Page 31598]]

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 \25\ and the rules and regulations thereunder.
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    \25\ 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).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\26\ that the Proposed Rule Change (SR-OCC-2022-005) be, 
and hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-11061 Filed 5-23-22; 8:45 am]
BILLING CODE 8011-01-P