8294 Federal Register / Vol. 81, No. 32 / Thursday, February 18, 2016 / Notices 

18 17 CFR 200.30–3(a)(12). 

1The Stockholder Exchanges are: Chicago Board 

Options Exchange, Incorporated; International 

Securities Exchange, LLC; NASDAQ OMX PHLX, 

LLC; NYSE MKT LLC; and NYSE Arca, Inc. See 

Exchange Act Release No. 74136 (January 26, 2015), 

80 FR 5171 (January 30, 2015) (SR–OCC–2015–02) 

(‘‘Notice’’). 

2Under OCC’s By-Laws, exchanges other than 

Stockholder Exchanges may participate in OCC’s 

services subject to meeting certain qualifications. 

See OCC By-Laws, Article VIIB (Non-Equity 

Exchanges). 

3OCC also is registered with the Commodity 

Futures Trading Commission as a derivatives 

clearing organization regulated to provide clearing 

services for four futures exchanges. 

4OCC has over 100 members which include large 

domestic and international broker-dealers and 

futures commission merchants. See OCC’s 2014 

Annual Report (available at: http://www.options

clearing.com/components/docs/about/annualreports/occ_2014_annual_report.pdf), and OCC’s 

Web site, ‘‘What is OCC?’’ (available at: https:// 

www.optionsclearing.com/about/corporateinformation/what-is-occ.jsp). 

5For instance, OCC provides CCP services for 

OTC options, and for two securities lending market 

structures, OCC’s OTC Stock Loan Program and 

AQS, an automated marketplace for securities 

lending and borrowing operated by Automated 

Equity Finance Markets, Inc. OCC currently 

participates in cross-margin programs with the CME 

and ICE and offers an internal cross-margin program 

for products regulated by the SEC and CFTC. See 

OCC’s Web site, OCC Fact Sheet (available at: 

http://www.optionsclearing.com/components/docs/

about/occ-factsheet.pdf), ‘‘What is OCC?,’’ 

(available at: http://www.optionsclearing.com/

about/corporate-information/what-is-occ.jsp.) and 

OCC’s Web site, ‘‘Cross Margin Programs’’ 

(available at: http://www.optionsclearing.com/

clearing/clearing-services/cross-margin.jsp.). 

6See Financial Stability Oversight Council 

(‘‘FSOC’’) 2012 Annual Report, Appendix A, 

(available at http://www.treasury.gov/initiatives/

fsoc/Documents/2012%20Appendix%20A%20

Designation%20of%20Systemically%20Important

%20Market%20Utilities.pdf). 7According to OCC, as of December 31, 2013, at 

the time it developed the Capital Plan, OCC had 

total shareholders’ equity of about $25 million, 

which represents approximately 6 weeks of 

operating expenses. Based on internal operational 

risk scenarios and loss modeling, OCC quantified its 

operational risk at $226 million and pension risk at 

$21 million. According to OCC, as of August 31, 

2015, in the absence of the $150 million capital 

contribution made pursuant to the Capital Plan, 

OCC’s adjusted shareholder equity would be about 

$149 million and OCC’s total capital resources 

would be less than $150 million. See Notice at 

5172–73; OCC’s Written Statement in Support of 

Affirming March 6, 2015 Order Approving Capital 

Plan (October 7, 2015) (‘‘OCC Support Statement’’). 

8 12 U.S.C. 5465(e)(1). On February 26, 2015, the 

Commission issued a notice of no objection to the 

advance notice filing. See Exchange Act Release No. 

74387 (February 26, 2015), 80 FR 12215 (March 6, 

2015) (SR–OCC–2014–813). 

9 15 U.S.C. 78s(b)(1). 

10 17 CFR 240.19b–4. 

11See Notice. 

12See Letter from Eric Swanson, General Counsel 

& Secretary, BATS Global Markets, Inc. (‘‘BATS’’) 

(February 19, 2015) (‘‘BATS Letter I’’); Letter from 

Tony McCormick, Chief Executive Officer, BOX 

Options Exchange, (‘‘BOX’’) (February 19, 2015) 

(‘‘BOX Letter I’’); Letter from Howard L. Kramer on 

behalf of Belvedere Trading, CTC Trading Group, 

IMC Financial Markets, Integral Derivatives, 

Susquehanna Investment Group, and Wolverine 

Trading (February 20, 2015) (‘‘MM Letter’’); Letter 

from Ellen Greene, Managing Director, Financial 

Services Operations, SIFMA (February 20, 2015) 

(‘‘SIFMA Letter’’); Letter from James E. Brown, 

General Counsel, OCC (February 23, 2015) 

(responding to BATS Letter and BOX Letter) (‘‘OCC 

Letter I’’); Letter from James E. Brown, General 

Counsel, OCC (February 23, 2015) (responding to 

MM Letter) (‘‘OCC Letter II’’); Letter from Barbara 

J. Comly, Executive Vice President, General Counsel 

& Corporate Secretary, Miami International 

Securities Exchange, LLC, (‘‘MIAX’’) (February 24, 

2015) (‘‘MIAX Letter I’’); Letter from James E. 

Brown, General Counsel, OCC (February 24, 2015) 

(responding to SIFMA Letter) (‘‘OCC Letter III’’); 

Letter from John A. McCarthy, General Counsel, 

KCG Holdings, Inc., (‘‘KCG’’) (February 26, 2015) 

(‘‘KCG Letter I’’); Letter from Eric Swanson, General 

Counsel and Secretary, BATS (February 27, 2015) 

(‘‘BATS Letter II’’); Letter from John A. McCarthy, 

General Counsel, KCG (February 27, 2015) (‘‘KCG 

Letter II’’); Letter from Richard J. McDonald, Chief 

Regulatory Counsel, Susquehanna International 

Group, LLP, (‘‘SIG’’) (February 27, 2015) (‘‘SIG 

Letter I’’); Letter from Barbara J. Comly, Executive 

Vice President, General Counsel & Corporate 

Secretary, MIAX (March 1, 2015) (‘‘MIAX Letter 

II’’); Letter from James E. Brown, General Counsel, 

OCC (March 2, 2015) (‘‘OCC Letter IV’’); Letter from 

Eric Swanson, General Counsel and Secretary, 

BATS (March 3, 2015) (‘‘BATS Letter III’’); and 

Letter from Tony McCormick, Chief Executive 

Officer, BOX (March 3, 2015) (‘‘BOX Letter II’’); 

Letter from Brian Sopinsky, General Counsel, SIG 

(March 4, 2015) (‘‘SIG Letter II’’). Since the proposal 

was filed as both an advance notice and proposed 

rule change, the Commission considered all 

comments received on the proposal, regardless of 

whether the comments were submitted to the 

proposed rule change or advance notice file. See 

comments on the advance notice (File No. SR– 

OCC–2014–813), http://www.sec.gov/comments/srocc-2014-813/occ2014813.shtml and comments on 

the proposed rule change (File No. SR–OCC–2015– 

02), http://www.sec.gov/comments/sr-occ-2015-02/

occ201502.shtml. In its evaluation of the proposed 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.18

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2016–03267 Filed 2–17–16; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–77112; File No. SR–OCC– 

2015–02] 

Self-Regulatory Organizations; The 

Options Clearing Corporation; Order 

Setting Aside Action by Delegated 

Authority, Approving Proposed Rule 

Change Concerning the Options 

Clearing Corporation’s Capital Plan 

and Denying Motions 

February 11, 2016. 

I. Introduction 

The Options Clearing Corporation 

(‘‘OCC’’) is a clearing agency registered 

with the Securities and Exchange 

Commission (‘‘Commission’’) and is the 

only clearing agency for standardized 

U.S. options listed on U.S. national 

securities exchanges. Today, listed 

options are traded on twelve national 

securities exchanges: five national 

securities exchanges that are equal 

owners of OCC (‘‘Stockholder 

Exchanges’’) 1 and seven national 

securities exchanges that have no 

ownership stake in OCC (‘‘NonStockholder Exchanges’’).2 OCC also 

serves other markets, including those 

trading commodity futures, commodity 

options, and security futures,3 the 

securities lending market and the OTC 

options market. In each of these 

markets, OCC provides clearing 

members 4 with central counterparty 

(‘‘CCP’’) clearing services and performs 

critical functions in the clearance and 

settlement process.5 OCC’s services 

increase the efficiency and speed of 

options trading and settlement as well 

as reduce members’ operational 

expenses and counterparty credit risk. 

OCC’s role as the CCP for all listed 

options contracts in the U.S. makes it an 

integral part of the national system for 

clearance and settlement, and its failure 

or service disruption could have 

cumulative negative effects on the U.S. 

options and futures markets, financial 

institutions, and the broader financial 

system. As such, OCC was designated 

by the Financial Stability Oversight 

Council as a systemically important 

financial market utility (‘‘SIFMU’’) in 

2012.6

In the context of a number of 

developments in the financial markets, 

OCC’s Board of Directors (‘‘Board’’) 

decided that OCC was significantly 

undercapitalized, and, in response, 

proposed and implemented an 

expedited plan to substantially increase 

OCC’s capitalization (the ‘‘Capital 

Plan’’), and, given OCC’s critical 

clearing functions and its systemic 

importance, the Commission agrees that 

having OCC increase its capitalization is 

appropriate and in the public interest.7

Procedural Background 

OCC filed the Capital Plan as an 

advance notice, SR–OCC–2014–813, 

under Section 806(e)(1) of the Payment, 

Clearing, and Settlement Supervision 

Act of 2010 (‘‘Payment, Clearing and 

Settlement Supervision Act’’) 8 on 

December 29, 2014. OCC filed the 

proposed rule change implementing the 

Capital Plan, SR–OCC–2015–02, with 

the Commission pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 9 and 

Rule 19b–4 thereunder 10 on January 14, 

2015. The proposed rule change was 

published for comment in the Federal 

Register on January 30, 2015.11 The 

Commission received seventeen 

comment letters on OCC’s proposal from 

twelve commenters, including OCC.12

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Federal Register / Vol. 81, No. 32 / Thursday, February 18, 2016 / Notices 8295 

rule change, the Commission assessed whether the 

proposal was consistent with the requirements of 

the Exchange Act and the applicable rules and 

regulations thereunder. 13Exchange Act Release No. 74452 (March 6, 

2015), 80 FR 13058 (March 12, 2015) (SR–OCC– 

2015–02). 14See 15 U.S.C. 78q–1(b)(3)(A); 15 U.S.C. 78q– 

1(b)(3)(F); 15 U.S.C. 78q–1(b)(3)(D); 15 U.S.C. 78q– 

1(b)(3)(I). 15See Letter from Barbara J. Comly, Executive 

Vice President, General Counsel & Corporate 

Secretary, MIAX (March 12, 2015); Letter from Lisa 

J. Fall, President, BOX (March 13, 2015); Letter from 

Eric Swanson, General Counsel and Secretary, 

BATS (March 13, 2015); Letter from Brian 

Sopinsky, General Counsel, SIG (March 13, 2015); 

Letter from John A. McCarthy, General Counsel, 

KCG (March 13, 2015). 

16See BATS Petition for Review (March 16, 2015) 

(‘‘BATS Petition’’); BOX Petition for Review (March 

20, 2015) (‘‘BOX Petition’’); KCG Petition for 

Review (March 20, 2015) (‘‘KCG Petition’’); MIAX 

Petition for Review (March 20, 2015) (‘‘MIAX 

Petition’’); SIG Petition for Review (March 20, 2015) 

(‘‘SIG Petition’’). 17 17 CFR 201.431(e). 18OCC Motion to Lift Stay (April 2, 2015) (‘‘OCC 

Stay Motion’’). 19BATS, BOX, MIAX Response to OCC’s Motion 

to Lift the Stay (April 8, 2015) (‘‘BATS Response’’); 

KCG Response to OCC’s Motion to Lift the Stay 

(April 9, 2015) (‘‘KCG Response’’); SIG Opposition 

to OCC’s Motion to Lift the Stay (April 9, 2015) 

(‘‘SIG Response’’); OCC’s Reply Brief in Support of 

its Motion to Lift the Stay (April 13, 2015) (‘‘OCC 

Stay Brief’’). 

20Exchange Act Release No. 75885 (September 

10, 2015), 80 FR 55700 (September 16, 2015). 

21Exchange Act Release No. 75886 (September 

10, 2015), 80 FR 55668 (September 16, 2015). 

22BATS, BOX, KCG, MIAX, SIG Motion to 

Reinstitute Automatic Stay (September 15, 2015) 

(‘‘Reinstitution Motion’’). 

23OCC Brief in Opposition to Motion to 

Reinstitute Automatic Stay (September 22, 2015) 

(‘‘OCC Reinstitution Response’’). 

24Memorandum in Further Support of Motion to 

Reinstitute Automatic Stay (on behalf of BATS, 

BOX, MIAX, and SIG) (September 25, 2015) 

(‘‘Memo in Further Support of Reinstitution’’). 

25Letter from Joseph C. Lombard, Murphy & 

McGonigle, on behalf of SIG (and together with the 

Petitioners) (December 22, 2015) (‘‘SIG Letter III’’). 

On February 2, 2016, SIG requested a telephone call 

to inquire about the status of the Reinstitution 

Motion. See Email from Stephen J. Crimmins, on 

behalf of SIG, to Brent J. Fields on February 2, 2016 

(‘‘SIG Email’’). 

26See BATS, BOX, KCG, MIAX, SIG Motion to 

Expedite the Commission’s Ruling on the Pending 

Motion to Reinstitute the Automatic Stay (February 

5, 2016) (‘‘Expedition Motion’’). 

27 17 CFR 201.431(a). 

28 15 U.S.C. 78s(b)(2)(C). 

29 15 U.S.C. 78q–1(b)(3)(A); 15 U.S.C. 78q– 

1(b)(3)(F); 15 U.S.C. 78q–1(b)(3)(D); 15 U.S.C. 78q– 

1(b)(3)(I). 

30As the Commission notes in the Notice, OCC 

states this proposal’s purpose is (in part) to 

facilitate compliance with proposed Commission 

rules on standards for covered clearing agencies 

(Exchange Act Release No. 71699 (March 12, 2014), 

79 FR 29508 (May 22, 2014) (S7–03–14)) and 

address Principle 15 of the Principles for Financial 

Market Infrastructures (‘‘PFMIs’’) (international 

standards for financial market intermediaries). 

Because the proposed Commission rules are 

pending, the Commission has evaluated this 

proposed rule change under the Exchange Act and 

the rules currently in force thereunder. 

31See 15 U.S.C. 78c(f). 

32See Notice at 5171–78, unless otherwise noted. 

33To implement the Capital Plan, OCC’s 

proposed rule change included: (i) Establishing 

policies on fees, refunds, and dividends (described 

further below); (ii) amending its By-Laws; (iii) 

amending its Restated Certificate of Incorporation; 

and (iv) amending its Stockholders Agreement. 

The Commission issued an order on 

March 6, 2015, through delegated 

authority, approving the proposal 

(‘‘Delegated Order’’).13

The Delegated Order describes the 

elements of the proposed Capital Plan, 

OCC’s financial condition, and the basis 

for OCC’s projected capital requirement. 

The Delegated Order also discusses and 

responds to the comments received on 

the proposed Capital Plan. The 

Delegated Order makes findings that the 

Capital Plan is consistent with Exchange 

Act Sections 17A(b)(3)(A), 17A(b)(3)(F), 

17A(b)(3)(D) and 17A(b)(3)(I).14

In response to the Delegated Order, 

BATS, BOX, KCG, MIAX, and SIG 

(collectively ‘‘Petitioners’’) filed notices 

of intention to petition for review of the 

Delegated Order, the first of which was 

filed on March 12, 2015.15 The 

Commission received five petitions for 

review of the Delegated Order 

(collectively ‘‘Petitions for Review’’ or 

‘‘Petitions’’) from the Petitioners 

between March 16 and March 20, 

2015.16 The filing of the first notice of 

intention to petition for review on 

March 12, 2015 automatically stayed the 

Delegated Order pursuant to Rule 431(e) 

of the Commission’s Rules of Practice.17

OCC filed a motion to lift the automatic 

stay on April 2, 2015.18 The Petitioners 

filed responses opposing lifting the stay, 

and OCC filed a reply brief supporting 

its motion to lift the stay.19

The Commission issued two orders on 

September 10, 2015. The first order 

granted the Petitions for Review and 

scheduled the filing of statements either 

in support of or against the Delegated 

Order (‘‘Review Order’’).20 The second 

order lifted the automatic stay (‘‘Stay 

Order’’).21 Shortly thereafter, on 

September 15, 2015, Petitioners filed a 

motion to reinstitute the automatic 

stay.22 OCC filed an opposition to the 

Reinstitution Motion on September 22, 

2015,23 and Petitioners filed a 

memorandum in further support of the 

Reinstitution Motion on September 25, 

2015.24 On December 22, 2015, in 

response to OCC’s announcement of the 

declaration of refunds, dividends, and 

fee reduction pursuant to the Capital 

Plan, a commenter filed a letter further 

advocating for reinstitution of the 

automatic stay.25 On February 5, 2016, 

Petitioners filed a motion to expedite 

the Commission’s ruling on the pending 

Reinstitution Motion.26 The 

Reinstitution Motion, Expedition 

Motion, various other motions, and the 

comments thereto are discussed in 

Section IV below. 

Summary of Findings 

The Commission’s Rules of Practice 

set forth procedures for reviewing 

actions made pursuant to delegated 

authority. Pursuant to Rule 431(a) of the 

Rules of Practice, the Commission may 

affirm, reverse, modify, set aside or 

remand for further proceedings, in 

whole or in part, the action made 

pursuant to delegated authority.27 Here, 

the Commission is setting aside the 

Delegated Order and conducting a de 

novo review of, and giving careful 

consideration to, the entire record, 

which includes: OCC’s proposal, all 

comments received in response to the 

Notice, the Petitions for Review, 

comments received in response to the 

Review Order, all motions filed, and 

OCC’s responses thereto. 

In conducting its de novo review, the 

Commission looks to Section 19(b)(2)(C) 

of the Exchange Act,28 which directs the 

Commission to approve a proposed rule 

change of a self-regulatory organization 

if 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 such selfregulatory organization. After carefully 

considering the entire record, for the 

reasons discussed throughout this order, 

the Commission finds that OCC’s 

proposed rule change is consistent with 

the Exchange Act requirements, 

including Exchange Act Sections 

17A(b)(3)(A), 17A(b)(3)(D), 17A(b)(3)(F), 

and 17A(b)(3)(I), 29 and the rules and 

regulations thereunder, that are 

applicable to OCC.30 Accordingly, the 

Commission is approving the proposed 

rule change implementing the Capital 

Plan. In approving this proposed rule 

change, the Commission also has 

considered the impact of the Capital 

Plan on efficiency, competition, and 

capital formation under Section 3(f) of 

the Exchange Act.31

II. Description of the Proposal 32

OCC proposes to amend its rules to 

implement the Capital Plan.33

According to OCC, the Capital Plan is 

designed to support OCC’s functions 

and continuity of its operations as a 

SIFMU. As proposed by OCC, the 

Capital Plan is designed to address 

business, operational, and pension risks. 

It is not designed to address 

counterparty risk, on-balance sheet 

credit risk, or market risk, all of which 

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34See OCC Support Statement. 

35OCC has determined that its current 

appropriate ‘‘Target Capital Requirement’’ is $247 

million, reflecting a ‘‘Baseline Capital 

Requirement’’ of $117 million, which is equal to 

six-month projected operating expenses, plus a 

‘‘Target Capital Buffer’’ of $130 million. 

36See OCC Support Statement. 

37According to OCC, the $200 million takes into 

account projected growth in the Baseline Capital 

Requirement for the foreseeable future and OCC 

estimated that the Baseline Capital Requirement 

would not exceed $200 million before 2022. 

38For example, if the Baseline Capital 

Requirement is greater than $200 million, then the 

Replenishment Capital that could be accessed by 

OCC would be capped at $200 million minus any 

outstanding Replenishment Capital. Therefore, if 

there is no outstanding Replenishment Capital, OCC 

could access up to $200 million. If on the other 

hand, the Baseline Capital Requirement is $100 

million, then OCC could access Replenishment 

Capital up to $100 million minus any 

Replenishment Capital outstanding. 

39For 2015, the Hard Trigger would be reached 

if OCC’s shareholders’ equity fell below $146.25 

million. 

40 If the Board decides to wind-down OCC’s 

operations, then OCC will access Replenishment 

Capital in the amount the Board determines is 

sufficient to fund the wind-down, subject to the 

Cap. If the Board decides to attempt a recovery of 

OCC’s capital and business, then OCC will access 

Replenishment Capital in the amount sufficient to 

return shareholders’ equity to $20 million above the 

Hard Trigger, subject to the Cap. 

41Article IV of OCC’s Certificate of Amendment 

of Certificate of Incorporation requires the approval 

of a majority of the issued and outstanding shares 

of each series of Class B Common Stock, voting 

separately as a series, to authorize or consent to the 

sale, lease, or exchange of all or substantially all of 

the property and assets of the Corporation, or to 

authorize or consent to the dissolution of the 

corporation. 

42For 2015, the Soft Trigger would be reached if 

OCC’s shareholders’ equity fell below $227.5 

million. 

43The Stockholder Exchanges are the sole holders 

of the Class B common stock and have each made 

Capital Contributions to OCC in respect of their 

equal ownership of Class B common stock, which 

entitles them to receive dividends, if declared. 

are addressed through margin, clearing 

fund deposits, and other means. 

OCC represents that it reviewed a 

range of risk scenarios and modeled 

potential losses arising from business, 

operational, and pension risks, and 

based on those results, it was 

appropriate to significantly increase its 

capital. After evaluating alternate 

sources of capital funding, including 

increasing fees or suspending refunds to 

clearing members, the Board approved 

the proposed Capital Plan.34

Under the Capital Plan, OCC annually 

will determine a target capital 

requirement (‘‘Target Capital 

Requirement’’). To meet the initial 

Target Capital Requirement, the 

Stockholder Exchanges provided capital 

to OCC (‘‘Capital Contribution’’) and 

entered into an agreement 

(‘‘Replenishment Capital Agreement’’) 

to provide additional replenishment 

capital (‘‘Replenishment Capital’’) under 

certain circumstances. In return, the 

Stockholder Exchanges are eligible to 

receive dividends from OCC (‘‘Dividend 

Policy’’). Additionally, OCC will set its 

fees annually to cover its estimated 

operating expenses plus a ‘‘Business 

Risk Buffer’’ (‘‘Fee Policy’’). Finally, 

clearing members will be eligible to 

receive refunds annually, under certain 

circumstances (‘‘Refund Policy’’). 

A. Target Capital Requirement 

The Target Capital Requirement 

consists of: (i) A ‘‘Baseline Capital 

Requirement’’ plus (ii) a ‘‘Target Capital 

Buffer.’’ The Baseline Capital 

Requirement is equal to the greatest of: 

(i) Six months budgeted operating 

expenses for the following year; (ii) the 

maximum cost of the recovery scenario 

from OCC’s recovery and wind-down 

plan; or (iii) the cost to OCC of winding 

down operations as set forth in its 

recovery and wind-down plan. The 

Target Capital Buffer is linked to 

plausible loss scenarios from business, 

operational, and pension risks and is 

designed to provide a significant capital 

cushion to offset potential business 

losses.35

B. Capital Contribution and 

Replenishment Capital Agreement 

Under the Capital Plan, OCC requires 

the Stockholder Exchanges to provide a 

Capital Contribution pursuant to their 

Class B Common Stock on a pro rata 

basis. At the time of the January 14, 

2015 filing, OCC proposed the Capital 

Contribution to be $150 million, and the 

Stockholder Exchanges have since 

contributed that amount to OCC 

pursuant to the Capital Plan.36

The Capital Contribution is supported 

by a Replenishment Capital Agreement, 

under which the Stockholder Exchanges 

have committed to provide 

Replenishment Capital if OCC’s total 

shareholders’ equity falls below a 

certain threshold. Specifically, if OCC’s 

shareholders’ equity falls below a ‘‘Hard 

Trigger’’ as described below, the 

Stockholder Exchanges are obligated to 

provide a committed amount of 

Replenishment Capital on a pro rata 

basis. The provision of Replenishment 

Capital is capped at the excess of: (i) 

The lesser of either the Baseline Capital 

Requirement at the time of relevant 

funding or $200 million,37 minus (ii) 

outstanding Replenishment Capital 

(collectively, the ‘‘Cap’’).38 In exchange 

for any Replenishment Capital made 

under the Replenishment Capital 

Agreement, the OCC will issue the 

Stockholder Exchanges a new class of 

OCC common stock (‘‘Class C Common 

Stock’’). The Capital Plan also has a 

‘‘Soft Trigger,’’ which would alert OCC 

that it should re-evaluate the sufficiency 

of its capitalization. 

As mentioned above, OCC has 

identified two triggers concerning the 

shareholders’ equity that would require 

action by OCC: (i) A ‘‘Soft Trigger,’’ a 

warning sign that OCC’s capitalization 

has fallen to a level that requires action 

to prevent it from falling to 

unacceptable levels, and (ii) a ‘‘Hard 

Trigger,’’ a sign that corrective action 

must be taken in the form of a 

mandatory Replenishment Capital call. 

The Hard Trigger is reached when 

OCC’s shareholders’ equity falls below 

125% of the Baseline Capital 

Requirement.39 Upon such occurrence, 

the Board will determine whether to 

attempt a recovery or a wind-down of 

OCC’s operations,40 or a sale or similar 

transaction, subject in each case to any 

necessary stockholder consent.41 OCC 

believes that the Hard Trigger would 

occur only as the result of a significant, 

unexpected event. 

The Soft Trigger is reached when 

OCC’s shareholders’ equity falls below 

the sum of: (i) The Baseline Capital 

Requirement and (ii) 75% of the Target 

Capital Buffer.42 Upon such occurrence, 

OCC’s senior management and the 

Board will evaluate options to restore 

the shareholders’ equity to the Target 

Capital Requirement, including, but not 

limited to, through increasing fees and/ 

or decreasing expenses. 

In addition, the Board will review the 

Replenishment Capital Agreement on an 

annual basis. While the Replenishment 

Capital amount will increase as the 

Baseline Capital Requirement increases, 

if the Baseline Capital Requirement 

approaches or exceeds $200 million, the 

Board will review and revise the Capital 

Plan, as needed, to address potential 

future needs for Replenishment Capital 

higher than the $200 million cap. OCC 

also represents that its management will 

monitor OCC’s shareholders’ equity to 

identify additional triggers or reduced 

capital levels that may require action. 

C. Fee Policy, Refund Policy, and 

Dividend Policy 

Under the Capital Plan, OCC will also 

implement a Fee Policy, Refund Policy, 

and Dividend Policy designed to 

maintain OCC’s shareholders’ equity 

above the Baseline Capital Requirement. 

Changes to the Fee Policy, Refund 

Policy, and Dividend Policy will require 

the affirmative vote of two-thirds of the 

directors then in office and unanimous 

approval by the holders of OCC’s 

outstanding Class B Common Stock.43

Any such changes also will be subject 

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44For example, fees could generate less revenue 

than expected if trading volume decreases. 

According to OCC, because OCC’s clearing fee 

schedules typically reflect different rates for 

different categories of transactions, fee projections 

will include projections of relative volume in each 

category. Therefore, the clearing fee schedule will 

be set to achieve the annual revenue target through 

a blended or average rate per contract, multiplied 

by total projected contract volume. 

45OCC stated that the Capital Plan would allow 

OCC to refund approximately $40 million from 

2014 fees to clearing members and to reduce fees 

in an amount to be determined by the Board. See 

Notice at 5174. OCC issued a press release 

announcing the declaration of a refund, dividend, 

and fee reduction, pursuant to the Capital Plan on 

December 17, 2015. See OCC Press Release, ‘‘OCC 

Declares Clearing Member Refund and Dividend for 

2015 and Reduction of Fees under Approved 

Capital Plan.’’ (available at: http://www.options

clearing.com/about/newsroom/releases/2015/12_

17.jsp (‘‘OCC Press Release’’). 

46OCC has announced it intended to lower fees 

by about 19% pursuant to the Capital Plan. See 

OCC Press Release. 

47OCC announced for 2016, that it will pay a 

previously declared 2014 refund of $33.3 million, 

a 2015 refund of $39 million, and special refund of 

$72 million. See OCC Press Release. 

48 If the Refund Policy has been eliminated, the 

refunds shall be deemed to be $0. 

49OCC issued a press release announcing the 

declaration of an approximate $17 million dividend 

for 2015 pursuant to the Capital Plan. See OCC 

Press Release. 

50 15 U.S.C. 78s(b)(2)(C). 

to the filing requirements of Section 

19(b) of the Exchange Act and the rules 

and regulations thereunder. 

1. Fee Policy 

Under the Fee Policy, OCC will set 

fees at a level that will cover OCC’s 

estimated operating expenses plus a 

‘‘Business Risk Buffer.’’ According to 

OCC, the purpose of the Business Risk 

Buffer is to ensure that OCC 

accumulates sufficient funds to cover 

unexpected fluctuations in operating 

expenses, business capital needs, and 

regulatory capital requirements. 

Specifically, in setting fees each year, 

OCC will calculate an annual revenue 

target based on a forward twelve months 

expense forecast divided by the 

difference between one and the 

Business Risk Buffer of 25% (i.e., OCC 

will divide the expense forecast by 

0.75). OCC believes that establishing the 

Business Risk Buffer at 25% will allow 

OCC to manage unexpected fluctuations 

in expenses or revenue.44

OCC notes that the 25% Business Risk 

Buffer will be lower than OCC’s 

historical 10-year average buffer of 31%. 

OCC represents that the lower buffer 

will permit it to charge lower fees to 

market participants, and thus become 

less reliant on refunds to clearing 

members to return any excess fees 

paid.45 In addition, by capitalizing OCC 

through shareholders’ equity (i.e., the 

Capital Contribution), OCC represents 

that it is positioned to charge lower fees 

that are more closely tied to its 

projected operating expenses, rather 

than annually generating a larger 

surplus to address business, operational, 

and pension risks.46 OCC states that the 

Business Risk Buffer will remain at 25% 

as long as OCC’s shareholders’ equity 

remains above the Target Capital 

Requirement. OCC represents that it will 

review its fee schedule on a quarterly 

basis to manage revenues as close to the 

25% Business Risk Buffer as possible, 

and, if the fee schedule needs to be 

changed to achieve the 25% Business 

Risk Buffer, OCC would file a proposed 

rule change with the Commission. 

2. Refund Policy 

Under the Refund Policy, except at a 

time when Replenishment Capital is 

outstanding, OCC will declare a refund 

to clearing members in December of 

each year using the formula set out in 

the Refund Policy. Specifically, the 

refund will equal 50% of the excess of: 

(i) Pre-tax income for the year in which 

the refund is declared over (ii) the sum 

of the following: (x) The amount of pretax income after the refund necessary to 

produce after-tax income for such year 

sufficient to maintain shareholders’ 

equity at the Target Capital Requirement 

for the following year, and (y) the 

amount of pre-tax income after the 

refund necessary to fund any additional 

reserves or additional surplus not 

already included in the Target Capital 

Requirement. 

The Refund Policy states that OCC 

will declare refunds, if any, in 

December of each year, and such 

refunds would be paid in the following 

year after OCC issues its audited 

financial statements, provided that: (i) 

The payment does not result in a total 

shareholders’ equity falling below the 

Target Capital Requirement and (ii) the 

payment is otherwise permitted by 

Delaware law, federal laws, and 

regulations.47

OCC will not make refund payments 

while Replenishment Capital is 

outstanding and will resume refunds 

after the Replenishment Capital is 

repaid in full and the Target Capital 

Requirement is restored. However, OCC 

will not resume paying refunds and will 

recalculate how refunds are made if, for 

more than 24 months: (i) Replenishment 

Capital remains outstanding or (ii) the 

Target Capital Requirement is not 

restored. 

3. Dividend Policy 

Under the Dividend Policy, OCC will 

pay dividends to Stockholder Exchanges 

as consideration for their Capital 

Contribution and commitment to 

provide Replenishment Capital under 

the Replenishment Capital Agreement. 

OCC will declare dividends, if any, in 

December of each year, and such 

dividends would be paid in the 

following year after OCC issues its 

audited financial statements, provided 

that: (i) The payment does not result in 

total shareholders’ equity falling below 

the Target Capital Requirement and (ii) 

the payment is otherwise permitted by 

Delaware law, federal laws, and 

regulations. 

Pursuant to the Dividend Policy, 

except at a time when Replenishment 

Capital is outstanding, OCC will declare 

a dividend on its Class B Common Stock 

in December of each year in aggregate 

equal to the excess of: (i) After-tax 

income for the year, after application of 

the Refund Policy48 over (ii) the sum of: 

(A) The amount required to be retained 

in order to maintain total shareholders’ 

equity at the Target Capital Requirement 

for the following year, plus (B) the 

amount of any additional reserves or 

additional surplus not already included 

in the Target Capital Requirement.49

Similar to the Refund Policy, if 

Replenishment Capital is outstanding, 

OCC will not pay dividends. OCC will 

resume dividends after the 

Replenishment Capital is repaid in full 

and the Target Capital Requirement is 

restored through the accumulation of 

retained earnings. However, OCC will 

not resume paying dividends and will 

recalculate how dividends are made if, 

for more than 24 months: (i) 

Replenishment Capital remains 

outstanding or (ii) the Target Capital 

Requirement is not restored. Moreover, 

the formulas for determining the 

refunds and dividends treat refunds as 

tax-deductible, and dividends are not 

tax-deductible. In the event that refunds 

are not tax-deductible, OCC represents 

that it will amend the Refund Policy 

and Dividend Policy to restore the 

relative economic benefits between the 

recipients of the refunds and the 

Stockholder Exchanges to what the 

Capital Plan currently provides. 

III. Summary of the Comments and 

Discussion 

A. Statutory Standards 

Exchange Act Section 19(b)(2)(C) 

directs the Commission to approve a 

proposed rule change of a selfregulatory organization if it finds the 

change is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

applicable to such organization.50 In 

particular, the Commission addresses 

the following provisions of the 

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51 15 U.S.C. 78q–1(b)(3)(F). 

52 15 U.S.C. 78q–1(b)(3)(I). 

53 15 U.S.C. 78q–1(b)(3)(D). 

54 15 U.S.C. 78q–1(b)(3)(I). 

55 15 U.S.C. 78c(f). 

56 15 U.S.C. 78q–1(b)(3)(F) and (I). 

57 15 U.S.C. 78q–1(b)(3)(I). 

58 15 U.S.C. 78q–1(b)(3)(F) and (I). 

59 Id. 

60SIG Statement in Opposition to the Order 

Approving OCC’s Capital Plan (October 7, 2015) 

(‘‘SIG Opposition Statement’’). This commenter also 

argues that the Dividend Policy fosters rewards, i.e., 

larger dividends paid to Stockholder Exchanges, 

thereby incenting the Board to approve inflated 

operating costs and larger budgets, which increases 

transaction costs. The Commission discusses this 

aspect of the comment regarding cost increases 

below in Section B(1)(ii). 

61See, e.g., BATS Letter I and Letter II; BOX 

Letter I; MIAX Letter II; BATS, BOX, and MIAX 

Statement in Opposition to the Action Made by 

Delegated Authority (October 7, 2015) (‘‘BATS 

Opposition Statement’’); KCG Statement in 

Opposition to the Order (October 7, 2015) (‘‘KCG 

Opposition Statement’’). 62 Id. 63OCC Support Statement; OCC Letter II; OCC 

Stay Brief. 64OCC Letter I; OCC Support Statement. 

65See OCC Support Statement. 

66 Id. 

Exchange Act in its review of this 

proposed rule change: 

• Section 17A(b)(3)(F) of the 

Exchange Act requires, in part, that the 

rules of a registered clearing agency be 

designed to protect investors and the 

public interest.51

• Section 17A(b)(3)(I) of the Exchange 

Act requires, in part, that the rules of a 

registered clearing agency do not 

impose any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act.52

• Section 17A(b)(3)(D) of the 

Exchange Act requires, in part, that the 

rules of a registered clearing agency 

provide for the equitable allocation of 

reasonable dues, fees, and other charges 

among its participants.53

• Section 17A(b)(3)(A) of the 

Exchange Act requires, in part, that a 

registered clearing agency be so 

organized and have the capacity to be 

able to facilitate the prompt and 

accurate clearance and settlement of 

securities transactions and to safeguard 

securities and funds in its custody or 

control or for which it is responsible.54

• Section 3(f) of the Exchange Act 

requires, in part, that whenever 

pursuant to the Exchange Act the 

Commission is engaged in the review of 

a rule of a self-regulatory organization, 

and is required to consider or determine 

whether an action is necessary or 

appropriate in the public interest, the 

Commission must also consider, in 

addition to the protection of investors, 

whether the action will promote 

efficiency, competition, and capital 

formation.55

B. Comments Received and Commission 

Response 

The discussion below summarizes the 

comments received regarding OCC’s 

proposed Capital Plan and provides 

OCC’s responses and the Commission’s 

evaluation of the proposal in accordance 

with the applicable Exchange Act 

requirements. 

1. Investor Protection and Public 

Interest in Exchange Act Section 

17A(b)(3)(F) and Burden on 

Competition in Exchange Act Section 

17A(b)(3)(I) 

Commenters argue that the Capital 

Plan is inconsistent with Exchange Act 

Sections 17A(b)(3)(F) and 17A(b)(3)(I),56

which require that the rules of a 

registered clearing agency, i.e., OCC, are 

designed to protect investors and the 

public interest and do not impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. Broadly, 

commenters argue that the Capital Plan 

is contrary to the protection of investors 

and the public interest, and imposes 

unnecessary and inappropriate burdens 

on competition, because: (i) The 

Dividend Policy would unfairly 

subsidize Stockholder Exchanges at the 

expense of the Non-Stockholder 

Exchanges, (ii) the Capital Plan would 

raise transaction costs by increasing fees 

and reducing refunds to pay dividends 

to the Stockholder Exchanges, and (iii) 

the Dividend Policy would pay 

Stockholder Exchanges an excessive rate 

of return. Commenters also assert that 

the Capital Plan imposes an 

inappropriate burden on competition, 

inconsistent with Exchange Act Section 

17A(b)(3)(I),57 because OCC’s Target 

Capital Requirement is inflated, or in 

the alternative, OCC is already 

sufficiently capitalized, thus rendering 

the Capital Plan unnecessary. Finally, 

commenters argue that the Capital Plan 

imposes an inappropriate burden on 

competition because OCC did not 

consider less costly alternative capital 

raising initiatives. 

The Commission discusses each of 

these comments and OCC’s responses 

below. After considering the entire 

record, and for reasons discussed below, 

the Commission finds that the Capital 

Plan is consistent with Exchange Act 

Sections 17A(b)(3)(F) and 17A(b)(3)(I).58

(i) Commenters Argue That the 

Dividend Policy Fails To Protect 

Investors and the Public Interest and 

Imposes a Burden on Competition Not 

Necessary or Appropriate in 

Furtherance of the Act 

Commenters argue that the Dividend 

Policy is inconsistent with Sections 

17A(b)(3)(F) and 17A(b)(3)(I) of the 

Exchange Act,59 because it enables the 

Stockholder Exchanges to monetize 

OCC’s clearing monopoly and changes 

OCC from a low-cost public utility to a 

for-profit enterprise by paying 

dividends to the Stockholder 

Exchanges.60 Commenters also assert 

that because only Stockholder 

Exchanges are eligible to receive 

dividend payments, and any such 

dividend payments are tantamount to a 

subsidy from OCC, the Dividend Policy 

harms the competitive balance between 

Stockholder Exchanges and NonStockholder Exchanges.61 In the 

commenters’ view, Stockholder 

Exchanges will be able to use the 

dividend ‘‘subsidy’’ to lower their 

options exchange operating costs and 

thus compete more effectively to 

provide trading and execution services 

than the Non-Stockholder Exchanges, 

which would not receive any such 

subsidy.62

OCC responds that the Dividend 

Policy is an integral part of the Capital 

Plan and is necessary to protect OCC 

against business, operational, and 

pension risks. OCC refutes the statement 

that the Capital Plan would turn OCC 

into a for-profit enterprise for the sole 

benefit of the Stockholder Exchanges.63

OCC states the purpose of the Capital 

Plan is to ensure sufficient capital to 

cover business, operational, and 

pension risks, and further argues that 

the plan as a whole works to limit 

returns to the Stockholder Exchanges to 

an appropriate level and lower clearing 

fees for all market participants.64 OCC 

also counters that the Capital Plan does 

not unfairly advantage Stockholder 

Exchanges as the obligations of the 

Stockholder and Non-Stockholder 

Exchanges are not identical. OCC 

maintains that commenters do not 

appropriately consider that the 

Stockholder Exchanges incur financial 

obligations under the Capital Plan by 

providing Capital Contributions and 

committing to provide Replenishment 

Capital, and therefore face the 

substantial risk of losing both 

contributions.65 OCC further states that 

the competitive balance between and 

among the options exchanges, including 

between the Stockholder Exchanges and 

the Non-Stockholder Exchanges, is far 

more complex than portrayed by the 

commenters, and that any dividend 

payments received by Stockholder 

Exchanges under the Dividend Policy 

would not have a meaningful impact on 

competition.66 Moreover, OCC argues 

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67See id. 

68 Id. OCC notes that both Stockholder and NonStockholder Exchanges have pricing power from 

many sources, and all of these sources have more 

impact than the dividend on these exchanges’ 

ability to compete. See id. at 19–20 (arguing that 

pricing power derives from many factors, and 

stating that ‘‘the revenue per contract variation 

among exchanges and among products, which 

[commenters] themselves note, suggests that the 

Stockholder Exchanges are not competing on the 

basis of price alone’’). 

69 15 U.S.C. 78q–1(b)(3)(F) and (I). 

70See MM Letter; KCG Petition; SIG Petition; SIG 

Opposition Statement. 

71 Id. 

72See, e.g., KCG Opposition Statement; SIG 

Opposition Statement. 

73See SIG Petition; SIG Opposition Statement. 

74OCC Letter II; OCC Stay Brief. 

75 Id. 

76OCC Support Statement. 

77 Id. 

78 Id. 

79 15 U.S.C. 78q–1(b)(3)(F) and (I). Commenters 

separately describe the dividend rate as 

unconscionable, exorbitant, and above market rate. 

Commenters estimate that the dividend payments 

will result in a rate of return for the Stockholder 

Exchanges’ investment of additional capital of 

upwards of 20% to 30% but state that the true 

amount is not known to them. See BATS Letter I; 

BATS Letter II; MIAX Letter I; KCG Opposition 

Statement; SIG Opposition Statement. 

80See BATS Letter II; Peak6 Capital Management 

Statement in Opposition to the Order (October 7, 

2015) (‘‘Peak6 Opposition Statement’’); SIG 

Opposition Statement. 

81See OCC Support Statement. 

82See Notice. See also OCC Support Statement. 

83See OCC Support Statement. 

84OCC engaged an outside consulting firm to 

develop capital needs and targets and a financial 

advisor to provide analysis on dividend returns. 

Outside counsel also provided advice on 

governance matters. See OCC Letter I; OCC Letter 

IV; OCC Support Statement. 

85See OCC Letter I. 

86 15 U.S.C. 78q–1(b)(3)(I). 

87See SIG Opposition; Reinstitution Motion. 

88See KCG Opposition Statement; PEAK6 

Opposition Statement; SIG Opposition Statement. 

89See KCG Opposition; SIG Opposition. 

the commenters artificially inflate the 

so-called ‘‘subsidy’’ effect by making 

erroneous assumptions that any 

dividend received would be devoted 

exclusively to subsidizing a segment of 

the products listed by the Stockholder 

Exchanges (and offsetting the cost of 

those listings).67 OCC also states that the 

commenters’ analysis does not 

appropriately address the other ways 

the Stockholder Exchanges and NonStockholder Exchanges compete.68

(ii) Commenters Argue That the Capital 

Plan Raises Transaction Costs and 

Imposes a Burden on Competition Not 

Necessary or Appropriate in 

Furtherance of the Act 

Commenters also argue that the 

Capital Plan is inconsistent with 

Sections 17A(b)(3)(F) and 17A(b)(3)(I) of 

the Exchange Act 69, because it raises 

transaction costs.70 Commenters allege 

that the Dividend Policy creates 

incentives for OCC to increase its 

operating expenses, and in turn, charge 

higher clearing fees because higher 

clearing fees will lead to higher 

dividend payments.71 Commenters state 

that these higher fees harm the NonStockholder Exchanges and are 

particularly detrimental to the public 

interest and investor protection because 

clearing members and customers 

collectively pay 95% of OCC operating 

expenses through clearing fees.72

Commenters argue that the Refund 

Policy does not protect investors or 

promote the public interest, because it 

reduces the percentage of excess net 

income refunded to clearing members 

from 100% to 50%. Commenters state 

that this reduction in refunds will lead 

to increased transaction costs through 

wider quoted spreads.73 Finally, 

commenters argue that the increased 

transaction costs impose a burden on 

competition not necessary or 

appropriate. 

OCC refutes commenters’ assertion 

that the Dividend Policy creates 

incentives for OCC to increase its 

operating expenses or its fees as a means 

to pay higher dividends to Stockholder 

Exchanges.74 OCC explains that the 

operation of the Capital Plan, in its 

totality, places limits on these purported 

incentives. OCC notes that commenters 

ignore the fact that higher operating 

expenses lead to a higher Target Capital 

Requirement, which would require 

additional capital contributions to be 

withheld from funds that would 

otherwise be used to pay dividends and 

refunds and therefore, would have the 

effect of reducing the rate of return to 

the Stockholder Exchanges.75 OCC 

further explains that the Capital Plan 

incorporates a lower Business Risk 

Buffer, i.e., 25%, than the historical 

average buffer of 31%. Because this 

buffer is used to set the clearing fee 

schedules, it will provide members with 

a lower fee structure.76 In addition, 

because the Capital Plan uses 

shareholders’ equity as capital to offset 

potential business, operational, and 

pension risks, OCC states that it would 

become less dependent on clearing fees 

to manage these risks.77 OCC also states 

that commenters’ concerns regarding 

future fee increases are speculative.78

(iii) Commenters Argue That the 

Dividend Rate Under the Capital Plan is 

Excessive and Inconsistent With the 

Protection of Investors and the Public 

Interest and Imposes a Burden on 

Competition Not Necessary or 

Appropriate in Furtherance of the Act 

Commenters assert that the rate of 

return the Stockholder Exchanges will 

receive for providing the Capital 

Contribution and committing to provide 

Replenishment Capital under the 

Dividend Policy is excessive, and is 

therefore inconsistent with Sections 

17A(b)(3)(F) and 17A(b)(3)(I) of the 

Exchange Act.79 Specifically, the 

commenters argue that OCC is a 

monopoly, and as such, its risk of 

capital impairment is low, such that the 

imputed rate of return to the 

Stockholder Exchanges is excessive.80

OCC responds that its status as the 

sole registered clearing agency in the 

options market does not mean that the 

Capital Contribution by the Stockholder 

Exchanges is a risk-free investment.81

As noted above, the Capital Plan is 

designed to support OCC’s operations in 

the event of substantial losses from 

potential business, operational, and 

pension risks—these risks are not 

mitigated by OCC’s status as the sole 

clearing agency in the listed options 

space.82 OCC also responds that the 

potential rate of return is not excessive 

and notes that the Capital Plan, 

including the Dividend Policy, was 

developed after an extensive and 

detailed deliberative process.83 OCC 

adds that the Board relied on advice 

received from external advisers to help 

ascertain whether the potential rate of 

return to Stockholder Exchanges was 

reasonable in light of the nature of the 

capital commitments and the additional 

risks inherent in their contributions.84

OCC further argues that the elements of 

the Capital Plan (the Fee Policy, Refund 

Policy, and Dividend Policy) are 

designed to provide appropriate limits 

on any dividend paid pursuant to the 

Dividend Policy.85

(iv) Commenters Argue That OCC Was 

Sufficiently Capitalized Without the 

Capital Plan 

Commenters argue that the Capital 

Plan is inconsistent with 17A(b)(3)(I) of 

the Exchange Act 86 because OCC’s 

Target Capital Requirement is inflated, 

and as a result, the Capital Plan imposes 

an unnecessary and inappropriate 

burden on competition.87 Commenters 

argue in the alternative that, even if the 

Target Capital Requirement is not 

inflated, there is no need for the Capital 

Plan 88 because OCC is sufficiently 

capitalized through the accumulation of 

fees since the publication of the 

Notice.89 In the commenters’ view, the 

accumulation of retained earnings has 

placed OCC within reach of its proposed 

capital levels and may even leave OCC 

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90See SIG Letter III. 

91See Notice; OCC Support Statement. 

92See OCC Support Statement. 

93 Id. 

94See OCC Support Statement. 

95See OCC Support Statement. 

96 15 U.S.C. 78q–1(b)(3)(I). 

97See, e.g., MM Letter; SIFMA Letter; SIG 

Opposition Statement. In support of the alternative 

of raising capital through accumulative retained 

earnings, commenters proposed an alternative of an 

escrow, or Payer Asset Approach, where OCC could 

accumulate retained earnings and place them in 

escrow. See MM Letter; SIG Petition. These 

commenters argue that by placing the fee revenue 

(which would be retained earnings if held by OCC) 

in escrow to cover business, operational, and 

pension risks, those monies would not be 

considered an asset of the Stockholder Exchanges 

and subject to tax and OCC could return excess 

from the escrow to investors through refunds or 

lower fees. 

98See MM Letter. Another commenter states that 

the Chicago Board Options Exchange offered to 

provide OCC with a capital infusion at a lower 

annual rate over a certain period of time that is 

more favorable than the Capital Plan, which 

contemplates paying the Stockholder Exchanges 

dividends in perpetuity. See SIG Opposition 

Statement. 

99See, e.g., BATS Letter I; BATS Letter II. 

100See BOX Letter I. 

101 15 U.S.C. 78q–1(b)(3)(I). 

102See, e.g., SIG Petition; BATS Letter I. 

103See OCC Letter II (noting that it was not clear 

how an escrow fund that is not an asset of OCC 

would satisfy the Commission’s proposed rule 

requirement concerning liquid net assets funded by 

equity); OCC Support Statement (noting that 

accumulating fees would require ‘‘$593 million in 

pre-tax clearing fees’’ from members). In addition, 

OCC states that its Board considered CBOE’s 

proposal, but did not find it viable in meeting its 

capital needs because CBOE’s proposed 

contribution would have been in the form of a loan, 

and thus would be debt, and was not fully 

developed. See October 15, 2015 Declaration of 

Craig S. Donohue (‘‘Donohue Declaration’’). OCC 

also states that it considered issuing capital stock 

to clearing members and Non-Stockholder 

Exchanges and issuing perpetual preferred shares to 

outside institutional investors. See OCC Letter I; 

OCC Letter II. 

104See OCC Letter II (noting the importance of 

OCC’s continuity and need for capital to withstand 

an event arising from business, operational and 

pension risks and the Board’s concern with 

timeliness; based on these considerations, the Board 

considered alternate plans as taking too long to 

accumulate sufficient capital); also see OCC 

Support Statement (noting that raising capital 

through fee increases does not provide the 

immediate access to additional capital that the 

Replenishment Capital commitment provides under 

the Capital Plan). 

105 Id. 

106Historically, the Stockholder Exchanges have 

contributed only minimal capital to OCC. The 

Board determined that to obtain substantial Capital 

Contributions and Replenishment Capital from the 

Stockholder Exchanges is the best alternative, 

which cannot be accomplished without 

modification of the past practice of not providing 

dividends to Stockholder Exchanges owners of 

OCC. See Notice at 5173–75. 

with a surplus, which renders the 

Capital Plan wholly unnecessary.90

OCC counters that the Target Capital 

Requirement is the product of extensive 

analysis and takes into account a broad 

set of factors to cover plausible loss 

scenarios from business, operational, 

and pension risks.91 OCC notes that 

commenters, in deeming OCC 

adequately capitalized, do not provide a 

methodology for ascertaining a Target 

Capital Requirement, nor do they 

provide with sufficient granularity or 

specificity the risks that would be 

covered (and those that would be 

excluded) with their proposed lower 

Target Capital Requirement.92 OCC 

notes its financial resources, such as 

margin and the clearing fund deposits, 

and not its capital, protect it against 

counterparty risk and on-balance sheet 

credit and market risk. In addition, OCC 

states that the commenters incorrectly 

included in their estimate of its current 

capital reserve capital refunds owed by 

OCC to clearing members and excess 

over expenses that would be subject to 

taxes if they were retained by OCC.93

OCC also disagrees that it has 

accumulated sufficient funds from 

clearing fees since the Capital Plan was 

proposed to render the Capital Plan 

unnecessary. OCC takes issue with 

commenters’ calculations because, 

despite claiming the Capital Plan as 

being unnecessary, commenters 

included the contributions already 

made pursuant to the Plan in their 

calculations.94 In absence of the Capital 

Plan, OCC notes that its capital 

resources would be less than $150 

million, which is less than both: (i) Half 

of the $364 million in capital resources 

available to it under the Capital Plan; 

and (ii) the $247 million Target Capital 

Requirement.95

(v) Commenters Argue That OCC Failed 

To Properly Consider Alternative 

Sources of Raising Capital 

Finally, commenters argue that the 

Capital Plan is inconsistent with Section 

17A(b)(3)(I) of the Exchange Act 96

because OCC’s Board failed to consider 

alternative and less costly ways to raise 

capital, including having OCC raise 

capital by accumulating retained 

earnings through some combination of 

fees and reduced rebates,97 raise capital 

from existing Stockholder Exchanges at 

a lower rate of return,98 raise capital 

from Non-Stockholder Exchanges, 

clearing members or third party 

investors at a lower rate of return,99 and 

raise capital through other instruments, 

such as perpetual preferred stock.100

Commenters suggested that the failure 

of the Board to pursue these alternative 

sources of capital renders the Capital 

Plan inconsistent with Section 

17A(b)(3)(I) of the Exchange Act 101

because it imposes unnecessary and 

inappropriate burdens on 

competition.102

OCC counters that the Board 

evaluated all viable and potential 

alternatives.103 Specifically, OCC notes 

that the Board considered potential 

alternatives and, after a thorough 

deliberation, voted in favor of the 

Capital Plan because it allowed OCC to 

increase its capital almost 

instantaneously (i.e., the Capital 

Contribution was paid immediately) and 

provided the benefit of Replenishment 

Capital.104 In addition to immediately 

increasing OCC’s Capital, OCC’s Board 

determined that the Capital Plan was 

superior to other alternatives when it 

took into account factors such as 

liquidity, the timeliness and certainty of 

obtaining capital, and applicable 

taxes.105

(vi) Commission Findings 

a. Capital Plan Is Consistent With 

Exchange Act Section 17A(b)(3)(F) 

The Commission has considered the 

comments described above and finds 

that the Capital Plan is consistent with 

Exchange Act Section 17A(b)(3)(F). 

After reviewing the Dividend Policy 

in conjunction with the other elements 

of the Capital Plan, the Commission 

does not believe that the Dividend 

Policy, or the Capital Plan as a whole, 

changes OCC’s essential role as a market 

utility. Instead, the Capital Plan is 

designed to enhance OCC’s 

capitalization rather than to enable the 

Stockholder Exchanges to monetize 

OCC’s clearing monopoly. This 

enhanced capitalization is designed to 

allow OCC to continue its essential role 

by raising sufficient capital to cover 

business, operational, and pension risks. 

The Board determined that the 

historical practice of solely using fees, 

with annual refunds, to cover operating 

expenses and manage risks did not 

allow OCC to reach adequate 

capitalization.106 Under the Refund 

Policy, OCC will continue its practice of 

refunding a significant percentage of 

excess clearing fees to clearing 

members, thus preserving that aspect of 

OCC’s industry ‘‘utility’’ function. And 

the components of the Capital Plan—the 

Fee Policy, Refund Policy, and Dividend 

Policy—are designed to set the 

dividends to be paid to the Stockholder 

Exchanges at a level that the Board, with 

the assistance of independent outside 

financial experts, has determined to be 

reasonable for the cost and risks 

associated with the Stockholder 

Exchanges’ contributed and committed 

capital. As pointed out by OCC, the plan 

as a whole works to avoid unnecessarily 

and unreasonably high operating 

expenses, maintain the Target Capital 

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107See OCC Letter II. The rate of return would be 

dependent on many factors, including clearing fees, 

which would be subject to the rule filing 

requirements of Section 19(b)(1) of the Exchange 

Act. The Commission also notes that OCC’s status 

as the only registered clearing agency for listed 

options is not relevant in assessing the appropriate 

dividend rate under the Capital Plan, which is 

designed to address business, operational, and 

pension risks. 

108 In fact, OCC stated that it expected that the 

Capital Contributions from the Stockholder 

Exchanges will enable it to provide a significant 

refund of 2014 fees. OCC further expected that its 

current clearing fees will be reduced significantly 

based on the Business Risk Buffer of 25% beginning 

in 2015 with refunds restored, and that these lower 

fees will continue for the foreseeable future. See 

Notice at 5175. As described above, OCC declared 

a refund of 2014 fees and a 19% fee reduction. In 

addition, OCC also announced a special refund that 

represents the excess of 2015 pre-tax income over 

OCC’s target revenue based on achievement of the 

25% Business Risk Buffer. See OCC Press Release. 

109 15 U.S.C. 78q–1(b)(3)(F). 

110 Id. 

111 15 U.S.C. 78q–1(b)(3)(I). 

112Bradford Nat’l Clearing Corp. v. SEC, 590 F.2d 

1085, 1105 (D.C. Cir. 1978) (noting that to the extent 

that the legislative history provides any guidance to 

the Commission in taking competitive concerns into 

consideration in its deliberations on the national 

clearing system, it merely requires the SEC to 

‘‘balance’’ those concerns against all others that are 

relevant under the statute). 

113Each Stockholder Exchange has contributed 

$30 million to OCC, which is capital that cannot be 

used for other purposes. Thus, each Stockholder 

Exchange has forgone the opportunity to deploy or 

invest that capital. Additionally, if OCC’s capital 

were to fall below the ‘‘Hard Trigger,’’ meaning that 

the initial Capital Contribution was lost, the 

Stockholder Exchanges would be required to 

provide Replenishment Capital, which, as 

discussed above, would likely be part of a recovery 

plan or otherwise in furtherance of winding down 

OCC’s business. In such situations, the Stockholder 

Exchanges would be committing additional capital 

without any expectation that such capital will ever 

be repaid. See OCC Support Statement. NonStockholder Exchanges are in a different position 

than the Stockholder Exchanges in that they are not 

obligated to provide a Capital Contribution or 

commit to provide Replenishment Capital, and 

therefore do not bear the costs and risks of the 

financial obligations attendant with the Capital 

Contribution and Replenishment Capital. 

Requirement at an appropriate level and 

set a reasonable dividend, each as 

determined by the Board. An increase in 

operating expenses would lead to an 

increase in the Target Capital 

Requirement, and therefore, could have 

the effect of reducing the rate of return 

in dividends.107

The Commission does not believe that 

the Capital Plan operates to increase 

fees, inflate operating expenses or drive 

up transaction costs in a manner 

inconsistent with the protection of 

investors or the public interest. The 

Commission notes that commenters’ 

arguments ignore that the Capital Plan 

incorporates a lower Business Risk 

Buffer, which allows generally lower 

fees.108 The Capital Plan provides OCC 

with sufficient shareholders’ equity to 

substantially cover the potential costs 

related to OCC’s business, operational, 

and pension risks, thus reducing the 

need for OCC’s Board to budget for 

those risks when estimating the 

projected forward 12-month operating 

expenses (a key component of the 

formula for setting fees under the Fee 

Policy). Therefore, the Commission 

believes that clearing members and 

customers will benefit from the 

proposed Capital Plan because it will 

allow OCC to continue to provide 

clearing services at expected lower fees. 

In addition, there will be tax 

implications associated with retained 

earnings and dividend payments, which 

in turn affects refunds and the dividend 

rate under the Capital Plan. OCC 

therefore would be motivated to take 

applicable taxes into consideration in 

setting new fee schedules or declaring 

dividends or refunds. At the very least, 

the Commission does not believe that it 

is inevitable that the Capital Plan will 

lead to higher fees as the commenters 

assert. 

For the reasons provided above, the 

Commission does not believe that the 

potential dividend rate, the Dividend 

Policy, or the Capital Plan, is 

inconsistent with investor protection or 

the public interest. On the contrary, the 

Capital Plan will support the critical 

functions and continued operations of 

OCC, particularly during times when its 

capital position is impaired, and is, 

therefore, consistent with the protection 

of investors and the public interest 

under Exchange Act Section 

17A(b)(3)(F).109

b. Capital Plan Is Consistent With 

Exchange Act Section 17A(b)(3)(I) 

After considering the comments 

described above, the Commission finds 

that the Capital Plan does not impose 

any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Act, and is 

therefore consistent with Exchange Act 

Section 17A(b)(3)(I).110

The Commission notes that Exchange 

Act Section 17A(b)(3)(I) 111 does not 

require the Commission to make a 

finding that OCC chose the option that 

imposes the least possible burden on 

competition. Rather, the Exchange Act 

requires that the Commission find that 

the Capital Plan does not impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act, which 

involves balancing the competitive 

effects of the proposed rule change 

against all other relevant considerations 

under the Exchange Act.112

The Commission has considered all 

the comments, OCC’s responses and 

alternate plans for raising capital 

described by commenters. As an initial 

matter, the Commission does not believe 

that the Dividend Policy, or the Capital 

Plan as a whole, creates a subsidy that 

unfairly advantages Stockholder 

Exchanges. The Commission notes that 

any potential dividends declared under 

the Dividend Policy are intended to be 

consideration for the Stockholder 

Exchanges’ contribution or commitment 

to capital and compensation for their 

opportunity cost and risk of loss 

associated with such contribution and 

commitment.113 Further, the 

Commission notes that the operation of 

the Capital Plan does not require 

dividends to be paid in any year, and 

under certain circumstances such as 

when Replenishment Capital is 

outstanding, OCC would not pay 

dividends. The Commission believes 

that various components of the Capital 

Plan operate to set reasonable dividends 

for the cost and risks associated with the 

Stockholder Exchanges’ contributed and 

committed capital. Thus, the 

Commission does not believe that the 

Capital Plan imposes any costs that 

could be viewed as imposing a burden 

on competition not necessary or 

appropriate under the Exchange Act. 

Similarly, the Commission does not 

believe that the Target Capital 

Requirement imposes a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. The 

Commission notes that the Target 

Capital Requirement is designed to 

provide adequate capitalization, thereby 

substantially enhancing OCC’s ability as 

a SIFMU to sustain non-default losses 

arising from business, operational, and 

pension risks. After reviewing the 

process used by OCC to establish the 

Target Capital Requirement, the 

Commission believes that the Target 

Capital Requirement is appropriately 

designed to capture identified and 

foreseeable business risks. OCC 

represents that it used various measures 

and took a methodical and reasoned 

approach to establish the Target Capital 

Requirement and the Commission does 

not believe that the Target Capital 

Requirement is or will be set at an 

unreasonable level. 

Moreover, commenters have not 

explained how alternatives to the 

Dividend Policy or the Target Capital 

Requirement would be effective in 

promoting the significant interest under 

the Exchange Act in having a wellcapitalized OCC to allow prompt 

clearance and settlement. A wellcapitalized OCC provides support for 

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114See OCC Support Statement (noting that, 

under the current fee schedule, it would take until 

mid-2017 to organically accumulate $364 million in 

capital. As a result, OCC concluded that organic 

accumulation of capital through fee increases was 

not a durable solution to its substantial capital 

needs). 

115Petitioners’ comments, when contending OCC 

was close to achieving its Target Capital 

Requirement of $247 million, did not acknowledge 

or accept that the total resource requirement under 

the Capital Plan was $364 million, including the 

Replenishment Capital commitment of $117 

million. See SIG Support Statement and KCG 

Support Statement. OCC also stated that, as of 

August 31, 2015, without the $150 million Capital 

Contribution under the Capital Plan, OCC’s 

adjusted shareholders’ equity would be 

approximately $149 million or less than half of the 

$364 million in total capital resources available 

under the Capital Plan, and significantly less than 

the $247 million Target Capital Requirement. See 

OCC Support Statement. 

116The Commission also notes that the Board 

determined that the Capital Plan contains certain 

aspects and features that the alternatives would not 

be able to achieve (such as characterization of the 

net liquid assets raised by OCC as equity instead of 

debt). 

117 15 U.S.C. 78q–1(b)(3)(I). 

118 15 U.S.C. 78q–1(b)(3)(D). 

119See SIG Petition; MM Letter; KCG Opposition 

Statement; BATS Opposition Statement. 

120See SIG Petition; MM Letter; BATS Petition; 

KCG Opposition Statement. 

121See BATS Petition. 

122See SIG Opposition Statement (questioning 

whether the Board would be able to ensure that 

budgets are not inflated and that no more revenues 

than needed are collected, because Stockholder 

Exchanges would be conflicted and would unduly 

influence Board votes to approve larger budgets that 

would enrich themselves via dividend payments). 

See also MM Letter at 13 (arguing ‘‘If the SEC 

allows the five owners to monetize OCC in this 

fashion, the conflicts of interest will diminish the 

prospect that OCC will perform efficiently to keep 

transaction fees low and operating expenses under 

control. . . . Given the potential of the dividend to 

increase with the size of OCC’s budget, we are 

concerned where transaction fees may go in the 

future.’’) 

123See BATS Petition; BATS Opposition 

Statement; KCG Opposition Statement. 

124See OCC Support Statement. 

125See OCC Stay Brief. 

126 15 U.S.C. 78q–1(b)(3)(D). 

the continued orderly operations of OCC 

and benefits clearing members, market 

participants and the options markets 

broadly. The Commission therefore 

finds that even if the dividends paid 

under the Dividend Policy or future 

costs incurred under the Target Capital 

Requirement or Capital Plan as a whole, 

as they are currently designed impose a 

burden on competition, that burden is 

necessary or appropriate in furtherance 

of the purposes of the Act. 

The Commission further notes that 

whether OCC would accumulate 

sufficient capital to reach the Target 

Capital Requirement through the accrual 

of fees was unknown at the time OCC 

proposed the Capital Plan. OCC’s Board 

considered this alternative and 

determined that accumulation of 

clearing fees would take several years to 

achieve the Target Capital 

Requirement.114 The Capital Plan 

immediately addressed the risk of a 

significant event impairing OCC’s 

capital, even though such an event has 

not in fact occurred.115

Finally, the existence of alternative 

ways for OCC to raise capital does not 

render the Capital Plan inconsistent 

with the Exchange Act. The 

Commission notes that the Board 

considered various alternative ways to 

raise capital and that the Board 

determined that the Capital Plan was in 

the best interests of OCC because it was 

designed to provide immediate access to 

capital through the Capital Contribution 

and was supported by the agreement to 

provide Replenishment Capital.116 In 

addition, in evaluating the relative 

competitive effects of the Capital Plan 

and alternative sources of capital, the 

Commission reiterates that it does not 

believe that the Capital Plan will 

necessarily lead to increased fees or 

transaction costs. Accordingly, the 

Commission finds the burdens imposed 

by the Capital Plan, if any, are necessary 

or appropriate in furtherance of the 

purposes of the Exchange Act. 

For reasons stated above, the 

Commission finds that the Capital Plan 

is consistent with Exchange Act Section 

17A(b)(3)(I).117

2. Capital Plan Provides for an Equitable 

Allocation of Reasonable Dues, Fees, 

and Other Charges Among the 

Participants 

Commenters assert that the Capital 

Plan is inconsistent with Exchange Act 

Section 17A(b)(3)(D)118 because it 

would result in unreasonable fees and 

cause an inequitable allocation of future 

clearing fees.119 Commenters argue that 

the Capital Plan does not provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

participants because the fees unfairly 

discriminate against Non-Stockholder 

Exchanges, are potentially excessive, or 

present conflicts.120 Commenters argue 

that the Capital Plan unfairly 

discriminates against the NonStockholder Exchanges because whereas 

all exchanges contribute equally to fees, 

only the Stockholder Exchanges are 

eligible to receive dividend 

payments.121

Commenters question whether the 

Board can fairly guide OCC on budget 

efficiencies in setting the fees.122

Commenters also argue that the rule 

filing process for fee changes, which 

requires submission to the Commission, 

public comment, and Commission 

review fails to adequately protect 

investors against dues, fees, or other 

charges that are not reasonable because, 

at the time of filing, there is no way to 

calculate whether a fee change will later 

result in excess dividends.123

As more fully discussed above, OCC 

counters that there is no unfair 

discrimination or inequitable allocation 

of fees because the parties’ obligations 

are different, as only the Stockholder 

Exchanges face substantial risk of loss 

from their capital contributions, and 

commit to Replenishment Capital.124

OCC also argues that in addition to the 

fee change rule filing process, the 

Commission could summarily act to 

suspend any such fee if necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.125

The Commission finds that the 

Capital Plan is consistent with Exchange 

Act Section 17A(b)(3)(D).126 Exchange 

Act Section 17A(b)(3)(D) provides that 

the rules of a clearing agency must 

provide for equitable allocation of fees 

among its participants and for 

reasonable fees and charges. With 

respect to equitable allocation, the 

Capital Plan as a whole, and the Fee 

Policy in particular, do not change the 

way that the fees are allocated among 

clearing members, and fees for 

similarly-situated market participants 

are equitable. While Stockholder 

Exchanges may receive dividends, 

nothing in the Exchange Act precludes 

OCC from paying dividends to the 

Stockholder Exchanges, who have made 

substantial contributions to improve 

OCC’s capital base. Although end of 

year refunds to clearing members will 

be reduced by 50% to allocate money to 

pay for dividends, those dividends are 

compensation for the financial risks and 

obligations incurred by the Stockholder 

Exchanges under the Capital Plan and 

all clearing members share in refunds. 

With respect to the reasonableness of 

fees, the Commission does not believe 

that the Capital Plan as a whole and the 

Fee Policy in particular, results in 

unreasonable dues, fees, and other 

charges. After setting its annual Target 

Capital Requirement, the Fee Policy 

requires OCC to set fees at levels to 

ensure that it can cover operational 

expenses, business and regulatory 

capital needs, and maintain shareholder 

equity. Reductions to, and the quarterly 

review of, the Business Risk Buffer will 

enable OCC to charge lower fees and 

make reductions as appropriate to 

manage revenue as close to its target as 

possible. These changes are designed to 

give market participants the benefit of 

lower upfront transaction costs, 

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127See Notice at 5175. 

128 15 U.S.C. 78s(b)(1). 

129 15 U.S.C. 78s(b)(3). 

130 15 U.S.C. 78q–1(b)(3)(D). 

131 15 U.S.C. 78q–1(b)(3)(A). 

132No commenters to the Notice raised specific 

concerns that the Capital Plan was inconsistent 

with Exchange Act Section 17A(b)(3)(A). 

133See BATS Letter I at 2; BOX Letter I at 1; KCG 

Letter I at 2; SIG Letter I at 2. 

134See OCC Letter I; OCC Stay Brief. 

135See OCC Support Statement. 

136See OCC Stay Brief; Notice at 5176. 

137 15 U.S.C. 78q–1(b)(3)(f). 

138BATS Opposition Statement; BOX Petition for 

Review; KCG Petition for Review. 

139See SIG Opposition Statement. 

140See OCC Support Statement. 

especially those customer end users 

who do not receive passed through 

refunds from the clearing member.127

In addition, any future fee change or 

increase will be subject to the rule filing 

requirements under Section 19(b) of the 

Exchange Act and Rule 19b–4 

thereunder. The Commission believes 

that these filing requirements provide 

appropriate protection against future fee 

increases despite commenters’ 

assertions to the contrary. The Exchange 

Act rule filing requirements for fee 

changes provide an opportunity for 

public comment 128 and an opportunity 

for the Commission to review the 

change, summarily suspend it and 

institute proceedings to ultimately 

approve or disapprove the change,129 as 

applicable, to ensure an SRO’s rules 

meet regulatory requirements. The 

Commission believes that various 

components of the Capital Plan, 

including the Dividend Policy, Refund 

Policy and Fee Policy, operate to 

maintain fees and dividend payments, if 

any, at appropriate levels based on the 

Target Capital Requirement established 

for the year, Business Risk Buffer, and 

other considerations, such as applicable 

taxes and OCC’s industry utility role to 

provide refunds. The Commission’s 

review of any future filings by OCC on 

its new fee schedule will determine 

whether the future fee changes are 

consistent with the applicable Exchange 

Act requirements, taking into account 

all relevant facts in addition to the Fee 

Policy under the Capital Plan. 

The Commission therefore, disagrees 

with commenters’ assertions that the fee 

filings will not adequately protect 

investors against dues, fees, or other 

charges that are not reasonable. 

For the reasons discussed above, the 

Commission finds that the Capital Plan 

is consistent with the Exchange Act 

Section 17A(b)(3)(D) 130 because it 

provides for the equitable allocation of 

reasonable dues, fees, and other charges 

among its participants. 

3. Facilitating Prompt and Accurate 

Settlement and Safeguarding of 

Securities and Funds Under Exchange 

Act Section 17A(b)(3)(A) 

Section 17A(b)(3)(A) of the Exchange 

Act 131 requires that a registered clearing 

agency be so organized and have the 

capacity to be able to facilitate the 

prompt and accurate settlement of 

securities transactions and to safeguard 

securities and funds in its custody or 

control or for which it is responsible. 

Commenters 132 acknowledged OCC’s 

fundamental need to raise additional 

capital to support OCC’s operations.133

OCC asserts that the Capital Plan is 

structured to provide OCC with 

sufficient capital (at a lower fee 

structure for market participants) to 

fund unpredictable business, 

operational, and pension events that 

might impair capital.134 OCC noted that 

in the absence of the Capital Plan, 

clearing members’ funds would be put 

at risk should OCC be unable to 

withstand an adverse capital event.135

Additionally, OCC asserts that the 

Capital Plan is structured to replenish 

capital during an adverse capital event, 

thereby ensuring OCC’s business 

continuity.136

Taking these comments into account, 

the Commission finds that the Capital 

Plan is consistent with Exchange Act 

Section 17(A)(b)(3)(A). The Capital Plan 

supports OCC’s business continuity 

(thereby facilitating the integrity of the 

clearing agency and its functions) by 

raising additional capital and obtaining 

a commitment from the Stockholder 

Exchanges to provide potential 

Replenishment Capital should it become 

necessary. In this manner, the Capital 

Plan ensures that OCC, especially 

during a significant event that impairs 

its capital, would have the capacity to 

facilitate and promote the prompt and 

accurate settlement of securities 

transactions and to safeguard securities 

and funds in its custody or control or for 

which it is responsible. Accordingly, the 

Commission finds that the Capital Plan 

is consistent with Exchange Act Section 

17A(b)(3)(A). 

4. Commission’s Consideration of SRO 

Rules’ Promotion of Efficiency, 

Competition and Capital Formation 

Under Exchange Act Section 3(f) 

Section 3(f) of the Exchange Act 137

directs that the Commission, when it is 

reviewing a rule of a self-regulatory 

organization, must consider whether 

such rule promotes efficiency, 

competition, and capital formation. 

Commenters argue that the Commission 

should not approve the Capital Plan 

because the Capital Plan introduces 

inefficiencies through costs, including 

tax liabilities, and imposes burdens on 

competition.138 One commenter argues 

that the Capital Plan is inefficient from 

a tax perspective because the dividend 

payments to Stockholder Exchanges 

subject a significant portion of OCC’s 

profits to taxes, which is an inefficient 

use of industry funds.139 In response, 

OCC noted that the Board considered 

the alternative of raising capital through 

accumulating pre-tax clearing fee 

revenues to a certain amount in after-tax 

net equity, but concluded that the 

Capital Plan was superior because it 

would increase certainty of OCC’s 

compliance with PFMI and 

Commission’s proposed Rule 17Ad– 

22(e)(15) in a timely way.140

The Commission has considered 

whether the Capital Plan promotes 

efficiency, competition, and capital 

formation, and discusses efficiency and 

capital formation below. The 

Commission has discussed the impact of 

the Capital Plan on competition in 

Section III.B.1 above. 

With respect to the promotion of 

efficiency, the Commission first notes 

that under the Capital Plan, OCC has 

both immediate and ongoing access to 

cash to meet its Target Capital 

Requirement. From a timing standpoint, 

the Capital Plan is more immediate and 

expedient than several of the 

alternatives, such as raising capital from 

Non-Stockholder Exchanges, clearing 

members or third-parties, each of which 

would have necessitated governance 

changes over a period of time. Similarly, 

raising capital through the accumulation 

of fees was forecasted by OCC to take 

several years and would be subject to 

clearing volume volatility risks. 

Second, the Capital Plan efficiently 

allocates costs for operational risk 

management among market participants. 

Having the Stockholder Exchanges bear 

the business, operational, and pension 

risks up front by making Capital 

Contributions and committing to 

Replenishment Capital in exchange for 

future dividend payments incents them, 

as owners of OCC, to prudently manage 

and minimize these risks, to avoid the 

loss of their capital contributions. 

Third, on an ongoing basis, OCC 

intends to use clearing fees to maintain 

the Target Capital Requirement. This 

aspect of the Capital Plan apportions the 

costs of the Capital Plan to the clearing 

firms in relation to their clearing 

activity. Thus, the Capital Plan seeks to 

align the costs and benefits to clearing 

firms in accordance with their level of 

clearing activity. The Commission has 

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141OCC represents that, in considering 

alternatives, OCC’s Board determined that the 

Capital Plan was financially superior to 

accumulating capital through fees, which would 

have required nearly $593 million in pre-tax 

clearing fees in order to grow $364 million in aftertax net equity. In addition, OCC estimated at the 

time such amount would take until mid-2017 to 

achieve. See OCC Support Statement. 

142See, e.g., BATS Letter II; MIAX Letter II; BOX 

Petition; BATS Petition; MIAX Petition. 

143See e.g., SIG Opposition Statement (stating 

that the case NetCoalition v. SEC, 615 F.3d 525 

(D.C. Cir. 2010) and the APA, 5 U.S.C. 551 et seq., 

obligate the Commission to engage in ‘‘reasoned 

decision-making’’). 

144 15 U.S.C. 78s(g)(1). 

145Article XI, Section I of OCC’s By-Laws 

provides that OCC’s By-Laws may be amended at 

any time by the Board upon the affirmative vote of 

two-thirds of the directors then in office (but not 

less than a majority of the number of directors). 

146See BATS Letter II; MIAX Letter II; BOX 

Petition; BATS Petition; MIAX Petition; see also 

SIG Opposition Statement (arguing that Stockholder 

Exchanges exercised control over the approval 

process and improperly exercised their veto power, 

or threatened to exercise their veto power, in a 

manner that prevented OCC from considering any 

plans that involved equity participation, even if 

such proposals may have been less costly). 

147See BATS Petition; BOX Petition. See also 

OCC Code of Conduct for OCC Directors, which 

provides that a director shall disclose any actual, 

potential or apparent conflict of interest in a matter 

to be acted on by the Board to the Executive 

Chairman and OCC’s General Counsel prior to the 

discussion or presentation of the matter, where 

possible in advance of the meeting, and shall be 

recused if requested by the Chair of the meeting. 

148See BATS Letter II; MIAX Letter II; SIG Letter 

I; SIG Letter II; BATS Opposition Statement (stating 

that the five directors representing the Shareholder 

Exchanges did not recuse themselves despite their 

conflict of interest due to their financial 

motivations for approving the Capital Plan). 

149BATS Opposition Statement; MIAX Petition; 

SIG Petition; BATS Letter III; BOX Letter II. 

150OCC Motion to Lift Stay; OCC Support 

Statement. 

considered that, under the Capital Plan, 

OCC expects to continue to pay refunds 

to clearing members from a portion of 

OCC’s net income. This feature would 

preserve some of the key attributes of 

OCC’s business model as a market 

utility. 

The Commission recognizes that, as 

commenters note, OCC will fund the 

cost of raising of capital by paying 

dividends, when eligible, to the 

Stockholder Exchanges. However, the 

Commission observes that other 

methods of raising capital similarly 

would incur costs to OCC and its 

participants. For example, raising 

capital through retained earnings 

involves costs related to applicable 

taxes as well as additional time to 

accumulate sufficient capital, during 

which time OCC will be exposed to 

business, operational and pension risks 

without sufficient capital to protect 

itself.141 Similarly, raising capital 

through other instruments such as 

issuance of perpetual preferred shares or 

common stock to Non-Stockholder 

Exchanges, clearing members or thirdparty investors, involves costs related to 

the transaction itself (e.g. underwriting), 

dividend payments, and applicable 

taxes. And, unlike the Replenishment 

Capital provided under the Capital Plan, 

such instruments would not provide 

readily available capital during a critical 

event, wind-down or recovery period. 

The Commission also has considered 

whether the Capital Plan promotes 

efficiency from the tax perspective. The 

Commission notes that similar tax 

consequences would exist if OCC had 

chosen to raise equity by issuing 

common stock or preferred stock to 

Non-Stockholder Exchanges, clearing 

members or third-party investors, 

because in each of these cases, OCC 

anticipates paying dividends to these 

parties in exchange for their 

investments, which will be subject to 

withholding tax prior to making 

dividend payments. Moreover, tax 

consequences are only one aspect of a 

consideration of efficiency in these 

circumstances. 

The Commission also has considered 

whether the Capital Plan will promote 

capital formation. As discussed 

throughout this order, the Capital Plan 

is designed to enable OCC to withstand 

business, operational, and pension risks 

that may significantly affect OCC’s 

ability to provide prompt clearance and 

settlement services. It also provides an 

incentive for OCC to prudently manage 

its risks by allocating these risks 

between Stockholder Exchanges and 

clearing participants. As OCC is the 

only clearing agency for listed 

standardized options in the U.S., it 

plays a crucial role in financial stability. 

A well-functioning equity options 

market provides an infrastructure 

necessary for trading both equity 

options and other equity investment 

products, which are used by companies 

and businesses to raise capital. The 

Commission believes that an adequately 

capitalized OCC should promote market 

confidence in OCC’s ability to 

continuously serve the options market, 

which in turn facilitates prompt 

clearance and settlement of options 

transactions and promotes capital 

formation. 

5. Other Issues Raised by Commenters 

Commenters also raise certain 

procedural concerns with respect to the 

Capital Plan. Specifically, commenters 

argue that the process OCC underwent 

to approve the Capital Plan failed to 

comply with its own rules.142

Commenters also argue that the Capital 

Plan should not have been approved 

under delegated authority and the 

Delegated Order failed to fulfill the 

Commission’s obligation to engage in 

‘‘reasoned decision-making’’ under the 

Administrative Procedure Act 

(‘‘APA’’).143 The Commission considers 

and discusses each of these comments 

below. 

(i) Compliance With Self-Regulatory 

Organization’s Own Rules as Required 

Under Exchange Act Section 19(g)(1) 

Section 19(g)(1) of the Exchange 

Act 144 requires, in part, that every selfregulatory organization shall comply 

with its own rules. Form 19b–4 requires 

each SRO to complete all actions 

required to be taken under its 

constitution, articles of incorporation, 

by-laws, rules or corresponding 

instruments prior to filing a proposed 

rule change. Several commenters argue 

that OCC failed to comply with its ByLaws and such failure might have 

adversely affected the quality of the 

Board’s deliberations and the validity of 

its ultimate approval of the Capital Plan. 

Commenters argue that OCC failed to 

abide by Article XI of its By-Laws,145

when it approved the Capital Plan with 

three instead of five public directors on 

the Board.146 Commenters also assert 

that OCC violated its Code of Conduct 

(including its Conflict of Interest 

Policy).147 Commenters argue that 

directors representing the Stockholder 

Exchanges should have been recused 

from the Board’s vote and their failure 

to do so invalidates the vote and the 

Board’s approval of the Capital Plan.148

Commenters also argue that OCC 

violated its Interpretation and Policy .01 

(to Article VIIB of its By-Laws), which 

requires OCC to notify Non-Stockholder 

Exchanges regarding matters of 

competitive significance as determined 

by the Executive Chairman to afford 

them an opportunity to make 

presentations to the Board, because OCC 

failed to notify Non-Stockholder 

Exchanges of the Capital Plan, which in 

commenters’ view, carries significant 

competitive effect on Non-Stockholder 

Exchanges.149

OCC responds that the Board was not 

prevented from approving the Capital 

Plan because of Board vacancies.150

OCC stated that the Capital Plan’s 

approval was in accordance with its ByLaws. OCC further maintains that the 

Board’s vote approving the Capital Plan 

was consistent with Delaware law and 

that neither its own By-Laws nor 

Delaware law requires a director to 

recuse himself or herself when directors 

on both sides of a question have 

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151OCC Motion to Lift Stay; OCC Support 

Statement. 

152OCC Motion to Lift Stay; OCC Stay Brief. 

153See Exchange Act Section 19(b)(2)(C), 15 

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

154See General Instruction to Form 19b–4, Item 

E. 

155According to OCC, eighteen directors were in 

office at the time the Capital Plan was approved by 

the Board and sixteen directors were present at the 

meeting when the vote approving the Capital Plan 

took place, which constituted a quorum. See OCC’s 

By-Laws Article III, Section 13. Further, OCC’s 

Code of Conduct does not on its face require 

interested Board members to recuse themselves, but 

rather to immediately bring to the attention of the 

Executive Chairman and the General Counsel any 

matters that may involve conflicts of interest or be 

reasonably perceived by others to raise questions 

about potential conflicts. See Code of Conduct for 

OCC Directors. The record further indicates that 

material facts regarding the directors’ interests were 

disclosed and known to the Board prior to the vote 

on the Capital Plan. See OCC Support Statement. 

156See 17 CFR 200.30–3(a)(12). 

157See BATS Letter II; BATS Petition; BOX 

Petition; KCG Letter I; KCG Petition; MIAX Petition; 

SIG Letter I; SIG Petition. 

158See SIG Opposition Statement (citing 

NetCoalition, 615 F.3d 525 to argue that the process 

by which an administrative agency reaches a result 

must be logical and rational and the Court’s task is 

to ensure that the agency has examined the relevant 

data and articulated a satisfactory explanation for 

its action including a ‘‘rational connection between 

the facts found and the choice made’’ when 

evaluating whether the agency action is arbitrary or 

capricious under Section 706(2)(A) of the APA, 5 

U.S.C. 706(2)(A)). 

159See Reinstitution Motion; see also Expedition 

Motion (arguing, inter alia, that the dividend 

payments, refund and fee reduction would be 

impracticable to claw back, such dividend 

payments and refund are likely imminent, and the 

Commission should expedite its ruling on the 

Reinstitution Motion). 

160See OCC Reinstitution Response; Memo in 

Further Support of Reinstitution; see also SIG Letter 

III (arguing, inter alia, that OCC’s December 2015 

declaration of a refund and dividend further 

supports the argument that the Commission should 

reinstitute the automatic stay). 

161Motion for an Order Referring this Matter to 

a Hearing Officer and Directing Discovery in 

Advance of Hearing and Supporting Brief (October 

7, 2015) (‘‘Evidentiary Motion’’) (citing 17 CFR 

201.452, which provides, inter alia, that the 

Commission may allow the submission of 

additional evidence and may remand or refer the 

proceeding to a hearing officer to take additional 

evidence as appropriate). 

162 17 CFR 201.452. 

163BATS, BOX, KCG, MIAX, and SIG filed this 

motion. See Evidentiary Motion. See also 

Memorandum in Support of Motion for an Order (1) 

Referring This Matter to a Hearing Officer for the 

Taking of Additional Evidence, and (2) Directing 

Discovery in Advance of the Hearing (October 7, 

2015) (‘‘Evidentiary Memo in Support’’); SIG Letter 

III (arguing, inter alia, that OCC’s December 2015 

declaration of a refund and dividend further 

supports the argument that the Commission should 

grant the Evidentiary Motion). 

164 17 CFR 201.451. 

165See Motion for Oral Argument in Connection 

with the Commission’s Review of the Staff’s Order 

Approving OCC’s Capital Plan (October 10, 2015) 

(‘‘Oral Argument Motion’’) (citing 17 CFR 201.451, 

which provides, in part, that the Commission may 

order an oral argument if it determines that the 

presentation of facts and legal arguments in the 

briefs and record and the decisional process would 

be significantly aided by oral argument). See also 

Motion for Oral Argument in Connection with the 

Commission’s Review of the Staff’s Order 

Approving OCC’s Capital Plan (October 10, 2015) 

(‘‘Oral Argument Memo in Support’’). 

potential conflicts but have fully 

disclosed those conflicts to the 

Board.151 With respect to the comment 

of failure to notify Non-Stockholder 

Exchanges of the Capital Plan, OCC 

responds that it did not violate its own 

By-Laws because there were no material 

competitive consequences resulting 

from the Capital Plan that would have 

triggered prior notice to or an 

opportunity for the Non-Stockholder 

Exchanges to make presentations. In 

OCC’s view, the Capital Plan does not 

alter the manner in which NonStockholder Exchanges receive clearing 

services.152

The Commission notes that the 

standard for approving a proposed rule 

change of a self-regulatory organization 

is that the proposed rule change is 

consistent with the requirements of the 

Exchange Act, and rules and regulations 

thereunder.153 While the Commission 

will not approve a proposed rule change 

of a self-regulatory organization before 

the self-regulatory organization has 

completed all action required to be 

taken under its constitution, articles of 

incorporation, by-laws, rules or 

corresponding instruments,154 OCC 

represented that it did so here, working 

through its internal governance process 

and obtaining its Board’s approval of the 

Capital Plan in accordance with its ByLaws prior to filing the proposed rule 

change. OCC also represents that the 

Capital Plan received approval from 

twelve directors, thus satisfying the 

requirement of two-thirds approval by 

directors then in office in accordance 

with its By-Laws.155 Nor do commenters 

challenge OCC’s representations that it 

engaged in that process. Rather, they 

raise separate questions as to whether 

the Board nonetheless failed to comply 

with its responsibilities under relevant 

corporate governance principles. Such 

questions are not appropriately 

addressed by the Commission in the 

context of reviewing this rule filing. 

(ii) Delegated Authority and 

Commission’s Reasoned Analysis 

The Commission has delegated to the 

Director of the Division of Trading and 

Markets the authority to ‘‘publish 

notices of proposed rule changes filed 

by self-regulatory organizations and to 

approve such proposed rule 

changes.’’ 156 Although commenters 

raise no legal authority to challenge the 

use of delegated authority, they state 

that the Capital Plan raises significant 

issues of policy that are more 

appropriate for Commission review.157

Because the Commission is setting aside 

the Delegated Order, and issuing this 

Order, this issue is moot. 

Commenters also argue that the 

Delegated Order failed to fulfill its 

obligation to engage in ‘‘reasoned 

decision-making,’’ or failed to examine 

the relevant data and articulate a 

satisfactory explanation for its action, 

including a rational connection between 

the facts found and the choice made.158

The Commission does not address these 

comments because it is itself engaging 

in a de novo review, which includes the 

appropriate inquiry and analysis as 

directed by the Exchange Act. 

IV. Other Motions and Filings 

As discussed above, shortly after the 

issuance of the Review Order and Stay 

Order, Petitioners filed the Reinstitution 

Motion on September 15, 2015, 

requesting that the Commission 

reinstitute the automatic stay.159 OCC 

filed the OCC Reinstitution Response on 

September 22, 2015 and commenters 

filed the Memo in Further Support on 

September 25, 2015.160

On October 7, 2015, BATS, BOX, 

KCG, MIAX and SIG filed a motion 

(‘‘Evidentiary Motion’’) pursuant to Rule 

452 of the Rules of Practice.161 Rule 452 

provides that a motion for leave to 

adduce additional evidence must show 

with particularity that such additional 

evidence is material and that there were 

reasonable grounds for failure to adduce 

such evidence previously. Rule 452 162

further states that if the Commission 

determines to accept additional 

evidence, it may, among other things, 

remand or refer the proceeding to a 

hearing officer for the taking of 

additional evidence as appropriate. The 

Evidentiary Motion requests that the 

Commission refer its review of the 

Capital Plan to a hearing officer to 

conduct an evidentiary hearing and to 

allow for discovery in advance of any 

such hearing.163

Additionally, one commenter filed a 

motion on October 7, 2015, requesting 

that the Commission order an oral 

argument pursuant to Rule 451 164 of the 

Rules of Practice.165 The commenter 

argues that oral argument should be 

granted because such argument would 

significantly aid the Commission’s 

decisional process in reviewing the 

Delegated Order given that the Capital 

Plan involves intense factual and legal 

disputes and the voluminous briefing 

and submissions this commenter and 

other petitioners have submitted to 

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166See Evidentiary Motion (also arguing that, if 

the evidentiary hearing takes place and discovery 

is conducted in advance of the hearing, oral 

argument addressing the discovery, evidence 

adduced at the evidentiary hearing, evidentiary 

findings and their significance would be invaluable 

to the Commission’s review). See also Evidentiary 

Memo in Support. 

167See OCC’s Brief in Opposition to Motion for 

Referral to Hearing Officer and Discovery (‘‘OCC 

Evidentiary Hearing Opposition’’). Specifically, 

OCC argues that Petitioners failed to show, with 

particularity, that the additional evidence sought to 

introduce is material and that they had reasonable 

grounds for failure to adduce the evidence 

previously, and merely raised a number of so-called 

‘‘open issues’’ and ‘‘unanswered questions’’ while 

they have had opportunities to develop the record 

in the prior proceeding. See OCC Evidentiary 

Hearing Opposition. 

168OCC Brief in Opposition to Motion for Oral 

Argument (October 15, 2015) (‘‘OCC Oral Argument 

Motion’’). 

169SIG filed this motion. Reply Memorandum in 

Further Support of Motion for Oral Argument in 

Connection with the Commission Review of the 

Staff’s Order Approving OCC’s Capital Plan 

(October 20, 2015) (‘‘Oral Argument Memo in 

Further Support’’). 

170Reply Memorandum in Further Support of 

Petitioners’ Motion for an Order (1) Referring this 

Matter to a Hearing Officer for the Taking of 

Additional Evidence, And (2) Directing Discovery 

in Advance of the Hearing (October 20, 2015) 

(‘‘Evidentiary Memo in Further Support’’); see also 

SIG Letter III. 

171See Reinstitution Motion. 172See Expedition Motion; see also SIG Letter III. 173See OCC Reinstitution Response. 174See id. 175See 17 CFR 201.451. 176 17 CFR 201.451. Commenters also cited the 

Commission’s Rules of Practice, Rule 100(c) as 

authority for the Commission to authorize prehearing discovery. See 17 CFR 201.100(c). 177See Evidentiary Motion; see also 

Memorandum in Support and Evidentiary Memo in 

Further Support. 

178See Evidentiary Memo in Support (citing 17 

CFR 201.100(c) as providing that the Commission 

‘‘may by order direct, in a particular proceeding, 

that an alternative procedure shall apply or that 

compliance with an otherwise applicable rule is 

necessary’’); (noting that factual record is not 

developed adequately regarding: (i) Exchange Act 

Section 17A(b)(3)(D); (ii) Exchange Act Section 

17A(b)(3)(F); and (iii) Exchange Act Section 

17A(b)(3)(I)). See also 15 U.S.C. 78s(b)(2)(C)(i). 

179NetCoalition v. SEC, 615 F.3d 525. 

180See Evidentiary Memo in Support (arguing 

that the Commission should refer the Delegated 

Order to an administrative law judge so that the law 

judge can consider a fully developed record). 

181 412 F.3d 133 (D.C. Cir. 2005). 

182Evidentiary Memo in Support. 

183See Evidentiary Memo in Support; Evidentiary 

Memo in Further Support (arguing that, under 

Chamber of Commerce, the Commission must 

explore alternatives; specifically, that the 

Commission must consider ‘‘facially reasonable 

alternatives’’ raised by a party, or provide reasons 

for not doing so). 

184See Evidentiary Memo in Support (citing 

Exchange Act Release No. 50699 (November 18, 

2004), 69 FR 71126, 71140 (December 8, 2004)(‘‘The 

Commission believes that independent directors 

must be provided with the opportunity to discuss 

any important matters regarding the exchange or 

association in a frank and open manner, free from 

the presence of management. Therefore, the 

Commission proposed that the independent 

directors of the exchange’s or association’s board 

meet regularly in executive session’’). 

185See Evidentiary Memo in Support. 

186See Evidentiary Memo in Further Support. 

address these complex factual and legal 

disputes.166

OCC filed a brief in opposition to the 

Evidentiary Motion on October 15, 

2015, arguing that the commenters 

failed to demonstrate that the legal 

requirements for granting the motion are 

satisfied and prompt affirmance of the 

Capital Plan is necessary for OCC to be 

prudently capitalized at a level 

appropriate for a SIFMU.167 OCC also 

filed a Brief in Opposition to Motion for 

Oral Argument on October 15, 2015, 

arguing the motion for an oral argument 

should be denied as it is unnecessary 

because all interested parties have had 

multiple opportunities to submit 

evidence and arguments to the 

Commission, and that oral argument 

would only serve to unduly delay 

resolution of the Commission’s review 

of the Delegated Order.168

The Commission received a reply 

memorandum in further support of the 

commenter’s motion for oral argument 

on October 20, 2015.169 On the same 

day, commenters also filed a reply in 

further support of its Evidentiary 

Motion.170

The Commission has considered these 

motions, including OCC’s oppositions 

and the movants’ reply memoranda. For 

the reasons discussed below, these 

motions are denied. 

A. Reinstitution Motion 

Commenters filed the Reinstitution 

Motion, requesting that the Commission 

reinstitute the automatic stay on the 

ground that there is no compelling 

reason to implement the Capital Plan 

because OCC’s current capital level is 

approaching the Target Capital 

Requirement and will soon exceed that 

amount and it would be extremely 

impracticable to reverse the 

implementation of the Capital Plan if 

the Delegated Order were subsequently 

reversed.171 These commenters 

reiterated their arguments following 

OCC’s announcement of its declaration 

of refunds, dividends, and fee reduction 

pursuant to the Capital Plan and 

requested the Commission to expedite 

its ruling on the Reinstitution 

Motion.172

OCC responds that the Reinstitution 

Motion restated issues that had already 

been argued at length, considered and 

denied by the Commission and the 

Petitioners have not shown any manifest 

error, change in law or other recognized 

basis for the Commission to reconsider 

the Stay Order.173 OCC further argues 

that the Petitioners failed to provide any 

other valid basis for the Commission to 

overturn the Stay Order, which was 

based on a finding that there is a 

compelling public interest in 

strengthening OCC’s capitalization and 

for the stay to be lifted.174

Because the Commission by this 

Order is engaging in a substantive 

review and approving the Capital Plan 

directly, the Reinstitution Motion and 

Expedition Motion are hereby moot. 

B. Evidentiary Motion 

Rule 452 governs the allowance of the 

submission of additional evidence.175

Specifically, Rule 452 of the 

Commission’s Rules of Practice 

describes discretionary standards by 

which the Commission may allow 

additional evidence, noting that motions 

for allowing the submission of 

additional evidence must: (i) Show with 

particularity that the requested evidence 

is material, and (ii) that reasonable 

grounds existed for the failure to adduce 

this evidence previously.176

In the Evidentiary Motion, the 

commenters request that the 

Commission: (i) Refer this matter to a 

hearing officer, and (ii) direct discovery 

in advance of the hearing.177 They argue 

that the current record before the 

Commission is insufficient for the 

Commission to find that the Capital 

Plan is consistent with the requirements 

of the Exchange Act under Exchange 

Act Section 19(b)(2)(C)(i).178

Commenters rely on NetCoalition v. 

SEC 179 to suggest that the Commission 

needs to supplement the factual 

record.180 Commenters also rely on 

Chamber of Commerce of U.S. v. SEC181

and the case’s emphasis on 

consideration of alternatives.182

Specifically, commenters note that the 

Delegated Order fails to mention 

multiple alternative capital raising plans 

that commenters proposed, including 

the CBOE proposal.183

Additionally, commenters question 

whether OCC’s Board approval process 

operated in a manner consistent with 

the public interest and seeks additional 

evidence about that approval process.184

Commenters also argue that OCC will 

effectively achieve its Target Capital 

Requirement within six months without 

implementing the Capital Plan.185 Due 

to an alleged lack of data and supposed 

‘‘opacity in the record concerning OCC’s 

current and projected capital levels,’’ 

commenters assert that discovery and an 

evidentiary hearing are necessary and 

that the replenishment capital 

calculation needs to be supported 

factually.186

OCC responds to these comments by 

noting that the commenters fail to meet 

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187See OCC’s Brief in Opposition to Motion for 

Referral to Hearing Officer and Discovery (October 

15, 2015) (‘‘OCC Evidentiary Hearing Opposition’’). 

188See id. 

189See id. 

190See id (citing 17 CFR 201.452). 

191See OCC Letter II and OCC Support Statement. 

192 17 CFR 201.451 (stating that the Commission 

‘‘on its own motion or the motion of a party or any 

other aggrieved person entitled to Commission 

review, may order oral argument with respect to 

any matter . . . [t]he Commission will consider 

appeals, motions and other matters properly before 

it on the basis of the papers filed by the parties 

without oral arguments unless the Commission 

determines that the presentation of the facts and the 

legal arguments in the briefs and record and 

decisional process would be significantly aided by 

oral argument’’). 

193See Motion for Oral Argument in Connection 

with the Commission’s Review of the Staff’s Order 

Approving OCC’s Capital Plan (October 7, 2015) 

(‘‘Oral Argument Motion’’); Memorandum in 

Support of Motion for Oral Argument in Connection 

with the Commission’s Review of the Staff’s Order 

Approving OCC’s Capital Plan (October 7, 2015) 

(‘‘Oral Argument Memo in Support’’); see also 

Reply Memorandum in Further Support of Motion 

for Oral Argument in Connection with the 

Commission’s Review of the Staff’s Order 

Approving OCC’s Capital Plan (October 21, 2015) 

(‘‘Oral Argument Reply Memo’’). 

194See Oral Argument Memo in Support. 

195See Motion for an Order (1) Referring This 

Matter to a Hearing Officer for the Taking of 

Additional Evidence, and (2) Directing Discovery in 

Advance of the Hearing (October 7, 2015); see also 

Memorandum in Support of Motion for an Order (1) 

Referring This Matter to a Hearing Officer for the 

Taking of Additional Evidence, and (2) Directing 

Discovery in Advance of the Hearing (October 7, 

2015). 

196See Oral Argument Memo in Support. 

197See Oral Argument Memo in Further Support. 

198See Oral Argument Memo in Further Support. 

199See Oral Argument Reply Memo (noting that 

oral argument would allow a fuller explanation of 

the Capital Plan’s issues necessary to satisfy the 

APA’s requirement for ‘‘reasoned decisionmaking’’). 

200See Oral Argument Reply Memo (suggesting 

that OCC’s recent submission of an affidavit by its 

Executive Chairman reflects information that was 

not previously discussed, and therefore, 

unaddressed by commenters). 

201See OCC Oral Argument Opposition Brief 

(October 15, 2015) (‘‘OCC Oral Argument 

Opposition’’) (citing In the Matter of D.E. Wine Inv., 

Inc., et al., File No. 3–8535, Exchange Act Release 

No. 43929 (Feb. 6, 2001); and In the Matter of the 

Application of Cleantech Innovations, Inc., File No. 

3–14640, Exchange Act Release No. 69968, at 17 

n.67 (July 11, 2013)). 

202See OCC Oral Argument Opposition. 

203See OCC Oral Argument Opposition. 

the Rule 452 standards; specifically: (i) 

That the motion fails to identify any 

material evidence with particularity, 

and (ii) that the motion fails to provide 

a reasonable basis to explain the 

commenters’ failure to obtain the 

requested information earlier.187

OCC states that, instead of identifying 

material evidence with particularity, 

commenters provided a sweeping list of 

discovery requests without an attempt 

to articulate why this information is 

material.188 Specifically, OCC notes that 

the motion raises three types of 

inquiries, each of which fails to meet 

the Rule 452 materiality standard: (i) 

Inquiries into alternatives; (ii) inquiries 

into the Board’s process for approval of 

the Capital Plan; and (iii) inquiries into 

OCC’s Target Capital Requirements.189

OCC further notes that Rule 452 requires 

a motion for leave to adduce additional 

evidence to ‘‘show with particularity 

that such additional evidence is 

material and that there were reasonable 

grounds for failure to adduce such 

evidence previously.’’190

The Commission has determined that 

the information the Evidentiary Motion 

seeks to discover is not material to its 

review of the Capital Plan for purposes 

of determining whether the Capital Plan 

is consistent with the Exchange Act. 

The Evidentiary Motion requests 

information regarding: (i) Whether OCC 

considered less expensive alternatives 

to the Capital Plan; (ii) whether OCC’s 

Board approval process was designed to 

serve the Stockholder Exchanges rather 

than the public interest; and (iii) 

whether OCC will achieve its Target 

Capital Requirement within six months 

without the Capital Plan’s 

implementation. As discussed above, 

the existence of alternatives to the 

Capital Plan does not render the Capital 

Plan inconsistent with the Exchange 

Act, and the record fully establishes that 

OCC considered other alternatives to the 

Capital Plan. Additionally, the record 

indicates that OCC engaged in the 

required process to approve the Capital 

Plan, and questions regarding whether 

that process complied with relevant 

corporate governance principles are not 

appropriately addressed by the 

Commission in the context of reviewing 

this rule filing. Finally, the Commission 

notes that whether OCC would 

accumulate sufficient capital to reach 

the Target Capital Requirement was 

unknown at the time OCC proposed the 

Capital Plan and commenters’ after-thefact assertions about OCC capital levels 

include capital contributions made 

pursuant to the Capital Plan. The record 

also shows that the Capital Plan 

provides for the immediate infusion of 

capital and a commitment to provide 

Replenishment Capital, which OCC 

states could not be achieved in the same 

manner by other means.191

The Commission has evaluated the 

record and, for reasons discussed above, 

finds that the Capital Plan is consistent 

with the Exchange Act requirements, 

and rules and regulations thereunder, 

applicable to OCC, and the Commission 

finds that the introduction of additional 

information is not necessary. 

Consequently, under Rule 452, the 

Commission denies the Evidentiary 

Motion. 

C. Oral Argument Motion 

Rule 451 192 of the Commission’s 

Rules of Practice provides that the 

Commission may order oral argument if 

the Commission determines that the 

presentation of the facts and the legal 

arguments in the briefs and record and 

decisional process would be 

significantly aided by oral argument. 

A commenter states that an oral 

argument is proper under Rule 451.193

Specifically, the commenter contends 

that an oral argument would allow the 

Commission to resolve the factual 

disputes regarding: (i) OCC’s proposed 

capital target assumptions; (ii) OCC’s 

actual financial condition; (iii) OCC’s 

Board approval process; and (iv) the 

availability of alternative plans.194 The 

commenter argues that, even if the 

Commission denies the other discovery 

motion,195 an oral argument would still 

allow the Commission to address 

multiple factual issues that remain in 

dispute in the current record.196

The commenter further argues that 

OCC has failed to show the negative 

impact of an oral argument.197

Specifically, the commenter states that 

OCC does not identify any harm that 

could result from any delay associated 

with the scheduling of an oral 

argument.198 The commenter also notes 

that oral argument would allow the 

Commission to satisfy concerns under 

the APA.199 Finally, the commenter 

states that OCC’s recent submissions 

reflect the need to supplement an 

evolving record.200

OCC responds that the commenter’s 

motion does not satisfy the 

requirements of Rule 451, stating that 

the Commission has routinely denied 

oral argument when the issues raised 

can be determined by the record and 

papers filed by the parties.201 OCC also 

notes that the motion does not 

demonstrate any facts or legal standards 

that the Commission cannot consider 

adequately on the written 

submissions.202 Further, OCC argues 

that the Commission should deny the 

motion for oral argument because: (i) 

Commenters already had multiple 

opportunities to submit arguments and 

information; and (ii) oral argument 

would unduly delay resolution of the 

Commission’s review.203

Pursuant to the Rules of Practice, the 

Commission considers matters properly 

before it on the basis of the papers filed 

by the parties without oral argument 

unless it determines that the 

presentation of facts and legal 

arguments in the briefs and record and 

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204See 17 CFR 201.451. 

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

2 17 CFR 240.19b–4. 

3References to rules are to Phlx rules unless 

otherwise noted. 

4See, e.g., Securities Exchange Act Release No. 

37019 (August 17, 1982), 47 FR 37019 (August 24, 

1982) (SR–Phlx–81–1) (approval order). 

5Electronic traders include market makers that 

are streaming quote traders (‘‘SQTs’’), remote 

streaming quote traders (‘‘RSQTs’’), and off-floor 

specialists (‘‘Remote Specialists’’). See Rules 

1014(b)(ii)(A), 1014(b)(ii)(B), and 1020. 

6Remote Specialists do not have a physical 

presence on the floor of the Exchange. Rule 1020. 

7While the vast majority of options rules are 

found in Rule 1000 and higher of the Exchange’s 

rule book, some older options-related rules, such as 

Rules 505 and 506, are in the Exchange’s rule book 

below Rule 1000. 

8 ‘‘Leasing’’ is the now-obsolete practice or one 

specialist leasing, or renting, an allocated issue to 

another specialist. 

the decisional process would be 

significantly aided by oral argument.204

The Commission notes the record is 

extensive, and contains significant 

amounts of data and information related 

to the Capital Plan. As a result, the 

Commission does not believe that either 

the presentation of facts and legal 

arguments in the briefs and record or 

the decisional process would be 

significantly aided by oral argument. 

Accordingly, the Commission denies the 

Oral Argument Motion. 

V. Conclusion 

It is therefore ordered that the earlier 

action taken by delegated authority, 

Securities Exchange Act Release No. 

74452 (March 6, 2015), 80 FR 13058 

(March 12, 2015) is set aside and 

pursuant to section 19(b)(2) of the 

Exchange Act SR–OCC–2015–02 is 

approved. All pending motions in this 

matter are hereby denied. 

For the reasons stated above, it is 

hereby: 

Ordered that the earlier action taken 

by delegated authority, Securities 

Exchange Act Release No. 74452 (March 

6, 2015), 80 FR 13058 (March 12, 2015) 

is hereby set aside; and 

It is further ordered that SR–OCC– 

2015–02 is hereby approved pursuant to 

section 19(b)(2) of the Exchange Act; 

and 

It is further ordered that the Motion to 

Reinstitute Automatic Stay is denied as 

moot; and 

It is further ordered that the Motion to 

Expedite the Commission’s Ruling on 

the Pending Motion to Reinstitute the 

Automatic Stay is denied as moot; and 

It is further ordered that the Motion 

for an Order (1) Referring this Matter to 

a Hearing Officer for the Taking of 

Additional Evidence, And (2) Directing 

Discovery in Advance of the Hearing is 

denied; and 

It is further ordered that the Motion 

for Oral Argument in Connection with 

the Commission’s Review of the Staff’s 

Order Approving OCC’s Capital Plan 

and Supporting Brief is denied. 

By the Commission. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2016–03265 Filed 2–17–16; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–77121; File No. SR–Phlx– 

2016–22] 

Self-Regulatory Organizations; 

NASDAQ PHLX LLC; Notice of Filing 

and Immediate Effectiveness of 

Proposed Rule Change Regarding Rule 

505 and Rule 506 

February 11, 2016. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 2 thereunder, 

notice is hereby given that on February 

5, 2016, NASDAQ PHLX LLC (‘‘Phlx’’ or 

‘‘Exchange’’) 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 by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

The Exchange is filing with the 

Commission a proposal to delete Rule 

505 (Allocation, Reallocation and 

Transfer of Issues) and update Rule 506 

(Allocation Application).3

The text of the proposed rule change 

is available on the Exchange’s Web site 

at http://nasdaqomxphlx.

cchwallstreet.com, at the principal 

office of the Exchange, and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange 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. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to update its 

rules to delete Rule 505 (Allocation, 

Reallocation and Transfer of Issues) and 

update Rule 506 (Allocation 

Application). 

Rules 505 and 506 were approved 

more than three decades ago,4 at which 

time Exchange options trading was 

strictly on-floor open outcry through 

specialists. Exchange options trading 

developed into a robust hybrid system 

that is currently largely electronic and 

off-floor 5 but continues to have on-floor 

specialists 6 and open outcry trading. 

The Exchange is now consolidating its 

Rules 505 and 506.7 Having found that 

some of the concepts in Rule 505 are 

obsolete and that others belong in Rule 

506, the Exchange is deleting Rule 505. 

Simultaneously, the Exchange is 

updating Rule 506 to make it more 

easily readable and to transfer certain 

concepts from Rule 505 to Rule 506. 

These changes are described below. 

Deletion of Rule 505 

The Exchange has concluded that 

with the placement of certain concepts 

from Rule 505 into Rule 506, Rule 505 

is no longer needed. The Exchange 

believes that it is desirable to discuss 

the process of allocation or reallocation 

application, allocation, reallocation, and 

transfer in one rule, namely Rule 506. 

Moreover, ‘‘leasing’’ is not practiced on 

the Exchange and obsolete language in 

Rule 505 in respect of leasing is no 

longer needed.8 The Exchange proposes 

to therefore delete Rule 505, and to 

update and clarify Rule 506 to be more 

descriptive and to add several concepts 

from deleted Rule 505. 

Updating of Rule 506 

First, Rule 506 is updated to make it 

clear to the reader that the rule applies 

to the process of allocation application 

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