Document ID: SEC-2018-1363-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2018-08-29T04:00Z

[Federal Register Volume 83, Number 168 (Wednesday, August 29, 2018)]
[Notices]
[Pages 44109-44114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18656]

[[Page 44109]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83928; File No. SR-OCC-2017-810]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice, as Modified by Partial 
Amendment No. 3, Concerning Updates to and Formalization of OCC's 
Recovery and Orderly Wind-Down Plan

August 23, 2018.

I. Introduction

    On December 8, 2017, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2017-810 (``Advance Notice'') pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled Payment, Clearing and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') \3\ to formalize and update its Recovery and Orderly 
Wind-Down Plan (``RWD Plan''). The Advance Notice was published for 
public comment in the Federal Register on January 23, 2018.\4\ On 
January 23, 2018, the Commission requested that OCC provide it with 
additional information regarding the Advance Notice.\5\ OCC responded 
to the request, and the Commission received the information on July 13, 
2018.\6\
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ See Exchange Act Release No. 82514 (January 17, 2018), 83 FR 
3224 (January 23, 2018) (SR-OCC-2017-810) (hereinafter referred to 
as the ``Notice of Filing''). On December 18, 2017, OCC also filed a 
related proposed rule change (SR-OCC-2017-020) with the Commission 
pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b-4 
thereunder, seeking approval of changes to its rules necessary to 
implement the Advance Notice (``Proposed Rule Change''). 15 U.S.C. 
78s(b)(1) and 17 CFR 240.19b-4, respectively. The Proposed Rule 
Change was published in the Federal Register on December 26, 2017. 
Exchange Act Release No. 82352 (Dec. 19, 2017), 82 FR 61072 (Dec. 
26, 2017) (SR-OCC-2017-021).
    \5\ See Memorandum from Office of Clearance and Settlement, 
Division of Trading and Markets, dated January 23, 2018, available 
at https://www.sec.gov/rules/sro/occ-an/2018/34-83305.pdf.
    \6\ See Memorandum from Office of Clearance and Settlement, 
Division of Trading and Markets, dated July 17, 2018, available at 
https://www.sec.gov/comments/sr-occ-2017-810/occ2017810-4062513-169149.pdf.
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    On July 11, 2018, OCC filed Partial Amendment No. 1 to the Advance 
Notice.\7\ On July 12, 2018, OCC filed Partial Amendment No. 2 and 
Partial Amendment No. 3 to the Advance Notice.\8\ Notice of the 
Amendments to the Advance Notice was published for public comment in 
the Federal Register on August 7, 2018,\9\ and the Commission has 
received no comments in response.
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    \7\ In Amendment No. 1, OCC made three modifications to the 
Notice of Filing: (1) Removal of sections of the RWD Plan concerning 
OCC's proposed authority to require cash settlement of certain 
physically delivered options and single stock futures; (2) updating 
the list of OCC's Critical Support Functions; and (3) making three 
changes to the RWD Plan to conform to a change contemporaneously 
proposed in Amendment No. 2 to OCC filing SR-OCC-2017-809 concerning 
enhanced and new tools for recovery scenarios.
    \8\ Partial Amendment No. 2 superseded and replaced Partial 
Amendment No. 1 in its entirety, due to technical defects in Partial 
Amendment No. 1. Partial Amendment No. 3 then superseded and 
replaced Partial Amendment No. 1 in its entirety, due to technical 
defects in Partial Amendment No. 2.
    \9\ See Exchange Act Release No. 83762 (Aug. 1, 2018), 83 FR 
38750 (Aug. 7, 2018) (``Notice of Amendment'').
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    This publication serves as notice that the Commission does not 
object to the changes set forth in the Advance Notice, as amended by 
Partial Amendment No. 3 (``Amended Advance Notice'').

II. Background \10\
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    \10\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    OCC's proposal would formalize and update its RWD Plan. The purpose 
of the RWD Plan is to: (i) Demonstrate that OCC has considered the 
scenarios which may potentially prevent it from being able to provide 
the services OCC determined to be critical as a going-concern; (ii) 
provide appropriate plans for OCC's recovery or orderly wind-down based 
on the results of such consideration; and (iii) impart to relevant 
authorities the information reasonably anticipated to be necessary for 
purposes of recovery and orderly wind-down planning.
    The RWD Plan would identify the services provided by OCC that OCC 
has determined to be critical, and it would set forth five qualitative 
events that could trigger a recovery scenario and six qualitative 
events that could trigger an orderly wind-down. It would also address 
six scenarios that describe OCC's possible responses to series of 
stresses. The RWD Plan would also include an overview designed to 
provide information that OCC believes would be essential to relevant 
authorities for purposes of recovery and orderly wind-down planning, as 
well as to provide readers of the Plan with necessary context for 
subsequent discussion and analysis. The overview would also include a 
detailed description of OCC's business, summarizing the role OCC has in 
the options market as well as the services and products it provides to 
its clearing members and market participants. The RWD Plan would 
identify fourteen internal support functions at OCC and provide a brief 
description of the activities performed by each support function. 
Similar to the information regarding OCC's business, this information 
is designed to inform the relevant authorities for orderly wind-down 
planning and as necessary context for understanding other elements of 
the RWD Plan.

A. Designating Critical Services and Critical Support Functions

    The RWD Plan would define the terms ``Critical Services'' and 
``Critical Support Functions.'' Specifically, a Critical Service would 
be a service provided by OCC that, if interrupted, would likely have a 
material negative impact on participants or significant third parties, 
give rise to contagion, or undermine the general confidence of markets 
that OCC serves. A Critical Support Function would be a function within 
OCC that must continue in some capacity for OCC to be able to continue 
providing its Critical Services.
    The RWD Plan would describe the framework that OCC uses to 
determine whether a service is critical. This framework includes four 
criteria to determine if failure or discontinuation of a particular 
service would impact financial and operational capabilities of OCC's 
clearing members, other FMUs, or the broader financial system: (1) 
Market dominance, (2) substitutability, (3) interconnectedness, and (4) 
barriers to entry. The current set of services designated as Critical 
Services under the RWD Plan is based on the analysis of these 
measureable indicators and subsequent internal discussion at OCC. The 
Critical Services currently include, but are not limited to, clearance 
services for listed options and clearance services for futures.

B. Recovery Plan

    The RWD Plan would include plans for recovery from scenarios that 
could prevent OCC from providing Critical Services.\11\ After 
discussing particular

[[Page 44110]]

scenarios, the RWD Plan identifies the tools that OCC could use as 
warranted in such scenarios. These tools fall into two categories: (1) 
Enhanced Risk Management Tools, and (2) Recovery Tools. An Enhanced 
Risk Management Tool is a tool that is designed to supplement OCC's 
existing processes and other existing tools in scenarios where OCC 
faces heightened stresses, while a Recovery Tool is a tool that is 
generally limited to a scenario in which a specific trigger has 
occurred. In its RWD Plan, OCC would define a set of five such 
qualitative trigger events (``Recovery Trigger Events'').
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    \11\ For the purposes of the RWD Plan, OCC defines ``recovery'' 
as ``the actions of [a financial market utility], consistent with 
its rules, procedures, and other ex-ante contractual arrangements, 
to address any uncovered credit loss, liquidity shortfall, capital 
inadequacy, or business, operational or other structural weakness, 
including the replenishment of any depleted pre-funded financial 
resources and liquidity arrangements, as necessary to maintain the 
[financial market utility's] viability as a going concern.''
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    The sequence and timing of the deployment of each Recovery Tool is 
more structured and lacks the flexibility inherent in the sequence and 
timing for use of the Enhanced Risk Management Tools. For each tool, 
the RWD Plan provides an overview of the tool, and, as appropriate, a 
discussion of its implementation with an estimated time frame for use 
of the tool, key risks associated with use of the tool, and the 
expected impact and incentives of using the tool.
1. Enhanced Risk Management Tools
    OCC stated that the Enhanced Risk Management Tools would be used 
prophylactically in an effort to prevent the occurrence of a Recovery 
Trigger Event and would not be limited to recovery. OCC would not 
anticipate applying a rigid order or timing for the deployment of the 
Enhanced Risk Management Tools. The RWD Plan would include five 
Enhanced Risk Management Tools: (1) Use of Current/Retained Earnings; 
(2) Minimum Clearing Fund Cash Contribution; (3) Borrowing Against 
Clearing Fund; (4) Credit Facility; and (5) Non-Bank Facility.
    Use of Current/Retained Earnings. Under its By-Laws, OCC may use 
current and/or retained earnings to discharge a loss that would be 
chargeable against the Clearing Fund, but would require unanimous 
consent from the holders of OCC's Class A and Class B common stock. The 
RWD Plan acknowledges that the utility of this tool is limited by the 
requirement for shareholder consent and that OCC's retained earnings 
presently amount to a small fraction of OCC's existing prefunded 
Clearing Fund resources. OCC stated that, given this amount, the 
maximum utility of this tool may be realized in specific circumstances 
at either the beginning of OCC's loss waterfall or toward the end of 
OCC's loss waterfall, where it would be sufficient to fully extinguish 
liabilities without triggering the use of another tool.
    Minimum Clearing Fund Cash Contribution. Under its current rules, 
OCC Clearing Members collectively contribute $3 billion in cash to 
OCC's Clearing Fund.\12\ In addition, OCC may, in certain limited 
circumstances, increase the minimum cash requirement up to the then-
minimum size of the Clearing Fund.\13\ The RWD Plan would acknowledge 
that increasing the minimum cash requirement would require preparation 
of OCC documentation that considers the projected liquidity demands for 
successful management of a defaulted Clearing Member.
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    \12\ See OCC By-Laws, Art. VIII, Section 3(a)(i). The Commission 
recently approved a proposal by OCC that, after implementation, 
would move this section of the OCC By-Laws to OCC Rule 1002(a)(i). 
See Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 37855, 
37859 (Aug. 2, 2018) (SR-OCC-2018-008) (``Order Approving Proposed 
Rule Change, as Modified by Amendments No. 1 and 2, Related to OCC's 
Stress Testing and Clearing Fund Methodology'').
    \13\ See OCC By-Laws, Art. VIII, Section 3(a)(i).
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    Borrowing Against Clearing Fund. OCC has the authority to borrow 
against the Clearing Fund in three circumstances: (1) To meet 
obligations arising out of the default or suspension of a Clearing 
Member or any action taken by OCC under Chapter XI of its rules 
pertaining to the suspension of a clearing member; (2) to borrow or 
otherwise obtain funds from third parties in lieu of immediately 
charging the Clearing Fund for a loss that is reimbursable out of the 
Clearing Fund; and (3) to meet liquidity needs for same-day settlement 
as a result of the failure of any bank or securities or commodities 
clearing organization to achieve daily settlement.\14\ The RWD Plan 
would acknowledge that any borrowing would require preparation of OCC 
documentation in accordance with OCC procedures. Further, the RWD Plan 
would recognize that the availability of this tool in advance of a 
heightened stress scenario would be unknown because OCC's primary 
liquidity facilities could already be fully or partially utilized.
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    \14\ See OCC By-Laws, Art. VIII, Section 5(e). The Commission 
recently approved a proposal by OCC that, after implementation, 
would move this section of the OCC By-Laws to OCC Rule 1006(f). See 
Order Approving Proposed Rule Change Related to OCC Stress Testing 
and Clearing Fund Methodology, supra note 12, 83 FR at 37859.
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    Credit Facility and Non-Bank Liquidity Facility. OCC maintains a $2 
billion dollar senior secured 364-day revolving credit facility with a 
syndicate of lenders for the purpose of providing OCC with liquidity to 
meet settlement obligations as a central counterparty. The RWD Plan 
would recognize that an inherent risk of the credit facility is that a 
portion of the syndicate may not provide funds in timely response to 
OCC's request. OCC also maintains a $1 billion dollar secured non-bank 
liquidity facility for the purpose of providing OCC with a non-bank 
liquidity resource to meet settlement obligations as a central 
counterparty. Similar to the risk associated with the credit facility, 
the RWD Plan would recognize the risk that OCC's counterparty may not 
timely execute the transaction under the non-bank liquidity facility.
2. Recovery Tools
    Under the RWD Plan, Recovery Tools would be different from Enhanced 
Risk Management Tools because OCC's use of a Recovery Tool is generally 
limited to a scenario in which a Recovery Trigger has occurred. The RWD 
Plan would identify five Recovery Tools, the last four of which would 
generally be deployed in the order they are described here: (1) 
Replenishment Capital; (2) Assessment Powers; (3) Voluntary Payments; 
(4) Voluntary Tear-Up; and (5) Partial Tear-Up.\15\ As noted above, the 
sequence and timing of deployment of the Recovery Tools would be more 
structured than the sequence and timing of the use of Enhanced Risk 
Management Tools.
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    \15\ For a more detailed description of the Recovery Tools 
numbered (2) through (5) here, please see Exchange Act Release No. 
83927 (Aug. 23, 2018).
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    Replenishment Capital. OCC holds capital contributed by its 
stockholder exchanges who have committed to replenish OCC's capital if 
it falls below a certain threshold.\16\ The RWD Plan would include the 
replenishment of capital by OCC's stockholder exchanges as a recovery 
tool.
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    \16\ The requirement to replenish OCC's capital was adopted as 
part of OCC's plan to raise and maintain capital at a specified 
level (``Capital Plan''). See Exchange Act Release No. 77112 
(February 11, 2016), 81 FR 8294 (February 18, 2016) (SR-OCC-2015-
02). The Capital Plan was later subject to judicial review by the 
U.S. Court of Appeals for the District of Columbia Circuit, which 
remanded for the Commission to further analyze whether the Capital 
Plan is consistent with the Exchange Act. Susquehanna Int'l Grp., 
LLP v. SEC, 866 F.3d 442 (D.C. Cir. 2017). The Commission's review 
of the Capital Plan on remand is ongoing, and the Capital Plan 
remains in effect during this ongoing review.
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    Assessment Powers. Under OCC's rules, OCC has authority to assess a 
non-defaulting Clearing Member during any cooling-off period for an 
amount equal to 200 percent of the Clearing Member's then-required 
contribution to the Clearing Fund.\17\ Following the end of

[[Page 44111]]

the cooling-off period, each remaining Clearing Member must replenish 
the Clearing Fund in the amount necessary to meet its then-required 
contribution.\18\ The RWD Plan would recognize the risk that the use of 
assessment powers may incentivize Clearing Members to withdraw from 
membership in OCC to avoid replenishment, and that such withdrawals 
would limit the resources available to OCC for future assessments.
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    \17\ The cooling-off period is the period following a 
proportionate charge assessed by OCC against the Clearing Members' 
Clearing Fund contributions. It is a minimum of fifteen days, but 
could extend to as much as twenty days from the date of the 
proportionate charge based on intervening events.
    \18\ A Clearing Member may avoid liability for replenishment by 
terminating its membership in OCC prior to the end of the cooling-
off period.
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    Voluntary Payments. OCC's rules provide a framework by which OCC 
can receive voluntary payments in response to a Clearing Member 
default. Use of this tool is permissible only where OCC has determined 
that it may not have sufficient resources to satisfy its obligations 
and liabilities arising out of the default. The RWD Plan would describe 
the processes involved in calling for and receiving voluntary payments, 
including the issuance of a notice to Clearing Members. The RWD Plan 
would recognize the risk that Clearing Members would be unwilling or 
unable to make voluntary payments. As an incentive for Clearing Members 
to provide voluntary payments, a non-defaulting Clearing Member who 
made a voluntary payment would receive priority in reimbursement from 
amounts recovered by OCC from the estate of a defaulting Clearing 
Member.
    Voluntary Tear-up. OCC's rules provide a framework by which non-
defaulting Clearing Members and customers could be permitted to 
voluntarily extinguish (i.e., voluntarily tear-up) open positions in 
response to a Clearing Member default. Voluntary Tear-up is permissible 
only where OCC has determined that it may not have sufficient resources 
to satisfy its obligations and liabilities arising out of the default. 
The RWD Plan would contemplate that OCC would initiate any tear-up 
process after the market close on the day that OCC determines it may 
have insufficient resources. The RWD Plan would further anticipate that 
OCC would publish notice of tear-up no later than the following morning 
(prior to the market open), and that positions would be extinguished 
following the market close. The RWD Plan would also recognize the risk 
that Clearing Members would be unwilling or unable to participate in 
the voluntary tear-up process. A non-defaulting Clearing Member that 
faced losses, costs, or expenses in reestablishing voluntarily torn-up 
positions could receive compensation from amounts recovered by OCC from 
the estate of a defaulting Clearing Member ahead of other Clearing 
Members that faced such losses, costs, or expenses after reestablishing 
torn up positions.
    Partial Tear-up. OCC's rules provide a framework by which OCC could 
extinguish the remaining open positions of a defaulted Clearing Member 
or its customers (i.e., Partial Tear-up) in response to a Clearing 
Member default. The RWD Plan would anticipate that the Partial Tear-up 
process would be intertwined with the Voluntary Tear-up process 
described above. The RWD Plan also would contemplate the compensation 
of Clearing Members facing losses, costs, or expenses after 
reestablishing torn up positions from Clearing Fund contributions.
    The RWD Plan also would provide a mapping of Enhanced Risk 
Management Tools and Recovery Tools to different types of risk 
exposures. Such risk exposures include: (1) Uncovered credit losses; 
(2) liquidity shortfalls; (3) replenishment of financial resource; (4) 
losses related to business, operational, or other structural 
weaknesses; and (5) re-establishment of a matched book. The RWD Plan 
discusses how each tool would apply to these risk categories and would 
reference the stress scenarios contemplated by the RWD Plan.
    The RWD Plan would outline an escalation process for the occurrence 
of each Recovery Trigger.\19\ Under the RWD Plan, OCC's Enterprise Risk 
Management and Financial Risk Management groups would be responsible 
for recommending which, if any, of the tools described above should be 
used in a given situation. Further, OCC's Chief Executive Officer and 
Executive Chairman would be responsible for approval of such 
recommendations, and OCC's Chief Risk Officer and Management Committee 
would be responsible for overseeing deployment of such tools. Finally, 
OCC's Board and the Risk Committee of the Board would be responsible 
for generally overseeing OCC's recovery efforts.
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    \19\ The RWD Plan also would discuss notification of regulators, 
including the Commission, the U.S. Commodity Futures Trading 
Commission, and the Federal Deposit Insurance Corporation, in 
response to the occurrence of a Recovery Trigger.
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C. Orderly Wind-Down Plan

    The RWD Plan would also include OCC's wind-down plan and include 
scenarios that could prevent OCC from being able to provide Critical 
Services as a going-concern. OCC would identify its wind-down objective 
as the pursuit of financial stability and ensuring the continuity of 
critical functions. The RWD Plan would provide OCC's assumptions 
concerning the wind-down process regarding: (1) Duration of wind-down; 
(2) cost of wind-down; (3) OCC's capitalization; and (4) the 
maintenance of Critical Services and Critical Support Functions. It 
also would identify six wind-down triggers (``WDP Trigger Events''), 
the occurrence of which could jeopardize the viability of OCC's 
recovery. Under the RWD Plan, the occurrence of a WDP Trigger Event 
would necessitate notification of regulators, including the Commission, 
the U.S. Commodity Futures Trading Commission, and the Federal Deposit 
Insurance Corporation, as well as internal notifications to OCC senior 
management.
    The RWD Plan would reference critical interconnections and key 
agreements for consideration in the context of wind-down. The RWD Plan 
also would discuss OCC's key actions in wind-down including the: (1) 
Decision by OCC's Board to initiate wind-down; (2) institution of 
heightened clearing member requirements; (3) imposition of heightened 
capital requirements for clearing members; (4) imposition of increased 
margin requirements; (5) cessation of investment by OCC; (6) 
institution of new operational practices; and (7) targeted reductions 
in force.
    The RWD Plan also would identify transactions that could be entered 
into to accomplish OCC's wind-down objectives: (1) Stock transactions; 
(2) merger transactions; and (3) asset transactions. The RWD Plan 
focuses discussion of wind-down transactions on issues including, but 
not limited to, governance and regulatory issues. The goal of any such 
transaction would be to transfer ownership of OCC in a manner that 
ensures the continuation of OCC's critical services; however, the RWD 
Plan also would contemplate the cessation of Critical Services through 
OCC's existing close-out netting rules.\20\
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    \20\ See also OCC By-Laws, Art. VI, Section 27.
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D. Governance

    The RWD Plan would also memorialize the governance processes for 
maintenance, review, and approval of the RWD Plan. Under the RWD Plan, 
all changes would originate in a recommendation from OCC's RWD Working 
Group. Changes would go through a series of consecutive rounds of 
review and approval by OCC's Management Committee, the Risk Committee 
of OCC's Board of Directors, and the full Board of Directors, which 
would have final approval authority.

[[Page 44112]]

III. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: To mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for systemically 
important financial market utilities (``SIFMUs'') and strengthening the 
liquidity of SIFMUs.\21\
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    \21\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \22\ authorizes 
the Commission to prescribe regulations containing risk-management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency. Section 805(b) of the 
Clearing Supervision Act \23\ provides the following objectives and 
principles for the Commission's risk-management standards prescribed 
under Section 805(a):
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    \22\ 12 U.S.C. 5464(a)(2).
    \23\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and 
default policies and procedures, among others areas.\24\
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    \24\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\25\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk-management practices on an 
ongoing basis.\26\ As such, it is appropriate for the Commission to 
review advance notices against the objectives and principles of these 
risk management standards as described in Section 805(b) of the 
Clearing Supervision Act and the Clearing Agency Rules.\27\ As 
discussed below, the Commission believes the proposal in the Amended 
Advance Notice is consistent with the objectives and principles 
described in Section 805(b) of the Clearing Supervision Act,\28\ and in 
the Clearing Agency Rules, in particular Rules 17Ad-22(e)(2)(i), (iii), 
and (v), 17Ad-22(e)(3)(ii), and 17Ad-22(e)(15)(i) under the Exchange 
Act.\29\
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    \25\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing 
Agency Standards''). The Commission established an effective date of 
December 12, 2016, and a compliance date of April 11, 2017, for the 
Covered Clearing Agency Standards. OCC is a ``covered clearing 
agency'' as defined in Rule 17Ad-22(a)(5).
    \26\ 17 CFR 240.17Ad-22.
    \27\ 12 U.S.C. 5464(b) and 17 CFR 240.17Ad-22.
    \28\ 12 U.S.C. 5464(b).
    \29\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v); (e)(3)(ii); 
(e)(15)(i).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposal contained in OCC's 
Amended Advance Notice is consistent with the stated objectives and 
principles of Section 805(b) of the Clearing Supervision Act. 
Specifically, as discussed below, the Commission believes that the 
changes proposed in the Amended Advance Notice are consistent with 
promoting robust risk management, promoting safety and soundness, 
reducing system risks, and supporting the stability of the broader 
financial system.\30\
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    \30\ 12 U.S.C. 5464(b).
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    First, the Commission believes that the proposed changes are 
consistent with reducing systemic risks and supporting the stability of 
the broader financial system. OCC is the sole registered clearing 
agency for the U.S. listed options markets and a SIFMU. By specifying 
the steps that OCC would take in either a recovery or an orderly wind-
down, the Commission believes that the proposed changes would enhance 
OCC's ability to address circumstances specific to an extreme stress 
event, thereby increasing the likelihood that it could execute a 
successful recovery or orderly wind-down in such an event. As such, the 
Commission believes that the RWD Plan would help reduce systemic risk 
by decreasing the likelihood of a disorderly or unsuccessful recovery 
or wind-down, which could otherwise disrupt the markets for which OCC 
clears, thereby leading to the transmission of risk across market 
participants. For the same reason, the Commission also believes the RWD 
Plan would support the stability of the broader financial system.
    Second, the RWD Plan would, as described above, specify the 
Enhanced Risk Management Tools and Recovery Tools available to OCC in 
recovery, as well as the governance framework applicable to the use of 
such tools. It would analyze the use of the Enhanced Risk Management 
Tools and Recovery Tools, the incentives created by such tools, and the 
risks associated with using such tools. The Commission believes that by 
specifying the tools that OCC would use to address, or preferably 
prevent, a recovery scenario, the RWD Plan would increase the 
likelihood that recovery would be orderly, efficient, and successful. 
By doing so, the Commission believes that the RWD Plan would enhance 
OCC's ability to maintain the continuity of its critical services 
(including clearance and settlement services) during, through, and 
following periods of extreme stress giving rise to the need for 
recovery, thereby promoting both robust risk management and safety and 
soundness in the clearance and settlement in the listed-options and 
futures markets.
    Similarly, the Commission believes that the RWD Plan would enhance 
OCC's ability to promote robust risk management and safety and 
soundness by establishing a plan to effectuate an orderly wind-down. 
The RWD Plan's governance processes and regulatory notice provisions 
could facilitate either the orderly transfer of OCC's Critical Services 
to another entity or the orderly close-out of positions. Providing 
additional information regarding the potential orderly transfer of 
services or close-out of positions would benefit Clearing Members and 
their customers by providing greater transparency and certainty 
regarding the potential disposition or treatment of their positions and 
assets at OCC, thereby benefiting market participants more broadly. 
Therefore, the Commission believes that these provisions would enhance 
OCC's ability to promote robust risk management and safety and 
soundness in the clearance and settlement of the listed-options and 
futures markets by assuring that transactions are transferred to 
another entity or closed out in an orderly and transparent manner.
    Accordingly, and for the reasons stated, the Commission believes 
the changes proposed in the Amended Advance Notice are consistent with 
Section 805(b) of the Clearing Supervision Act.\31\
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    \31\ 12 U.S.C. 5464(b).
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B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the 
Exchange Act

    Rules 17Ad-22(e)(2)(i), (iii), and (v) require that OCC establish, 
implement,

[[Page 44113]]

maintain and enforce written policies and procedures reasonably 
designed to provide for governance arrangements that are clear and 
transparent, that support the public interest requirements in Section 
17A of the Exchange Act applicable to clearing agencies, and the 
objectives of owners and participants, and that specify clear and 
direct lines of responsibility.\32\
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    \32\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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    The RWD Plan would outline an escalation process for the occurrence 
of a Recovery Trigger Event, which would provide a governance framework 
for the use and functioning of the Enhanced Risk Management Tools and 
Recovery Tools in addition to those specified elsewhere in OCC's rules. 
It would also identify the internal notification requirements that 
would apply to WDP Trigger Events and establish the role of the Board 
in determining whether to enter into a wind-down or take other key 
actions, consistent with the governance specified elsewhere in OCC's 
rules.
    Moreover, the RWD Plan would identify the internal governance 
process for the approval of subsequent changes to OCC's RWD Plan. The 
RWD Plan would also specify the process OCC would take to receive input 
from various parties at OCC, including management and the Board.
    Taken together, the Commission believes that these lines of control 
could contribute to establishing, implementing, maintain and enforcing 
clear and transparent governance arrangements that support the public 
interest requirements in Section 17A of the Exchange Act applicable to 
clearing agencies, and the objectives of owners and participants.
    Therefore, the Commission believes that the proposed changes are 
consistent with Rules 17Ad-22(e)(2)(i), (iii), and (v).\33\
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    \33\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Exchange Act

    Rule 17Ad-22(e)(3)(ii) requires that OCC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by OCC, which includes plans for the recovery and orderly wind-
down of OCC necessitated by credit losses, liquidity shortfalls, losses 
from general business risk, or any other losses.\34\
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    \34\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The Commission believes that the information the RWD Plan would 
provide about the OCC's recovery tools would enhance OCC's ability to 
recover from credit losses, liquidity shortfalls, general business risk 
losses, or other losses, consistent with Rule 17Ad-22(e)(3)(ii).\35\ 
Specifically, the information from the RWD Plan would enable OCC to 
prepare in advance for the use of such tools, which would in turn 
enhance OCC's ability to use such tools effectively to carry out a 
successful recovery. In addition, by establishing a single source of 
information about, and steps needed to effectuate, a recovery of OCC, 
the RWD Plan would allow OCC personnel to effectuate a recovery in a 
consistent and coordinated fashion, and would thereby increase the 
likelihood of a successful recovery. Moreover, by identifying and 
assessing available Enhanced Risk Management Tools and Recovery Tools, 
the Commission believes that the RWD Plan would enhance OCC's ability 
to use such tools effectively to bring about a recovery by identifying 
in advance which tools may be most effective for different situations 
or needs, consistent with Rule 17Ad-22(e)(3)(ii).\36\
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    \35\ Id.
    \36\ Id.
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    Similarly, in providing detailed information about the assumptions, 
actions, and objectives related to triggering and implementing the 
wind-down portion of the RWD Plan, discussed in more detail above, the 
Commission believes that the RWD Plan would enhance OCC's ability to 
effectuate an orderly wind-down, consistent with Rule 17Ad-
22(e)(3)(ii).\37\ Specifically, by setting out in advance the potential 
events that could cause OCC to trigger, and transactions by which OCC 
would effectuate, a wind-down, the RWD Plan would enable OCC to prepare 
in advance for a wind-down, which the Commission believes would enhance 
OCC's ability to use the RWD Plan effectively to carry-out an orderly 
wind-down. In addition, by establishing a single source of information 
about, and steps needed to effectuate, a wind-down of OCC, the 
Commission believes the RWD Plan would allow OCC personnel to 
effectuate a wind-down in a consistent and coordinated fashion, and 
would thereby increase the likelihood of an orderly wind-down. Finally, 
the RWD Plan would identify the legal basis for OCC's actions with 
respect to a potential wind-down, including relevant citations to 
provisions of the rule books of its various clearing services and 
contractual agreements, which the Commission believes would further 
facilitate an orderly wind-down process by providing OCC with a single 
source of information and steps needed for a wind-down, consistent with 
Rule 17Ad-22(e)(3)(ii).\38\
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    \37\ Id.
    \38\ Id.
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    Therefore, the Commission believes that the proposed changes to 
adopt plans for the orderly recovery and wind down of OCC are 
consistent with Rule 17Ad-22(e)(3)(ii).\39\
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    \39\ Id.
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D. Consistency With Rules 17Ad-22(e)(15)(i) Under the Exchange Act

    Rule 17Ad-22(e)(15)(i) requires OCC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to identify, monitor, and manage its general business risk and 
hold sufficient liquid net assets funded by equity to cover potential 
general business losses so that OCC can continue operations and 
services as a going concern if those losses materialize, including by 
determining the amount of liquid net assets funded by equity based upon 
its general business risk profile and the length of time required to 
achieve a recovery or orderly wind-down, as appropriate, of its 
critical operations and services if such action is taken.\40\
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    \40\ 17 CFR 240.17Ad-22(e)(15)(i).
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    OCC's RWD Plan would estimate costs related to a wind-down based on 
a series of assumptions laid out in the RWD Plan. These assumptions 
include duration of the wind-down process, OCC's capitalization through 
the wind-down process, the maintenance of Critical Services and 
Critical Support Functions, and the retention of personnel and 
contractual relationships. OCC also provided information regarding its 
assumption about the cost of the wind-down process. Further, the RWD 
Plan identifies potential transactions that could be effected to 
accomplish the objectives of wind-down with the ultimate goal of 
transferring ownership of OCC itself by the consummation or a 
consensual sale or similar transaction, in a manner that ensures the 
continuation of OCC's Critical Services. The Commission considered the 
assumptions that the RWD Plan makes regarding wind-down as well as the 
potential transactions in which OCC might engage in the event of a 
wind-down. The Commission also considered the estimated cost of wind-
down noted in the RWD Plan in light of OCC's rules regarding the 
maintenance of certain capital levels and qualifying liquid resources. 
The Commission

[[Page 44114]]

believes that the RWD Plan, which indicates the cost at which OCC could 
effectuate an orderly wind-down, i.e., at a lower cost than the amount 
of its liquid resources is consistent with Rule 17Ad-22(e)(15)(i).\41\
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    \41\ 17 CFR 240.17Ad-22(e)(15)(i).
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    Therefore, the Commission believes that the proposed changes that 
would determine costs associated with an orderly wind-down and that 
would further ensure that OCC holds liquid net assets greater than 
these costs, are consistent with Rule 17Ad-22(e)(15)(i).\42\
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    \42\ 17 CFR 240.17Ad-22(e)(15)(i).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\43\ that the Commission does not object to 
Advance Notice (SR-OCC-2017-810), as modified by Partial Amendment No. 
3, and that OCC is authorized to implement the proposed change as of 
the date of this notice or the date of an order by the Commission 
approving proposed rule change SR-OCC-2017-021, as modified by Partial 
Amendment No. 3, whichever is later.
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    \43\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18656 Filed 8-28-18; 8:45 am]
 BILLING CODE 8011-01-P