Document ID: SEC-2020-1786-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2020-11-09T05:00Z

[Federal Register Volume 85, Number 217 (Monday, November 9, 2020)]
[Notices]
[Pages 71384-71387]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24783]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90315; File No. SR-OCC-2020-013]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Update The Options Clearing 
Corporation's Recovery and Orderly Wind-Down Plan

November 3, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 20, 2020, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared primarily by OCC. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by OCC would amend OCC's Recovery and 
Orderly Wind-Down Plan (``RWD Plan'' or ``Plan''), adopted pursuant to 
the requirement in Rule 17Ad-22(e)(3)(ii),\3\ to reflect: (i) Changes 
to OCC's capital structure resulting from the disapproval of OCC's 
previously approved ``Capital Plan'' \4\ and the subsequent approval of 
OCC's ``Capital Management Policy,'' \5\ and (ii) changes made to each 
chapter of the Plan during OCC's annual internal review and update of 
the Plan, as required by OCC's internal governance.
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    \3\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \4\ Securities Exchange Act Release No. 85121 (Feb. 13, 2019), 
84 FR 5157 (Feb. 20, 2019) (SR-OCC-2015-02).
    \5\ Securities Exchange Act Release No. 86725 (Aug. 21, 2019), 
84 FR 44952 (Aug. 27, 2019) (SR-OCC-2019-007).
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    The RWD Plan is included as confidential Exhibit 5 to SR-OCC-2020-
013. Material proposed to be added is marked by underlining and 
material proposed to be deleted is marked by strikethrough text.\6\ The 
proposed rule change does not require any changes to the text of OCC's 
By-Laws or Rules. All terms with initial capitalization that are not 
otherwise defined herein have the same meaning as set forth in the OCC 
By-Laws and Rules.\7\
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    \6\ OCC has also filed an advance notice with the Commission in 
connection with this proposal. See SR-OCC-2020-806.
    \7\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. OCC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
Background
    On August 23, 2018, the Commission approved OCC's proposed rule 
change to formalize and update OCC's RWD Plan, consistent with the 
requirements of Rule 17Ad-22(e)(3)(ii).\8\ As approved, the RWD Plan 
incorporated key pieces of OCC's previously approved Capital Plan, 
including but not limited to the Capital Plan's provision for 
``Replenishment Capital.'' \9\ In OCC's RWD Plan, Replenishment Capital 
was one of the tools by which OCC could have recapitalized in certain 
of its recovery and wind-down scenarios.
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    \8\ Securities Exchange Act Release No. 83918 (Aug. 23, 2018), 
83 FR 44091 (Aug. 29, 2018) (SR-OCC-2017-021).
    \9\ Securities Exchange Act Release No. 74452 (Mar. 6, 2015), 80 
FR 13058 (Mar. 12, 2015) (SR-OCC-2015-02). The Capital Plan was a 
previously approved plan for raising additional capital under which 
the securities options exchanges that own equity in OCC committed to 
contributing additional capital to OCC under certain conditions and 
provided for the provision of further Replenishment Capital in 
certain circumstances.
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    On February 13, 2019, the Commission disapproved OCC's Capital 
Plan.\10\ The disapproval of the Capital

[[Page 71385]]

Plan left OCC's RWD Plan with several invalid references to the Capital 
Plan or to certain of its component parts, including references to 
Replenishment Capital as one of OCC's identified tools for recovery and 
wind-down and references to a trigger event within the Capital Plan as 
one of OCC's recovery triggers. As a result of the disapproval of the 
Capital Plan, OCC subsequently proposed the ``Capital Management 
Policy,'' which among other things establishes a new mechanism for 
funding OCC's replenishment capital and changes OCC's ``default 
waterfall'' (i.e., the resources available to OCC in the event of a 
Clearing Member's suspension).\11\ These changes to OCC's replenishment 
capital and default waterfall necessitated changes to existing passages 
concerning the same in the RWD Plan.
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    \10\ See supra note 5.
    \11\ See supra note 6.
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    In addition, OCC has made changes to its RWD Plan as a result of 
its annual review and update process. As adopted, the RWD Plan itself 
recognizes OCC's internal governance requirement to review and update 
the Plan at least every twelve months. Accordingly, during the first 
several months of 2019 and 2020, an internal, cross-disciplinary 
working group within OCC conducted a review and recommended numerous 
changes to the RWD Plan, which were approved by OCC's management, the 
Risk Committee of OCC's Board of Directors (``Board'') and OCC's Board. 
The changes resulting from the adoption of the Capital Management 
Policy and the changes from OCC's annual review process are discussed 
in greater detail below.
Proposed Changes
    The proposed rule change would update each of the eight chapters of 
the RWD Plan.\12\ A summary description of the types of changes 
proposed to each of the eight chapters of the RWD Plan is provided 
below:
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    \12\ In addition to the changes summarized below, OCC would also 
make administrative changes throughout the Plan to update various 
OCC internal policy and procedure names.
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Chapter 1: Executive Summary
    Chapter 1 of the RWD Plan provides an executive summary and 
overview of OCC's proposed Plan. The proposed changes to Chapter 1 of 
the Plan would simply align the executive summary and overview to the 
changes made throughout subsequent chapters of the Plan.
Chapter 2: OCC Overview
    Chapter 2 of the RWD Plan provides 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 the subsequent discussion and analysis of 
OCC's ``Critical Services'' and ``Critical Support Functions'' in 
Chapter 4 (discussed below) and of OCC's wind-down process in Chapter 6 
(discussed below). The proposed rule change would update several 
figures and factual discussions to reflect changes since the Plan's 
initial approval by the Commission. The types of changes being made to 
Chapter 2 would include: (i) Updated figures and numbers about market 
share and contract volume; (ii) updated lists of securities options 
exchanges and futures exchanges cleared by OCC; (iii) updated 
organizational charts, headcount numbers, discussions of OCC's 
management structure and descriptions of management roles and 
responsibilities; (iv) updated descriptions of OCC's Board's 
responsibilities and procedures, lists of Board members, and 
descriptions of OCC's Board committees' roles and responsibilities; 
\13\ (v) revised descriptions that would acknowledge certain program 
changes that have occurred since the initial 2018 approval of the RWD 
Plan (e.g., changes to OCC's cross-margining arrangements, changes in 
credit facilities and changes concerning investment counterparties, 
exchanges and vendors); (vi) updated graphs of OCC's Clearing Fund 
total monthly deposits; and (vii) updated discussions of OCC's 
retirement plan obligations. In addition to these updated figures and 
factual discussions, the proposed rule change would (i) revise Chapter 
2 to remove excerpts from OCC's most recent annual report (which would 
be relocated to one of the appendices); (ii) replace a lengthy overview 
of OCC's risk management program with a more concise summary; (iii) 
update a summary description of OCC's interconnections with external 
vendors and a list of vendors that provide OCC critical technology and 
information reporting services; and (iv) revise a fee management 
discussion to align with changes resulting from the implementation of 
the Capital Management Policy.\14\
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    \13\ Securities Exchange Act Release No. 84473 (Oct. 23, 2018), 
83 FR 54385 (Oct. 29, 2018) (SR-OCC-2018-012).
    \14\ The changes to the fee management discussion concern the 
potential for OCC's Board to lower the direct costs of participation 
if OCC's shareholder equity exceeds 110% of a predetermined ``Target 
Capital Requirement.'' See Securities Exchange Act Release No. 86725 
(Aug. 21, 2019), 84 FR 44944 (Aug. 27, 2019) (SR-OCC-2019-007).
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Chapter 3: Support Functions
    Chapter 3 of the RWD Plan identifies each of OCC's different 
internal support functions and provides a brief description of the 
activities performed by each such support function. For purposes of the 
RWD Plan, ``internal support functions'' are the various departments 
within OCC that are necessary for OCC to provide its services to 
Clearing Members and other participants. Since the initial 2018 
approval of the RWD Plan, OCC has added two additional internal support 
functions and expanded its Office of the Chief Executive Officer, 
renamed the ``Corporate'' support function, to include OCC's executive 
officers and administrative support staff. Accordingly, the proposed 
rule change would add two new internal support functions (and 
descriptions thereof) and replace the Office of the Chief Executive 
Officer with the Corporate support function, bringing the total number 
of internal support functions from 14 to 16. Since the initial 2018 
approval of the RWD Plan, OCC also has modified and updated its 
administrative descriptions of the roles and responsibilities of the 14 
internal support functions that were discussed in the initial 2018 
approval of the RWD Plan. Accordingly, the proposed rule change would 
update the descriptions of all OCC's internal support functions so they 
align with the modified and updated internal administrative 
descriptions of such functions.
Chapter 4: Critical Services and Critical Support Functions
    Chapter 4 of the RWD Plan identifies OCC's ``Critical Services'' 
\15\ and ``Critical Support Functions.'' \16\ The proposed rule change 
would group two previously identified Critical Services into a single 
Critical Service (i.e., the changes would simply use a single term to 
refer to two services that were previously listed separately). The 
proposed rule change also would update dated factual references and 
make other minor changes to OCC's description of its evaluations of 
Critical Services and Critical Support Functions, notably to recognize 
the consolidation of the two previously identified Critical Services

[[Page 71386]]

into a single Critical Service and recalibrate the evaluation of an OCC 
service in considering whether it is a Critical Service. The proposed 
rule change also would change the mapping of Critical Services to 
Support Functions to recognize the ``primary,'' ``secondary,'' or 
``non-critical'' nature of each Support Function, which better aligns 
with OCC's internal taxonomy.
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    \15\ A ``Critical Service,'' as defined in the proposed Plan, 
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 the FMU serves.
    \16\ A ``Critical Support Function,'' as defined in the proposed 
Plan, would be a function within OCC that must continue in some 
capacity in order for OCC to be able to continue providing its 
Critical Services.
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Chapter 5: Recovery Plan
    Chapter 5 of OCC's proposed Plan constitutes OCC's recovery plan. 
The proposed rule change would make conforming edits to references to 
certain former provisions within OCC's By-Laws that have since been 
relocated to OCC's Rules.\17\ The proposed rule change also would 
revise the inventory and description of OCC's available ``Enhanced Risk 
Management Tools'' and ``Recovery Tools'' to (i) replace references to 
and discussions of Replenishment Capital with references to and 
descriptions of the replenishment structure under the adopted Capital 
Management Policy; (ii) replace references to and discussions of the 
discretionary use of OCC's current and/or retained earnings with 
references to and discussions of the mandatory contribution--
immediately following the use of margin, deposits in lieu of margin and 
the Clearing Fund deposits of the suspended Clearing Member--of OCC's 
current and retained earnings greater than 110% of OCC's annually-
established ``Target Capital Requirement,'' as implemented by the 
Capital Management Policy; (iii) update the description of how OCC 
could increase the minimum required cash contribution to the Clearing 
Fund to reflect enhancements to OCC's liquidity risk management 
framework that the Commission approved in 2020; \18\ (iv) include a 
discussion of the mandatory contribution of any unvested portions of 
OCC's Executive Deferred Compensation Plan (``EDCP''), in proportion to 
any charges against the mutualized portion of OCC's Clearing Fund, as 
implemented by the Capital Management Policy; and (v) update the 
governance of the Recovery Tools to include OCC's Chief Executive 
Officer and Chief Operating Officer in various communications to OCC's 
Executive Chairman. The proposed rule change also would revise the list 
of ``Recovery Trigger Events'' in the recovery plan to (i) delete one 
of the Recovery Trigger Events that was derived from a defined term in 
the Capital Plan, (ii) consolidate two other Recovery Trigger Events 
into a single, operational loss-related recovery trigger, and (iii) add 
a qualification onto an existing liquidity loss-related recovery 
trigger. The proposed rule change would also delete unnecessary 
historical data on business volumes from the hypothetical stress 
scenarios in Chapter 5 that illustrate how OCC could use its recovery 
tools.
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    \17\ See Securities Exchange Act Release No. 83735 (Jul. 27, 
2018), 83 FR 37855 (Aug. 2, 2018) (SR-OCC-2010-008).
    \18\ See Securities Exchange Act Release No. 89014 (Jun. 4, 
2020), 85 FR 35446 (Jun. 10, 2020) (SR-OCC-2020-003).
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Chapter 6: Wind-Down Plan
    Chapter 6 of OCC's RWD Plan constitutes OCC's orderly wind-down 
plan. The proposed rule change would revise the list of Wind-Down Plan 
Trigger Events (``WDP Triggers'') to consolidate two current WDP 
Triggers into a single WDP Trigger related to OCC's financial resource 
requirements, and consolidate two other current WDP Triggers into a 
single WDP Trigger related to operational disruption. The proposed rule 
change would also update discussions of the tools by which OCC could 
have recapitalized in certain of its recovery and wind-down scenarios. 
As revised, these discussions would describe replenishment capital 
available under the adopted Capital Management Policy, deleting 
descriptions of Replenishment Capital available under the former 
Capital Plan. The proposed rule change also would update certain of the 
references to OCC's internal support functions and certain references 
to headcount in Chapter 6.
Chapter 7: RWD Plan Governance
    Chapter 7 of OCC's RWD Plan section details the governance of OCC's 
RWD Plan. The proposed rule change would revise the lists of OCC staff 
involved in the completion of the plan (largely to give effect to the 
fact that the titles of certain offices changed since the RWD Plan's 
proposal in 2017).
Chapter 8: Appendices
    Chapter 8 of OCC's RWD Plan is comprised of several appendices. The 
proposed rule change would update several lists within the appendices 
to reflect changes that have occurred since the Plan's initial approval 
by the Commission. The types of changes being made to Chapter 8 would 
include: (i) Updated lists of OCC's clearing membership; (ii) updated 
lists of participation on OCC's Board; (iii) updated lists of 
settlement banks and letter of credit banks; (iv) updated lists of 
vendors and service providers that would be necessary to support a 
recovery or wind-down of OCC; (v) updates to the extreme hypothetical 
scenarios designed by OCC that, if such scenarios occurred, could cause 
OCC to activate the RWD Plan; and (vi) updated lists of the key 
agreements to be maintained during recovery and wind-down efforts.
(2) Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A of the Act \19\ and the rules thereunder applicable to OCC. 
Section 17A(b)(3)(F) of the Act \20\ requires, in part, that the rules 
of a clearing agency be designed, in general, to protect investors and 
the public interest. The RWD Plan is designed to enhance OCC's ability 
to address extreme stresses or crises by establishing a framework that 
OCC could use to navigate the use its Enhanced Risk Management Tools 
and Recovery Tools, with the aim of maintaining OCC's viability as a 
going concern. In the event that OCC's recovery efforts are not 
successful, the RWD Plan would seek to improve the possibility that a 
resolution of OCC's operations can be conducted in an orderly manner, 
thereby minimizing the disruption to Clearing Members and market 
participants and improving the likelihood of minimizing the risk of 
contagion to the broader financial system. Accordingly, OCC believes 
the conforming updates to the RWD Plan would improve the possibility of 
OCC's effectively addressing a variety of potential risks, thereby 
improving OCC's ability to ultimately maintain market and public 
confidence during a time of unprecedented stress. In this regard, OCC 
believes the proposed rule change ultimately would protect investors 
and the public interest in a manner consistent with Section 
17A(b)(3)(F) of the Act.\21\
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    \19\ 15 U.S.C. 78q-1.
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC also believes that the proposed rule change is consistent with 
Exchange Act Rule 17Ad-22(e)(3)(ii), which requires each covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to include plans for the 
recovery and orderly wind-down of the covered clearing agency 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.\22\ As stated above, the 
RWD Plan would describe OCC's plans to recover from, or orderly resolve 
its operations as a result of, severe stress brought about by credit 
losses, liquidity shortfalls, losses from general business risk or 
other losses.\23\ The proposed

[[Page 71387]]

updates to the RWD Plan would improve the accuracy of the inventory of 
OCC's Recovery Tools and improve OCC's evaluation of scenarios which 
may potentially prevent OCC from providing its Critical Services as a 
going-concern, as well as OCC's plans for recovery or orderly wind-
down. Further, the proposed changes to the Plan would update and 
improve the information that a resolution authority may reasonably 
anticipate as necessary for purposes of recovery and orderly wind-down 
planning.\24\ In this regard, OCC believes its proposed rule change is 
consistent with Rule 17Ad-22(e)(3)(ii).\25\
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    \22\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \23\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \24\ See 81 FR at 70810.
    \25\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

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

    Section 17A(b)(3)(I) of the Act \26\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would impact or impose any burden 
on competition.\27\ The proposed rule change would update OCC's RWD 
Plan. The proposed updates to the RWD Plan are the result of OCC's 
annual review and update process; these proposed changes would revise 
certain factual representations, update certain organizational 
discussion and make changes to conform to OCC's adopted Capital 
Management Policy. None of the proposed updates to the RWD Plan would 
affect Clearing Members' access to OCC's services or impose any direct 
burdens on clearing members. Accordingly, the proposed rule change 
would not unfairly inhibit access to OCC's services or disadvantage or 
favor any particular user in relationship to another user.
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    \26\ 15 U.S.C. 78q-1(b)(3)(I).
    \27\ 15 U.S.C. 78q-1(b)(3)(I).
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impact or impose a burden on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OCC-2020-013 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2020-013. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2020-013 and 
should be submitted on or before November 30, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-24783 Filed 11-6-20; 8:45 am]
BILLING CODE 8011-01-P