Document ID: SEC-2017-2103-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2017-12-19T05:00Z

[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60262-60264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27228]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82309; File No. SR-OCC-2017-017]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change Concerning Liquidity for Same Day 
Settlement

December 13, 2017.
    On October 13, 2017, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2017-007 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on November 1, 2017.\3\ The Commission did not 
receive any comments on the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-81956 (Oct. 26, 
2017), 82 FR 50705 (Nov. 1, 2017) (SR-OCC-2017-017) (``Notice''). 
OCC also filed an Advance Notice with the Commission in connection 
with the proposed change. See Securities Exchange Act Release No. 
82056 (Nov. 13, 2017), 82 FR 54430 (Nov. 17, 2017) (SR-OCC-2017-
806).

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[[Page 60263]]

I. Description of the Proposed Rule Change

A. Background

    OCC filed the proposed rule change to modify the tools available to 
OCC to provide a mechanism for addressing the risks of liquidity 
shortfalls, specifically, in the extraordinary situation where OCC 
faces a liquidity need to meet its same-day settlement obligations 
resulting from the failure of a bank or securities or commodities 
clearing organization (``Settlement Entity'') to achieve daily 
settlement. As stated in the Notice, OCC's By-Laws currently grant OCC 
the authority to borrow against its Clearing Fund where a Settlement 
Entity fails to make timely settlement with OCC due to bankruptcy, 
insolvency, resolution, suspension of operations, or a similar event of 
such Settlement Entity.\4\ The proposed rule change seeks to expand 
this borrowing authority to circumstances that include a temporary 
failure of a Settlement Entity to achieve daily settlement.
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    \4\ OCC By-Laws, Article VIII, Section 5.
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    Article VIII, Section 5(e) of OCC's By-Laws provides OCC with the 
authority to borrow against the Clearing Fund in two circumstances. 
First, the By-Laws provide OCC the authority to borrow where OCC 
``deems it necessary or advisable to borrow or otherwise obtain funds 
from third parties in order to meet obligations arising out of the 
default or suspension of a Clearing Member or any action taken by the 
Corporation in connection therewith pursuant to Chapter XI of the Rules 
or otherwise.'' Second, the By-Laws provide OCC the authority to borrow 
against the Clearing Fund where OCC ``sustains a loss reimbursable out 
of the Clearing Fund pursuant to [Article VIII, Section 5(b) of OCC's 
By-Laws] but [OCC] elects to borrow or otherwise obtain funds from 
third parties in lieu of immediately charging such loss to the Clearing 
Fund.'' In order for a loss to be reimbursable out of the Clearing Fund 
under Article VIII, Section 5(b) of OCC's By-Laws, the loss must arise 
from a situation in which any Settlement Entity has failed ``to perform 
any obligation to [OCC] when due because of its bankruptcy, insolvency, 
receivership, suspension of operations, or because of any similar 
event.'' \5\
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    \5\ To the extent that a loss resulting from any of the events 
referred to in Article VIII, Section 5(b) is recoverable out of the 
Clearing Fund pursuant to Article VIII, Section 5(a), the provisions 
of Article VIII, Section 5(a) control and render the provisions of 
Article VIII, Section 5(b) inapplicable.
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    Under either of the circumstances above, OCC is authorized to 
borrow against the Clearing Fund for a period not to exceed 30 days, 
and during this time, the borrowing would not affect the amount or 
timing of any charges otherwise required to be made against the 
Clearing Fund pursuant to Article VIII, Section 5 of the By-Laws. 
However, if any part of the borrowing remains outstanding after 30 
days, then at the close of business on the 30th day (or the first 
Business Day thereafter) the amount must be considered an actual loss 
to the Clearing Fund, and OCC must immediately allocate such loss among 
its Clearing Members in accordance with Article VIII, Section 5.

B. The Proposed Rule Change to OCC's By-Laws

    The proposed rule change seeks to expand OCC's authority to borrow 
against its Clearing Fund to instances where a Settlement Entity 
suffers an event relatively less extreme than bankruptcy, insolvency, 
or a similar event, but is still temporarily unable to timely make 
daily settlement with OCC. Such an event might include a scenario where 
the ordinary operations of a settlement bank are disrupted in a manner 
that temporarily prohibits the bank from timely effecting settlement 
payments in accordance with OCC's daily settlement cycle. OCC believes 
that such authority would only be used in extraordinary circumstances, 
and any funds obtained from any such transaction could only be used for 
the stated purpose of satisfying a need for liquidity for same-day 
settlement.
    Pursuant to the proposed change, any ability to borrow under this 
expanded authority would not exceed thirty (30) days. During this 
period, the funds obtained would not be deemed to be charges against 
the Clearing Fund and would not affect the amount or timing of any 
charges otherwise required to be made against the clearing fund under 
Article VIII of OCC's By-Laws.\6\ Should the borrowing unexpectedly 
remain outstanding after thirty (30) days, at the close of business on 
the 30th day (or the first Business Day thereafter), the amount 
outstanding would be considered an actual loss to the Clearing Fund. 
However, OCC would also have discretionary authority to declare a 
borrowing outstanding for less than thirty (30) days as an actual loss 
chargeable against the Clearing Fund to be collected from Clearing 
Members.\7\ If the amount outstanding becomes an actual loss to the 
Clearing Fund, OCC, in accordance with its By-Laws, would then charge 
all of its Clearing Members to make pro rata contributions to the 
Clearing Fund to cover the deficit arising from the loss.
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    \6\ Assets contained in the Clearing Fund, including those 
assets pledged by OCC pursuant to its authority under this proposed 
expansion of borrowing authority, would remain in OCC's possession.
    \7\ OCC states that such discretionary authority could be 
exercised in a circumstance where, depending on the size of the 
borrowing, OCC must ensure that it maintains financial resources 
necessary to meet a ``Cover 1'' liquidity resource standard. OCC 
must establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, effectively 
identify, measure, monitor, and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully 
with a high degree of confidence, and, to the extent not already 
maintained pursuant to the foregoing, maintaining additional 
financial resources at the minimum to enable it to cover a wide 
range of foreseeable stress scenarios that include, but are not 
limited to, the ``default of the participant family that would 
potentially cause the largest aggregate credit exposure for the 
covered clearing agency in extreme but plausible market 
conditions.'' 17 CFR 240.17Ad-22(e)(4)(iii).
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    To implement the proposed change, OCC proposed to amend Sections 
1(a), 5(b) and 5(e) of Article VIII of its By-Laws to give effect to 
the expanded borrowing authority. First, Article VIII, Section 5(e) of 
the By-Laws would be amended to permit OCC to borrow against the 
Clearing Fund if it reasonably believes such borrowing is necessary to 
meet its liquidity needs for same-day settlement as a result of the 
failure of any Settlement Entity to achieve daily settlement. Second, 
Article VIII, Section 1(a) of the By-Laws would be amended to include 
conforming changes stating that the purpose of the Clearing Fund 
includes borrowing against the Clearing Fund as permitted under Article 
VIII, Section 5(e).
    Next, Article VIII, Section 5(b) of the By-Laws would be amended to 
include conforming changes that would declare that any borrowing 
remaining outstanding for less than 30 days may be considered, in OCC's 
discretion, an actual loss to the Clearing Fund to be charged 
proportionately against all Clearing Members' computed contributions. 
Further, any borrowing remaining outstanding on the 30th day shall be 
considered an actual loss to the Clearing Fund and the amount of any 
such loss shall be charged proportionately against all Clearing 
Members' computed contributions to the Clearing Fund as fixed at the 
time.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \8\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such

[[Page 60264]]

proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to such organization. 
The Commission finds that the proposal is consistent with Section 
17A(b)(3)(F) of the Act \9\ and Rule 17Ad-22(e)(7)(viii) \10\ 
thereunder, as described in detail below.
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    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(e)(7)(viii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    The Commission finds that the proposed change is consistent with 
Section 17A(b)(3)(F) of the Act,\11\ which requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions. The Commission understands that the proposed rule change 
constitutes a limited expansion of OCC's ability to address liquidity 
needs that arise from scenarios that, while relatively less extreme 
than a Settlement Entity suffering a bankruptcy, insolvency, 
resolution, suspension of operations, or similar event, nevertheless 
can prevent daily settlement from occurring. The Commission therefore 
believes that the proposed rule change is designed to enhance OCC's 
ability to access liquid resources under such circumstances, which, in 
turn, would allow OCC to continue to meet its settlement obligations to 
its Clearing Members in a timely fashion, thereby promoting prompt and 
accurate clearance and settlement of securities transactions.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    Specifically, the Commission believes that the proposed rule change 
is designed to expand OCC's existing borrowing authority in a scenario 
where a Settlement Entity is temporarily unable to achieve daily 
settlement, but is not facing bankruptcy, insolvency, resolution, 
suspension of operations, or similar event. Therefore, the proposed 
rule change is designed to provide OCC with an alternative tool with 
which to address what OCC describes as an ``extraordinary 
circumstance'' that would enable OCC to borrow against the Clearing 
Fund in order to avoid disrupting its ordinary settlement cycle. The 
Commission believes that the authority to take such action is designed 
to avoid imposing a disruption on Clearing Members and reduce the need 
to extend the settlement window, which could allow OCC to settle 
transactions in a more timely fashion. Accordingly, the Commission 
finds that the proposed rule change is designed to promote the prompt 
and accurate clearance and settlement of securities transactions, and 
is therefore consistent with Section 17A(b)(3)(F) of the Act.\12\
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    \12\ Id.
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B. Consistency With Rule 17Ad-22(e)(7)(viii) Under the Act

    The Commission further believes that the proposed rule change is 
consistent with Rule 17Ad-22(e)(7)(viii), which requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to, as applicable, 
effectively measure, monitor, and manage liquidity risk that arises in 
or is borne by the covered clearing agency, including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
and timely basis, and its use of intraday liquidity by, at a minimum, 
addressing foreseeable liquidity shortfalls that would not be covered 
by its liquid resources and seek to avoid unwinding, revoking, or 
delaying the same-day settlement of payment obligations.\13\
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    \13\ 17 CFR 240.17Ad-22(e)(7)(viii).
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    The Commission believes that the proposed rule change is designed 
to improve OCC's ability to address a temporary liquidity need 
resulting from the failure of a Settlement Entity to achieve timely 
settlement. The Commission believes that the proposed rule change is 
designed to provide OCC with additional tools to address a foreseeable, 
temporary liquidity shortfall to prevent the unwinding, revoking, or 
delaying of same-day settlement should that scenario materialize, and 
is therefore consistent with Rule 17Ad-22(e)(7)(viii) under the Act.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed change is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A of the Act \14\ and 
the rules and regulations thereunder.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-OCC-2017-017) be, and it 
hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27228 Filed 12-18-17; 8:45 am]
 BILLING CODE 8011-01-P