Document ID: SEC-2013-1864-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2013-10-30T04:00Z

[Federal Register Volume 78, Number 210 (Wednesday, October 30, 2013)]
[Notices]
[Pages 65027-65030]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25646]

[[Page 65027]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70753; File No. SR-OCC-2013-17]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning Charters for the 
Board of Directors, the Membership/Risk Committee, the Audit Committee 
and the Performance Committee

October 24, 2013.
    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 17, 2013, 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 by OCC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change concerns the charters of OCC's Board of 
Directors (``Board Charter'') and the Membership/Risk Committee (``MRC 
Charter''), Audit Committee (``AC Charter'') and Performance Committee 
(``PC Charter'') of OCC's Board of Directors (collectively, the 
``Committee Charters'').\3\
---------------------------------------------------------------------------

    \3\ The Board Charter was adopted by the Board of Directors on 
March 7, 2013. Prior versions existed of the MRC Charter, AC Charter 
and PC Charter. Each of these Committee Charters were reviewed and 
amended in 2012 with the MRC Charter being further amended in 2013. 
The 2013 amendment provided that a Public Director would Chair the 
Membership/Risk Committee. See Securities Exchange Act Release No. 
70486 (September 24, 2013), 78 FR 59994 (September 30, 2013) (SR-
OCC-2013-12). OCC has not previously submitted the Board Committee 
Charters as rule changes pursuant to Section 19(b) of the Exchange 
Act, 15 U.S.C. 78s(b), and Rule 19b-4 thereunder, 17 CFR 240.19b-4, 
but is now doing so in light of recently provided guidance by the 
Commission's staff. Since none of these Charters have been the 
subject of prior rule filings, the key terms of each Charter, as 
most recently approved by the Board, are described in more detail 
below in Item 3.
---------------------------------------------------------------------------

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 of the Proposed Rule Change
    This proposed rule change concerns the Board, Membership/Risk 
Committee (``MRC''), Audit Committee (``AC'') and Performance Committee 
(``PC'') Charters.

Board of Directors Charter

    The introduction of the Board Charter reconfirms that oversight of 
the management of the business and affairs of OCC is generally vested 
in the Board. OCC has not previously adopted a charter for its Board of 
Directors (``Board'') because OCC's By-Laws and Rules provide the 
framework within which the respective responsibilities of OCC's Board 
and management have been defined. The Board Charter does not impose any 
new responsibilities on the Board, but rather reflects the longstanding 
powers and duties of the Board, as well as underlying practices that 
have been developed to aid the Board in meeting its obligations. The 
Board's adoption of a Charter at this time reflects a desire to 
increase the transparency of the Board's oversight activities for 
parties outside of OCC, promote accountability, and to align with 
corporate governance best practices.
    The Board Charter would also acknowledge certain parameters 
applicable to the membership in and organization of the Board, many of 
which are separately provided for in OCC's By-Laws.\4\ The Board 
Charter would reflect that the size and composition of the Board and 
qualification standards used in the selection of Directors would be 
consistent with the corresponding terms of the By-Laws. Actions 
concerning the election, resignation, and disqualification of 
Directors, and with respect to the tenure of service of each category 
of Director, would be required to be taken in accordance with the By-
Laws. The Management Director \5\ and Exchange Directors would be 
required to be elected at each annual stockholder meeting and term 
limits and the absence of age limits for Directors would be addressed 
along with responsibilities of any Management or Member Vice Chairman.
---------------------------------------------------------------------------

    \4\ The Board Charter contains cross-references to such 
applicable provisions of OCC's By-Laws. For ease of readability, 
those cross-references have not been repeated in this Item 3.
    \5\ Pursuant to a recent OCC rule change that has been approved 
by the Commission, but not yet implemented by OCC, the office of 
Chairman of OCC will be split into two offices, Executive Chairman 
and President. Each of the Executive Chairman and the President will 
be elected as Management Directors by the stockholders at each 
annual stockholder meeting. See File No. SR-OCC-2013-09, 78 FR 47449 
(Aug. 5, 2013).
---------------------------------------------------------------------------

    The Board Charter would address certain aspects of the membership 
and organization of the Board with respect to meetings. The Board would 
meet a minimum of five times each year with special meetings called 
pursuant to the By-Laws.\6\ Expectations concerning participation in 
meetings by Directors would be set out and the Chairman of the Board 
would be required to set the agenda in consultation with the President 
and the Secretary.
---------------------------------------------------------------------------

    \6\ The Chairman would be permitted to ask OCC management or 
others to attend meetings and to provide pertinent information and 
the Board would be permitted to call executive sessions from which 
OCC management may be excluded. A majority of the Directors then in 
office, but not fewer than six Directors, would constitute a quorum 
for the conduct of business of the Board.
---------------------------------------------------------------------------

    The Board Charter would provide that the Board is authorized to 
make inquiries as it deems appropriate in the execution of its duties 
and may confer with OCC management or employees.\7\ The Board would 
elect certain corporate officers annually, as provided for in the By-
Laws.
---------------------------------------------------------------------------

    \7\ The Board Charter would provide that in discharging its 
oversight role the Board may hire specialists or rely on outside 
advisors or specialists and that it would have the authority to 
approve related fees and terms of retention.
---------------------------------------------------------------------------

    The Board would be permitted to form such committees and 
subcommittees as it deems appropriate and delegate authority to 
committee members.\8\ Chairs of the Board committees would be 
determined in accordance with the terms of the applicable committee 
charter and any applicable provisions of the By-Laws. Committee 
assignments would be annually reviewed and approved by the Board 
subject to the By-Laws. Consistent with the requirements applicable to 
the Directors serving on the Board, Directors on Board committees would 
be expected to meet certain standards of preparation and participation.
---------------------------------------------------------------------------

    \8\ The Board would be required to establish a written charter 
for each committee.
---------------------------------------------------------------------------

    As a more detailed expression of the Board's responsibility to act 
as a steward of OCC and ensure it has the critical capabilities to 
achieve its obligations in a safe, sound, efficient and prudential 
manner, the Board Charter would identify specific

[[Page 65028]]

functions and responsibilities of the Board.\9\ The Board Charter would 
also note that certain functions and responsibilities of the Board are 
set forth separately in the By-Laws \10\ and that each Director must 
act in good faith in the best interests of OCC and with due regard for 
the fiduciary responsibilities owed to OCC. Each Director would also be 
required to comply with certain conduct requirements.
---------------------------------------------------------------------------

    \9\ These include the responsibility to oversee: OCC's 
governance processes in a manner consistent with the Board Charter; 
processes and framework for assessing, managing and monitoring 
strategic, financial and operational risk; financial reporting, 
auditing, accounting and compliance processes; a system of internal 
controls; major capital expenditures; the development and design of 
employee compensation, incentive and benefit programs; and 
compensation of the Chairman and the President. The Board Charter 
would also specifically require the Board to approve and oversee 
OCC's business strategies, monitor performance in delivering 
clearance and settlement services; foster OCC's processes designed 
to ensure compliance with applicable laws and regulations and 
conduct business in a legal and ethical manner; assure management 
succession; and approve OCC's annual budget and corporate plan.
    \10\ The Charter would identify the Board's responsibility under 
the By-Laws to approve applications for clearing membership and 
initial contributions to the clearing fund, OCC's fee structure as 
well as rebates, discounts and refunds of clearing fees, and 
modifications of OCC's By-Laws and Rules. The Board Charter would 
also identify the responsibility of the Board to determine 
disqualifications from Board service and fill vacancies, elect 
corporate officers, conduct hearings in connection with a denial or 
suspension of membership; and suspend a clearing member.
---------------------------------------------------------------------------

Committee Charters
    OCC has long maintained Charters for the MRC, AC and PC (each, a 
``Committee,'' and collectively, the ``Committees''). Below is a 
discussion of the provisions common across all the Committee Charters, 
followed by a discussion of each Committee Charter's unique provisions.
    The purpose of the Committee Charters is to describe the role each 
Committee plays in assisting the Board in fulfilling its 
responsibilities, as described in OCC's By-Laws and Rules, as well as 
specify the policies and procedures governing the membership and 
organization, scope of authority, and specific functions and 
responsibilities of each Committee. The guidelines for the composition 
of each Committee, as well as the policies regarding its meeting 
schedules, quorum rules, minute-keeping and reporting requirements, are 
set forth in each charter and conform to applicable requirements 
specified in OCC's By-Laws and Rules. Each Committee, subject to the 
direction of the Board, is authorized to act on behalf of the Board 
with respect to any matter necessary or appropriate to accomplish the 
purpose and responsibilities set forth in its Charter, and is 
authorized to further delegate this authority to various subcommittees 
that it may form. Each Committee is authorized to make inquiries into 
any matter related to its respective purpose and responsibilities \11\ 
and to confer with OCC's management and other employees as it deems 
appropriate. Additionally, the chair of each Committee would be 
authorized to act on behalf of its respective Committee in the case 
that immediate action is required, and it is impractical to convene 
such Committee.\12\
---------------------------------------------------------------------------

    \11\ The Committee Charters further permit each Committee to 
hire specialists or rely on outside advisors or specialists to 
assist in carrying out the Committee's activities and confirm the 
Committee's authority to approve any related terms of retention and 
fees. The MRC and PC's authority under these provisions, however, is 
subject to Board approval.
    \12\ In such instances, the committee chair must, as soon as 
practicable, report any actions taken to its committee for its 
ratification.
---------------------------------------------------------------------------

    While each Committee Charter sets forth its own Committee 
composition requirements, each requires the inclusion of at least one 
Public Director and empowers the Board to remove or replace any 
Committee member at any time.
    Each Committee Charter sets forth its own meeting schedule, though 
each empowers its respective chairman to call additional meetings as 
circumstances dictate. Each Committee Charter specifies that the agenda 
for each Committee's meetings would be established by the chairman of 
the Committee, or its designee, in consultation with the Secretary and 
OCC's management. A majority of the members would constitute a quorum, 
and if the chairman is not present at a meeting the members who are 
present would designate a member to act as the chairman. All Committees 
are permitted to call executive sessions from which guests of such 
Committee may be excluded, and Committee members are permitted to 
participate in all meetings by conference telephone call or other means 
of communication that permit all meeting participants to hear each 
other.\13\
---------------------------------------------------------------------------

    \13\ Meeting minutes would be required to be kept and circulated 
with the Board.
---------------------------------------------------------------------------

    Each Committee Charter requires the relevant Committee to review 
its respective charter annually, with each charter submitted to OCC's 
Board for reapproval with any such changes that the relevant Committee 
deems advisable.
    The discussion that follows summarizes the key charter provisions 
associated with the specific functions of the MRC, AC and PC, 
respectively.

The MRC Charter

    The MRC Charter sets forth the MRC's purpose as overseeing OCC's 
policies and processes for identifying, addressing and reporting on 
strategic, operational and financial risk as well as OCC's enterprise 
risk management framework, among other duties, as well as performing 
those functions delegated to it in OCC's By-Laws and Rules.\14\ In 
addition, the MRC Charter clarifies that it is the MRC's responsibility 
to review periodic reports from OCC's enterprise risk management 
program and to review and assess that program annually, and that the 
MRC must provide a report to the Board of Directors on an annual basis 
that summarizes its activities during the past year.\15\
---------------------------------------------------------------------------

    \14\ This oversight by the MRC includes, but is not limited to, 
review of material policies and processes concerning: membership 
criteria and financial safeguards; member and other counterparty 
risk exposure assessments; liquidity requirements and maintenance of 
financial resources; risk modeling and assessments; and default 
management planning.
    \15\ The MRC may make other reports to the Board of Directors as 
it deems appropriate.
---------------------------------------------------------------------------

    The MRC Charter requires the MRC to be composed of OCC's Chairman, 
Member Vice Chairman, and three or more other Member Directors 
appointed annually by the Board. The MRC is to be chaired by a Public 
Director. The MRC Charter requires the MRC to meet at least seven times 
a year.
    The MRC Charter sets forth certain responsibilities and functions 
for the MRC, including but not limited to, the following: reviewing and 
approving or disapproving certain requests from clearing members, 
including proposals to become managed clearing members, to expand 
clearing activities to include additional account types or products, 
and to participate in stock loan programs; periodically reviewing OCC's 
initial and ongoing membership requirements and standards; periodically 
reviewing and recommending modifications to the inputs to OCC's margin 
formula, the methodologies behind margin and clearing fund 
requirements, the lists of approved classes of GSE debt securities for 
margin deposits, and the applicable haircuts for margin; modifying 
margin requirements; reviewing the adequacy and efficacy of and 
recommending modifications to OCC's contingency plans for clearing 
member failures; periodically reviewing clearing member surveillance 
standards, and reviewing and advising management with respect to such 
surveillance; periodically reviewing and assessing, and reviewing 
reports from, OCC's enterprise risk management program; and performing

[[Page 65029]]

such other functions specified in OCC's By-Laws and Rules or delegated 
to it by the Board.

The AC Charter

    The AC Charter sets forth the purpose of the AC as assisting the 
Board in fulfilling its oversight responsibilities, by serving as an 
independent and objective party to oversee OCC's financial reporting 
process, system of internal control, and auditing, accounting and 
compliance environment and processes. The AC's purpose also includes 
overseeing the audit efforts of OCC's independent accountants and the 
internal audit department, as well as facilitating open communication 
among the independent accountants, financial and senior management, 
internal audit department, compliance department and the Board.
    The AC Charter requires that the AC be composed of three or more 
directors appointed annually by the Board, each of whom must have a 
working familiarity with basic finance and accounting practices. At 
least one member, if possible, is required to have accounting or 
related financial management expertise. The Board is permitted to 
appoint a Chair of the AC, though in the absence of a Board 
appointment, the AC should appoint a Chairman by majority vote of the 
full AC membership. The AC Charter requires the AC to meet at least 
four times a year.
    The AC Charter also assigns specific activities to the AC, 
including, but not limited to, the following: appointing, overseeing 
and reviewing OCC's independent accountants, and all fees paid to them; 
reviewing the annual audit plan, annual internal control attestation 
engagement, and the annual audited financial statements and related 
reports; approve any decision of OCC's management to appoint or replace 
the Chief Compliance Officer; reviewing and approving the Compliance 
Charter; assessing the performance and effectiveness of the compliance 
program; reviewing and evaluating any annual compliance report that may 
as a matter of regulation be certified by the Chief Compliance Officer; 
reviewing remediation tracking performed by OCC's compliance department 
in connection with regulatory inspection reports and management's 
response; reviewing OCC's system to communicate and monitor compliance 
with and enforcement of OCC's Code of Conduct and the outcome of 
disciplinary actions taken by OCC; and establishing ``whistleblower'' 
procedures for the reporting by personnel of any concerns regarding 
unethical or illegal conduct.

The PC Charter

    The PC Charter sets forth the PC's purpose as assisting the Board 
in oversight of OCC's overall performance in promptly and accurately 
delivering clearance, settlement and other designated industry services 
and in the accomplishment of other periodically-established corporate 
goals and objectives given OCC's systemically important status. The PC 
is also tasked with recommending compensation for certain OCC officers 
and reviewing and approving the structure and design of employee 
compensation, incentive and benefit programs.
    The PC Charter requires that the PC be composed of OCC's Chairman, 
Member Vice Chairman and three or more other directors appointed 
annually by the Board, and that the PC be chaired by OCC's Member Vice 
Chairman. The PC Charter states that the PC will generally meet in 
advance of each regularly scheduled Board meeting.
    The PC Charter describes the PC's role as one of oversight, 
including oversight of management's responsibility to identify, 
organize, and manage the operational, systems, technology, financial, 
human, and other resources necessary to support OCC's clearance, 
settlement and other business activities. The PC Charter sets forth 
additional functions and responsibilities including, but not limited 
to, the following: regularly scheduled reviews of OCC's Corporate Plan, 
Budget, executive performance and compensation, employment contracts, 
changes in OCC's fee structure, and special financial matters; 
oversight of the administration of OCC's various incentive, bonus, 
deferred compensation, retirement and welfare plans; periodic 
assessment of succession plans for key executives; oversight of the 
compensation, benefits and perquisites of OCC's executive and 
management personnel, provided that decisions with respect to the 
individual compensation of the Chairman, Management Vice Chairman, and 
President shall be made in the form of recommendations to the Board; 
and any other activities that are consistent with the PC Charter, as 
the PC or the Board may deem necessary or appropriate.
2. Statutory Basis for the Proposed Rule Change
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \16\ because the Board Charter and 
Committee Charters will help ensure that OCC's governance structure is 
designed to protect investors and the public interest. By creating a 
Board Charter and making certain amendments to the MRC Charter, AC 
Charter and PC Charter that clarify the duties and operations of the 
Board and its Committees OCC will have, as required under Rule 17Ad-
22(d)(8),\17\ a clear and transparent governance structure that will 
fulfill the public interests requirements in Section 17A of the Act, 
support the objectives of OCC's owners and participants, and promote 
the effectiveness of OCC's risk management procedures.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

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

    OCC does not believe that the proposed rule change would impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.\18\ This proposed rule change 
will help ensure that OCC meets regulatory requirements that it has a 
clear and transparent governance structure, as well as clarify the 
organization, duties and operation of its Board and Committee, through 
the adoption of the Board Charter and updated Committee Charters. To 
the extent OCC's clearing members are affected by proposed rule change, 
OCC believes that, by clarifying and publishing the terms of the Board 
and Committee Charters in the public domain, all of its participants 
will have greater certainty concerning OCC's governance arrangements 
and that such clarification will facilitate the prompt and accurate 
settlement of securities transactions. Accordingly, OCC does not 
believe that the proposed rule will it impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

 (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

[[Page 65030]]

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-2013-17 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2013-17. 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 of submission. The Commission will post all 
comments on the Commission's Internet Web site (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 Web site 
viewing and printing in the Commission's Public Reference Room located 
at 100 F Street NE., Washington, DC 20549-1090 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 Web site at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_13_17.pdf. All comments received will be posted without change; 
the Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-OCC-
2013-17 and should be submitted on or before November 20, 2013.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-25646 Filed 10-29-13; 8:45 am]
BILLING CODE 8011-01-P