Document ID: SEC-2011-1670-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2011-11-01T04:00Z

[Federal Register Volume 76, Number 211 (Tuesday, November 1, 2011)]
[Notices]
[Pages 67523-67525]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28199]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65622 File No. SR-OCC-2011-15]

Self-Regulatory Organizations; Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to Management of 
Liquidity Risk

October 26, 2011.
    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 12, 2011, 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. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would clarify OCC's ability to obtain 
temporary liquidity for purposes of meeting liquidity needs arising 
from default obligations.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

[[Page 67524]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend OCC's by-laws 
and rules to clarify OCC's authority to use, and the manner in which 
OCC may use, a defaulting clearing member's margin deposits and 
contributions to the clearing fund and all other clearing members' 
clearing fund contributions \3\ to obtain temporary liquidity for 
purposes of meeting liquidity needs arising from Default 
Obligations.\4\
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    \3\ Margin deposits secure only the depositing clearing member's 
own obligations to OCC whereas clearing fund deposits of all 
clearing members may be applied by OCC not only to losses arising 
from the depositing clearing member's default, but also to losses 
resulting from defaults by other clearing members and specified 
other third parties such as settlement banks and other clearing 
organizations. See generally Article VIII, Sections 1 and 5 of OCC's 
by-laws and Rule 604 of OCC's rules.
    \4\ The specific language of the proposed changes can be found 
at http://www.optionsclearing.com/components/docs/legal/rules_and_bylaws/sr_occ_11_15.pdf.
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    An essential element of OCC's risk management regime is sound 
management of liquidity risk. OCC regularly examines its liquidity risk 
exposure to determine the optimal amount and form of available 
liquidity. OCC's largest potential liquidity needs are projected to 
occur in the case of a clearing member's default where OCC would be 
obligated to settle the defaulting clearing member's payment 
obligations with respect to option premiums, settlement of cash-settled 
option exercises, and mark-to-market payments. These are obligations 
that OCC must fund on time and potentially with only a few hours of 
advance notice--from notice of default until the payments are due.
    One of the resources that OCC may use to meet its liquidity needs 
is its existing committed credit facility. The amount of funds 
available to OCC under the committed credit facility is limited not 
only by the overall size of the facility, but also by the amount of 
assets that OCC can pledge as collateral to lenders supporting the 
facility. OCC believes that, in addition to the authority it already 
has to pledge clearing fund assets to secure a loan to cover Default 
Obligations, it should also have the express power to pledge a 
suspended clearing member's margin deposits to secure loans for the 
purpose of meeting obligations arising out of the default and 
suspension of that clearing member or any action taken by OCC in 
connection therewith. OCC clearly has authority to pledge a suspended 
clearing member's clearing fund deposits for that purpose under Article 
VIII, Section 5(e) of the by-laws. However, it is not as clear that OCC 
has authority to pledge a suspended clearing member's margin deposits. 
Rule 1104(a) provides, among other things, that upon the suspension of 
a clearing member, OCC shall promptly ``convert to cash,'' in the most 
orderly manner practicable, all of the clearing member's margin 
deposits. Although this mandate might be construed to include the 
authority to pledge margin assets as collateral for borrowings under 
the committed credit facility, the phrase ``convert to cash'' has 
generally been used in the by-laws as synonymous with ``liquidate'' to 
refer to a final disposition of an asset. And even if OCC does have 
implied authority to pledge margin assets, that may not be transparent 
to all clearing members because it is not expressly stated in the rule. 
In order to eliminate any ambiguity, OCC proposes to (i) Amend Rule 
1104 and Rule 1106 to replace the phrases ``convert to cash,'' 
``conversion to cash'' and ``converted to cash'' with the words 
``liquidate,'' ``liquidation'' and ``liquidated,'' respectively; and 
(ii) amend Rule 1104(b) to expressly give OCC the power to pledge a 
suspended clearing member's margin deposits as security for loans if 
designated executive officers of OCC determine that immediate 
liquidation of such assets for cash under then-existing circumstances 
would not be in the best interests of OCC, other clearing members, or 
the general public.
    While OCC's $2 billion committed credit facility should normally be 
more than sufficient to meet OCC's liquidity needs, it is nevertheless 
possible that OCC could encounter a liquidity demand that exceeds the 
size of that facility. Moreover, it could be difficult to maintain the 
size of the facility under unfavorable market conditions (i.e., if the 
credit markets tighten significantly). In addition, future regulatory 
requirements for clearinghouses could impose liquidity requirements 
that would be difficult to meet with a committed credit facility alone. 
In order to be better prepared to deal with such situations, OCC 
believes that it is necessary to actively explore a variety of means 
for raising and maintaining liquidity resources, including 
participation in securities lending or tri-party repo markets. 
Therefore, OCC proposes to amend both Article VIII, Section 5(e) of the 
by-laws and Rule 1104(b) to clarify that OCC's authority to use a 
suspended clearing member's margin and clearing fund deposits and other 
clearing members' clearing fund deposits to obtain temporary liquidity 
for purposes of meeting Default Obligations is not limited to pledging 
such assets under the committed credit facility. Rather, OCC would have 
express authority to use such assets to obtain liquidity through any 
reasonable means as determined by designated executive officers of OCC 
in their discretion. The addition of the language ``or otherwise 
obtain'' in Article VIII, Section 5(e) of the by-laws reflects that 
certain transactions by which OCC may obtain liquidity could be 
characterized as something other than a transaction in which funds are 
``borrowed.'' For example, in a Master Repurchase Agreement, the 
Agreement states that the parties' intent is for the transactions to be 
``sales'' and ``purchases,'' but also contains provisions if such 
transactions are deemed to be loans. Accordingly, the use of ``or 
otherwise obtain'' in the phrase ``borrow or otherwise obtain'' 
addresses the possibility that the transaction by which OCC obtains 
funds may not be deemed to be a ``borrowing'' and forestalls technical 
arguments that it would be necessary for the transaction to be a 
``loan'' in order for OCC to borrow funds.
    OCC believes that the proposed changes to its by-laws and rules are 
consistent with the purposes and requirements of Section 17A of the 
Securities Exchange Act of 1934, as amended (the ``Exchange Act''), 
because they are designed to permit OCC to perform clearing services in 
a manner consistent with OCC's obligations to promote the prompt and 
accurate clearance and settlement of securities transactions and to 
protect investors and the public interest. They accomplish this purpose 
by clarifying and enhancing OCC's ability to raise liquidity to satisfy 
Default Obligations. The proposed rule change is not inconsistent with 
any rules of OCC, including any rules proposed to be amended.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

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

[[Page 67525]]

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 Commissions 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-2011-15 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-2011-15. 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 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 Section, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filings will also 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_11_15.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-2011-15 
and should be submitted on or before November 22, 2011.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
Kevin M. O'Neill,
Deputy Secretary.
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    \5\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2011-28199 Filed 10-31-11; 8:45 am]
BILLING CODE 8011-01-P