Document ID: SEC-2011-1694-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2011-11-03T04:00Z

[Federal Register Volume 76, Number 213 (Thursday, November 3, 2011)]
[Notices]
[Pages 68236-68237]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28459]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65648; File No. SR-OCC-2011-12]

Self-Regulatory Organizations; Options Clearing Corporation; 
Order Approving Proposed Rule Change To Adopt Fitness Standards for 
Directors, Clearing Members, and Others

October 27, 2011.

I. Introduction

    On August 31, 2011, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2011-12 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 September 19, 2011.\3\ No comment letters were 
received. 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. 65338 (September 14, 
2011); 76 FR 58061 (September 19, 2011).
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II. Description

    The purpose of this rule change is to facilitate compliance by OCC 
with new core principles (``Core Principles'') applicable to 
derivatives clearing organizations (``DCOs'') that are set forth in the 
Commodity Exchange Act (``CEA''), as amended by the Dodd-Frank Act. In 
particular, new DCO Core Principle O requires DCOs to establish fitness 
standards for directors, clearing members and certain other 
individuals.

Background

    The Core Principles for DCOs are set forth in the CEA and consist 
of a number of governing principles to which a DCO is required to 
adhere. OCC is registered as a DCO with the Commodity Futures Trading 
Commission (the ``CFTC'') under Section 5b of the CEA, and clears 
commodity futures and commodity options traded on five futures 
exchanges subject to the CFTC's jurisdiction. Title VII of the Dodd-
Frank Act amended the CEA to expand existing Core Principles and to add 
certain new Core Principles. The applicable Dodd-Frank amendments to 
the CEA become effective July 16, 2011. In January 2011, the CFTC 
published proposed rules (the ``Proposed Rules'') to implement the Core 
Principles, as amended and expanded by the Dodd Frank Act.\4\ The 
Proposed Rules propose certain minimum criteria for complying with the 
Core Principles, and propose certain clarifications of the more 
ambiguous provisions of the Core Principles. The Proposed Rules have 
not been adopted and will not be effective until 60 days following the 
date on which the CFTC publishes final rules implementing the Core 
Principles.
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    \4\ See 76 FR 722 (January 6, 2011).
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    Core Principle O provides that each DCO must: (i) Establish 
governance arrangements that are transparent (I) To fulfill public 
interest requirements and (II) to permit the consideration of the views 
of both owners and participants, and (ii) establish and enforce 
appropriate fitness standards for (I) directors, (II) members of any 
disciplinary committee, (III) members of the DCO, (IV) any other 
individual or entity with direct access to the settlement or clearing 
activities of the DCO, and (V) any party affiliated with any of the 
above. OCC believes that its existing governance arrangements satisfy 
the transparency requirements of subparagraph (i) of Core Principle O. 
OCC proposed to adopt the Fitness

[[Page 68237]]

Standards \5\ in order to assure compliance with subparagraph (ii) of 
Core Principle O.
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    \5\ This rule change adds Interpretations and Policies entitled 
``Fitness Standards'' to Sections 2, 6, 6A, and 7 of Article III and 
Section 1 of Article V of OCC's By-Laws.
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Description of Fitness Standards

    OCC believes that its Fitness Standards comply with Core Principle 
O by establishing minimum standards for directors and clearing members, 
as well as affiliates of such directors and clearing members.\6\ The 
Fitness Standards are generally similar to fitness standards adopted by 
the Depository Trust and Clearing Corporation.
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    \6\ OCC has noted that in a prior discussion with the CFTC 
staff, the CFTC staff indicated that the proposed rule change may 
become effective after July 16, 2011 without impacting OCC's status 
as a DCO.
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    OCC believes that the Fitness Standards incorporate the Proposed 
Rule's minimum fitness standards for directors and clearing members, 
including the bases for refusal to register a person under Section 
8a(2) of the CEA and, for directors only, the absence of a significant 
history of serious disciplinary offences, such as those that would be 
disqualifying under Section 1.63 of the CFTC's regulations. The Fitness 
Standards do not establish criteria for members of the disciplinary 
committee or for persons ``with direct access to the settlement or 
clearing activities'' of OCC (``Access Persons''). In OCC's case, all 
members of disciplinary committees \7\ are directors of the Corporation 
and will be subject to the Fitness Standards as such. With respect to 
Access Persons, neither the CEA nor the Proposed Rules provide any 
explicit guidance as to the persons intended to be included in the 
phrase ``any other individual or entity with direct access to the 
settlement or clearing activities of the [DCO].'' Similarly, the term 
``direct access'' is not defined in the CEA or the Proposed Rules. 
However, Core Principle O is closely modeled on existing designated 
contract market (``DCM'') Core Principle 14, which also requires that 
fitness standards be established for directors, members and ``any other 
persons with direct access to the facility.'' The CFTC has previously 
issued guidance on DCM Core Principle 14 and interpreted ``persons with 
direct access to the facility'' to include ``non-member market 
participants who are not intermediated and do not have [member] 
privileges, obligations, responsibilities or disciplinary authority.'' 
This interpretation suggests that ``access'' is intended to mean the 
type of access that a member would have. OCC believes that by analogy 
``persons with direct access to the settlement or clearing activities'' 
of a DCO, as used in Core Principle O, is intended to refer to persons 
with access to submit transactions for clearing or to give instructions 
to OCC regarding accounts or transactions or otherwise have access to 
the clearing system in a manner similar to the access that a Clearing 
Member would have. OCC also does not read ``any other individual or 
entity with direct access to the settlement or clearing activities of 
the [DCO]'' to include OCC employees or service providers such as 
settlement banks. Accordingly, OCC believes that there are presently no 
persons with ``direct access'' to the settlement and clearing 
activities of OCC other than clearing members.
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    \7\ OCC has no standing disciplinary committee. Disciplinary 
committees are formed on an ad hoc basis. See OCC Rule 1202(a).
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By-Law Changes

    Article III (Board of Directors) and Article V (Clearing Members) 
set forth qualifications for directors and clearing members, 
respectively. The Interpretations and Policies under the appropriate 
sections of both Articles are being amended to incorporate the 
applicable Fitness Standards by reference.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Sections 
17A(b)(3)(A) and (C) of the Act.\8\ Section 17A(b)(3)(A) of the Act 
requires that a clearing agency is so organized to facilitate the 
prompt and accurate clearance and settlement of securities transactions 
and derivative agreements, contracts, and transactions for which it is 
responsible. The proposed rule change establishes Fitness Standards for 
the purpose of permitting OCC to comply with new Core Principle O, 
applicable to DCOs under the CEA. The proposed rule change is 
consistent with 17A(b)(3)(A) because it is designed to assure that OCC 
has the governance structure in place to clear and settle the 
transactions that it clears and settles as DCO. Furthermore, the 
Commission notes that the proposed rule change does not affect OCC's 
governance structure with respect to the fair representation of its 
shareholders and participants in the selection of its directors and 
administration of its affairs. Accordingly, OCC's rules should continue 
to assure the fair representation of its shareholders and participants 
as required by Section 17A(b)(3)(C).
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    \8\ 15 U.S.C. 78q-1(b)(3)(A) and (C).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \9\ and the 
rules and regulations thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-OCC-2011-12) be, 
and hereby is, approved.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact of efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-28459 Filed 11-2-11; 8:45 am]
BILLING CODE 8011-01-P