Document ID: SEC-2020-1351-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2020-08-24T04:00Z

[Federal Register Volume 85, Number 164 (Monday, August 24, 2020)]
[Notices]
[Pages 52176-52178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18461]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89590; File No. SR-OCC-2020-010]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Concerning the Commingling of 
Certain Non-Customer Margin Assets with Clearing Fund Contributions in 
The Options Clearing Corporation's Account at the Federal Reserve Bank 
of Chicago

August 18, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on August 7, 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 set forth new 
interpretations and policies to OCC Rules 604 (Form of Margin Assets) 
and 1002 (Clearing Fund Contributions) to provide OCC with express 
authority to hold cash Clearing Fund contributions and certain non-
customer cash margin assets in its account at the Federal Reserve Bank 
of Chicago at the same time. The proposed changes to OCC's Rules are 
included in Exhibit 5 of filing SR-OCC-2020-010. Material proposed to 
be added is underlined and material proposed to be deleted is marked in 
strikethrough text. All terms with initial capitalization that are not 
defined herein have the same meaning as set forth in the OCC By-Laws 
and Rules.\3\
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    \3\ 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
    As part of OCC's designation as a systemically important financial 
market utility by the Financial Stability Oversight Council on July 18, 
2012, OCC is eligible pursuant Section 806 of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 to request 
the use of certain accounts and services of Federal Reserve Banks. OCC 
has been approved by the Board of Governors of the Federal Reserve 
System to maintain an account at the Federal Reserve Bank of Chicago 
(``Federal Reserve Bank Account'') to hold, among other things, cash 
deposits from its Clearing Members to satisfy margin and Clearing Fund 
requirements.\4\ However, OCC Rules 1002(c) and 604(d) (described in 
more detail below) impose certain restrictions on the manner in which 
OCC must hold Clearing Fund contributions and margin assets.\5\ 
Consistent with these requirements, OCC currently holds only cash 
Clearing Fund contributions in its Federal Reserve Bank Account and 
separately holds cash margin assets of Clearing Members in accounts 
with commercial banks.
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    \4\ See Federal Reserve Bank of Chicago authorization to provide 
accounts and services to Options Clearing Corporation and Chicago 
Mercantile Exchange, Inc., in accordance with the Dodd-Frank Act and 
Regulation HH, approved March 15, 2016 (https://www.federalreserve.gov/releases/h2/20160319/h2.pdf). OCC has also 
been approved to maintain two additional accounts to serve as 
customer segregated accounts as defined under Section 4d of the 
Commodity Exchange Act. Since these accounts are segregated margin 
accounts, the change discussed herein does not impact the activation 
of these accounts.
    \5\ See OCC Rule 604(d) (allowing OCC to deposit margin assets 
of Clearing Members ``with such banks, trust companies or other 
depositories as the Board of Directors may select'') and Rule 
1002(c) (allowing OCC to deposit Clearing Fund contributions ``in 
approved custodians''). Article I, Section 1.A.(3) defines term 
``approved custodian'' to mean ``a bank or trust company approved 
the Chief Executive Officer, or Chief Operating Officer.''
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    Congress established the Federal Reserve System, comprised of the 
Board of Governors, the Federal Open Markets Committee, and twelve 
Federal Reserve Banks, in 1913 as the central bank of the U.S. ``to 
provide the nation with a safer, more flexible, and more stable 
monetary and financial system.'' \6\ The Commission's rules for covered 
clearing agencies \7\ like OCC expressly promote the use of central 
bank services for a variety of purposes, including using central bank 
services to: conduct money settlements,\8\ satisfy requirements 
regarding custody of qualifying liquid resources,\9\ and enhance 
management of liquidity risk.\10\ OCC is proposing amendments to Rules 
604 and 1002 that, as described below, would permit OCC to commingle 
cash Clearing Fund contributions and certain non-customer cash margin 
assets of Clearing Members in its Federal Reserve Bank Account.
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    \6\ Board of Governors of the Federal Reserve System, Federal 
Reserve Act (March 10, 2017), https://www.federalreserve.gov/aboutthefed/fract.htm.
    \7\ 17 CFR 240.17Ad-22(a)(5).
    \8\ 17 CFR 240.17Ad-22(e)(9).
    \9\ 17 CFR 240.17Ad-22(a)(14)(i), (e)(7)(ii).
    \10\ 17 CFR 240.17Ad-22(e)(7)(iii).
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Proposed Change
Cash Margin Assets
    OCC Rule 604(d) states that certain cash margin assets of Clearing 
Members (``Specified Cash Margin Assets'') must be deposited to the 
credit of OCC in an

[[Page 52177]]

account or accounts,\11\ designated as Clearing Member margin accounts, 
with such banks, trust companies or other depositories as the Board of 
Directors may select. Rule 604(d) further states that such Specified 
Cash Margin Assets shall not be commingled with funds of OCC or used by 
OCC as working capital. Under OCC's By-Laws and Rules, OCC has a lien 
on margin assets of a Clearing Member to be able to satisfy obligations 
of the Clearing Member to OCC; however, OCC does not have authority to 
use the margin assets of one Clearing Member to satisfy obligations to 
OCC of a different Clearing Member.\12\
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    \11\ OCC Rule 604(d) expressly excludes from these Specified 
Cash Margin Assets those funds that are: (i) Deposited in respect of 
a segregated futures account (which must be held in accordance with 
the provisions of Section 4d of the Commodity Exchange Act and 
regulations thereunder); (ii) invested by OCC pursuant to Rule 
604(a); or (iii) credited by OCC to a liquidating settlement account 
pursuant to Chapter XI of OCC's Rules.
    \12\ See OCC By-Laws Article I., Sections 1.G.(1) (defining the 
term ``general lien'') and R.(7) (defining the term ``restricted 
lien''); see also OCC By-Laws Article VI, Section 3 (specifying the 
application of general and restricted liens to Clearing Member 
margin assets credited to different OCC account types).
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    OCC proposes to add Interpretation and Policy .18 to Rule 604 to 
provide that, notwithstanding anything else in Rule 604, Specified Cash 
Margin Assets held by OCC as non-customer margin assets and deposited 
to the credit of OCC in its Federal Reserve Bank Account may be 
deposited in accounts that are not designated as Clearing Member margin 
accounts and may be commingled with cash Clearing Fund contributions.

Cash Clearing Fund Contributions

    OCC Rule 1002(c) states in relevant part that cash Clearing Fund 
contributions may from time to time be partially or wholly invested by 
OCC for its account in Government securities, and to the extent that 
such contributions are not so invested they ``shall be deposited by OCC 
in a separate account or accounts for Clearing Fund contributions in 
approved custodians, provided that such account or accounts may 
commingle the Clearing Fund contributions of different Clearing 
Members.'' As noted, OCC currently holds only cash Clearing Fund 
contributions in its Federal Reserve Bank Account.
    OCC proposes to add Interpretation and Policy .04 to Rule 1002 to 
provide that, notwithstanding the aforementioned requirements of Rule 
1002(c), Clearing Fund contributions deposited in an account at a 
Federal Reserve Bank may be commingled in the account with Specified 
Cash Margin Assets that are non-customer margin assets in accordance 
with the requirements of proposed Interpretation and Policy .18 to Rule 
604.
    As described above, the purpose of the proposed interpretations and 
policies is to provide OCC with clear authority to be able to maintain 
Specified Cash Margin Assets that are non-customer margin assets and 
cash Clearing Fund contributions in its Federal Reserve Bank Account at 
the same time. OCC currently maintains a single Federal Reserve Bank 
Account for assets that are not required to be segregated under Section 
4d of the Commodity Exchange Act, so the Specified Cash Margin Assets 
that are non-customer margin assets and cash Clearing Fund 
contributions would be commingled in this account. OCC believes that 
the ability to hold such margin and cash Clearing Fund contributions in 
its Federal Reserve Bank Account at the same time would be consistent 
with Commission rules for covered clearing agencies \13\ that encourage 
the use of central bank services. OCC notes that it would not be 
required to hold all non-customer margin cash in its Federal Reserve 
Bank Account and that it may continue to maintain some or all non-
customer margin cash at creditworthy commercial banks that are approved 
custodians for OCC.\14\
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    \13\ See supra notes 8-10 and accompanying text.
    \14\ See supra note 5.
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    All other OCC By-Laws and Rules pertaining to margin assets and 
Clearing Fund contributions would be unchanged and apply as they do 
currently, regardless of whether margin assets or Clearing Fund 
contributions are held in commercial bank accounts or in OCC's Federal 
Reserve Bank Account. For example, Specified Margin Assets of a 
Clearing Member that are held in OCC's Federal Reserve Bank Account 
would continue to only have a lien on Specified Margin Assets to 
satisfy obligations of that particular Clearing Member to OCC.
(2) Statutory Basis
    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency must be designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, safeguard securities and funds in its custody or control 
or for which it is responsible, and comply with the provisions of the 
Exchange Act and the rules and regulations thereunder.\15\ The proposed 
rule change would allow OCC to maintain Specified Cash Margin Assets of 
Clearing Members that are non-customer margin assets with cash Clearing 
Fund contributions in its Federal Reserve Bank Account. The proposed 
rule change would provide OCC with an additional approved custodian at 
which OCC can hold such assets in a manner that minimizes the custody 
risk of those assets and ensures prompt access to such assets when 
needed, thereby promoting the prompt and accurate clearance and 
settlement of securities transactions and the safeguarding the 
securities and funds in OCC's custody or control or for which it is 
responsible.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    Exchange Act Rule 17Ad-22(e)(16) requires OCC, as a covered 
clearing agency, to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to safeguard its own and 
its Clearing Members' assets, minimize the risk of loss and delay in 
access to these assets, and invest such assets in instruments with 
minimal credit, market, and liquidity risks.\16\ In adopting Rule 17Ad-
22(e)(16), the Commission stated that in satisfying the requirements a 
covered clearing agency should consider, among other things: (i) 
Whether it holds its own and its participants' assets at supervised and 
regulated entities that have robust accounting practices, safekeeping 
procedures, and internal controls that fully protect these assets; (ii) 
whether it has prompt access to its assets and the assets provided by 
participants, when required; and (iii) whether it evaluates and 
understands its exposures to its custodian banks, taking into account 
the full scope of its relationships with each.\17\
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    \16\ 17 CFR 240.17Ad-22(e)(16).
    \17\ See Exchange Act Release No. 78961 (September 28, 2016), 81 
FR 70786, 70837 (October 13, 2016) (File No. S7-03-14).
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    OCC believes that the proposed rule change is consistent with these 
considerations. As part of the U.S. central banking system, the Federal 
Reserve Bank of Chicago, where OCC maintains its account, is among the 
safest and most sound depository institutions in the world. Therefore, 
the ability to maintain Specified Cash Margin Assets that are non-
customer assets and cash Clearing Fund contributions in the account at 
the same time would provide OCC with an additional approved custodian 
for such assets that would appropriately safeguard those assets and 
minimize the risk of OCC's loss or delay in access to

[[Page 52178]]

them consistent with Exchange Act Rule 17Ad-22(e)(16).\18\
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    \18\ 17 CFR 240.17Ad-22(e)(16).
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    Moreover, and as noted above, provisions in Exchange Act Rules 
17Ad-22(e)(7) and (9) also promote the use of central bank services by 
a covered clearing agency to conduct money settlements,\19\ satisfy 
requirements regarding custody of qualifying liquid resources \20\ and 
enhance management of liquidity risk.\21\ Accordingly, providing OCC 
with clear authority to use its Federal Reserve Bank Account to custody 
Specified Cash Margin Assets that are non-customer margin assets and 
cash Clearing Fund contributions at the same time is generally 
consistent with these provisions.
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    \19\ 17 CFR 240.17Ad-22(e)(9).
    \20\ 17 CFR 240.17Ad-22(a)(14)(i), (e)(7)(ii).
    \21\ 17 CFR 240.17Ad-22(e)(7)(iii).
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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 Exchange Act \22\ 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 Exchange 
Act. OCC does not believe that the proposed rule change would impact or 
impose any burden on competition. The proposed rule change is designed 
to facilitate OCC's ability to appropriately safeguard Specified Cash 
Margin Assets that are non-customer margin assets and cash Clearing 
Fund contributions using OCC's Federal Reserve Bank Account. The 
proposed rule change would apply equally to all Clearing Members in 
that all Specified Cash Margin Assets that are non-customer margin 
assets and cash Clearing Fund contributions of Clearing Members would 
be eligible to be maintained in OCC's Federal Reserve Bank Account. 
Therefore, the proposal does not favor or disfavor any Clearing Member 
or group of Clearing Members compared to others.
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    \22\ 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 Exchange 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 Exchange 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-2020-010 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-2020-010. 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/about/publications/bylaws.jsp.
    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-2020-010 and 
should be submitted on or before September 14, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\

    \23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18461 Filed 8-21-20; 8:45 am]
BILLING CODE 8011-01-P