Document ID: SEC-2016-1712-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2016-09-22T04:00Z

[Federal Register Volume 81, Number 184 (Thursday, September 22, 2016)]
[Notices]
[Pages 65415-65431]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22792]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78862; File No. SR-OCC-2016-002]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change, as Modified by Amendment No. 1, 
Concerning Enhancements to The Options Clearing Corporation's 
Governance Arrangements

September 16, 2016.
    On July 15, 2016, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2016-002 pursuant to Section 19(b)(1) of 
the Securities and Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published in the Federal 
Register on

[[Page 65416]]

August 3, 2016.\3\ The Commission did not receive any comments on the 
proposed rule change. On August 24, 2016, OCC filed Amendment No. 1 to 
the proposed rule change.\4\ 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\ Exchange Act Release 78438 (July 28, 2016), 81 FR 51220 
(August 3, 2016) (SR-OCC-2016-002).
    \4\ In Amendment No. 1, OCC revised Item 2 of Form 19b-4 to 
confirm that holders of all OCC common stock unanimously consented 
to the amendments to OCC's Certificate of Incorporation and to 
Article III, Sections 1, 10, 12, and 15 of its By-Laws as approved 
by OCC's Board at a meeting held on May 4, 2016 and as contained 
within the proposed rule change. Amendment No. 1 clarified further 
that changes to OCC's Certificate of Incorporation would not take 
effect until filed with Delaware Secretary of State. Amendment No. 1 
is not subject to notice and comment because it does not materially 
alter the substance of the proposed rule change or raise any novel 
regulatory issues.
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I. Description of the Proposed Rule Change

    OCC is amending its Certificate of Incorporation, By-Laws, and 
Board of Directors (``Board'') Charter to require that only one 
Management Director serve on OCC's Board (as opposed to the current 
requirement of two Management Directors). Moreover, OCC is proposing to 
amend its By-Laws and Rules to delete all references to the title and 
responsibilities of the Management Vice Chairman. In addition, OCC is 
amending its By-Laws to: (i) Provide that the Compensation and 
Performance Committee (``CPC'') \5\ and the Audit Committee (``AC'') 
each will be chaired by a Public Director; (ii) modify the composition 
requirements of the Risk Committee (``RC'') to, among other things, 
provide that an Exchange Director be a member of the Risk Committee; 
(iii) provide for action by the OCC Board in the nomination process for 
Member Directors and Public Directors; (iv) eliminate term limits for 
Public Directors; and (v) consolidate By-Law sections that identify the 
committees of the Board into a single section of the By-Laws. Finally, 
OCC is amending the Charters of the Board and the AC, CPC, Governance 
and Nominating Committee (``GNC''), RC, and Technology Committee 
(``TC'') (collectively, ``Board Committees'' or ``Committees'' and each 
a ``Board Committee'' or ``Committee'') that stem from scheduled 
reviews of such documents.
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    \5\ As described below, the Performance Committee will be 
renamed the Compensation and Performance Committee.
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    According to OCC, the amendments to the Board and Committee 
Charters are designed, in general, to provide more clarity and 
transparency around the oversight functions and responsibilities of the 
Board and each of its Committees and provide for a more comprehensive 
and robust oversight framework for the financial reporting, audit and 
compliance, compensation and performance, governance and nomination, 
risk, and technology functions at OCC.
    The amendments to OCC's Certificate of Incorporation, By-Laws, 
Rules, Board and Committee Charters, and Amended and Restated 
Stockholders Agreement are described in detail below.
    All capitalized terms not defined herein have the same meaning as 
set forth in the OCC By-Laws and Rules.

(1) Amendments to OCC's Certificate of Incorporation

    OCC is amending its Certificate of Incorporation to state that the 
number of Management Directors serving on OCC's Board shall be such 
number as shall be fixed by or pursuant to OCC's By-Laws.\6\ OCC stated 
that the purpose of this proposed change is ultimately to require that 
only one Management Director shall serve on OCC's Board. OCC will also 
amend its By-Laws to state that one Management Director shall serve on 
OCC's Board (as discussed in more detail below). The amendments will 
also ensure consistency among all of OCC's governing documents 
concerning the number of Management Directors on OCC's Board. OCC's 
Certificate of Incorporation and By-Laws currently state that OCC's 
Board shall be composed of Members Directors, Exchange Directors, 
Public Directors, and two Management Directors. Recently, however, 
there has been a vacancy for one Management Director position and only 
one Management Director is serving on the Board at this time.\7\ OCC's 
Board continually evaluates the leadership structure at OCC, including 
the appropriate number of Management Directors for OCC's Board, and in 
light of recent experience since the vacancy of the second Management 
Director position, believes that amending the Board composition to 
require only one Management Director on OCC's Board will provide an 
appropriate level of management representation in the Board-level 
oversight of OCC. OCC stated that the Executive Chairman, as Management 
Director, continues to represent management's viewpoint on OCC's Board. 
Moreover, the Board has access to OCC's management team, which OCC 
believes ensures that the Board has continued access to management's 
perspectives on the business and affairs of OCC. Furthermore, OCC notes 
that, prior to the addition of a second Management Director seat in 
2013, OCC has historically had only one Management Director serving on 
its Board.\8\ Accordingly, OCC believes that the proposed amendments 
would continue to provide for prudent governance arrangements at OCC. 
OCC is also proposing conforming changes to the Board Charter as 
described below.
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    \6\ The number of Management Directors required to serve on 
OCC's Board will be stipulated by Article III, Section 1 of OCC's 
By-Laws. Article XI, Section 1 of OCC's By-Laws states that Article 
III of the By-Laws may not be amended by action of the Board without 
the approval of the holders of all of the outstanding Common Stock 
of the Corporation entitled to vote thereon. Accordingly, any 
proposed change in the number of Management Directors required to 
serve on OCC's Board will continue to be subject to stockholder 
approval.
    OCC is also making conforming changes to Article III, Sections 
10 (Resignations) and 12 (Filling of Vacancies and Newly Created 
Directorships) of the By-Laws to reflect that only one Management 
Director, the Executive Chairman, will be serving on OCC's Board.
    \7\ In 2014, the Commission approved a proposed rule change 
providing that OCC's President would not be considered a Management 
Director and, therefore, only one Management Director (the Executive 
Chairman) currently serves on the Board. See Securities Exchange Act 
Release No. 73785 (December 8, 2014), 79 FR 73915 (December 12, 
2014) (SR-OCC-2014-18).
    \8\ In 2013, the Commission approved a proposed rule change by 
OCC to provide for the separation of the powers and duties combined 
in the office of OCC's Chairman of the Board of Directors into two 
offices, Chairman and President, and to create an additional 
directorship to be occupied by the President. See Securities 
Exchange Act Release No. 70076 (July 30, 2013), 78 FR 47449 (August 
5, 2013) (SR-OCC-2013-09).
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(2) Amendments to OCC's By-Laws and Rules

(a) Number of Management Directors on OCC's Board
    Consistent with the amendments to the Certificate of Incorporation, 
described above, OCC is amending Article III, Section 1 of its By-Laws 
to state that only one Management Director will serve on OCC's Board 
(as opposed to the current requirement of two). As noted above, OCC's 
Board continually evaluates the leadership structure at OCC, including 
the appropriate number of Management Directors for OCC's Board, and 
believes that amending the Board composition to require one Management 
Director on OCC's Board will continue to provide an appropriate level 
of management representation in the Board-level oversight of OCC. OCC 
is also making conforming changes to Article III, Sections 10 
(Resignations) and 12 (Filling of Vacancies and Newly Created 
Directorships) of the By-Laws to reflect that only one Management 
Director, the Executive Chairman, would be serving on OCC's Board.

[[Page 65417]]

(b) Elimination of Management Vice Chairman Role
    OCC is amending its By-Laws and Rules to eliminate the role of 
Management Vice Chairman. The office of Management Vice Chairman has 
been vacant for a number of years and has not been included in the 
Board's current discussions regarding management succession planning. 
During that time, OCC's thought process surrounding leadership roles at 
OCC has evolved. OCC believes that any of the responsibilities of the 
Management Vice Chairman have been appropriately handled by other 
officers of OCC, primarily the Executive Chairman and President (or 
where applicable, other officers such as the Secretary or Directors 
such as the Member Vice Chairman) \9\ and as a result, this role is 
being eliminated from OCC's By-Laws and Rules. OCC believes the 
amendments will more accurately reflect the current state of affairs 
regarding the office, ensure consistency across all of OCC's governing 
documents, and provide more clarity and transparency regarding OCC's 
intended governance arrangements.
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    \9\ For example, under proposed revisions to Article IV, Section 
7, the Member Vice Chairman would preside over Board and stockholder 
meetings in the absence of the Executive Chairman.
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    In particular, OCC is amending (i) By-Laws Article I.A.(13); 
Article II, Section 4; Article III, Section 15; Article IV; Article V, 
Sections 1 and 3; Article VI, Section 17; Article VIII, Section 5; 
Article IX, Sections 12 and 14 and (ii) Rules 305, 309, 309A, 505, 
609A, 801, 804, 805, 901, 903, 1104, 1106, 1309, 1402, 1405, 1604, 
1610, 2104, 2110, and 2408 to remove all references to and 
responsibilities of the role of Management Vice Chairman.
(c) Committee Descriptions and Other Conforming By-Law Amendments
    OCC is amending Article III of its By-Laws to provide descriptions 
of the AC, CPC, GNC, RC, and TC in a single section of the By-Laws. 
Specifically, OCC is amending its By-Laws to consolidate existing 
Article III, Section 4 (which concerns the GNC) and existing Article 
III, Section 9 (which concerns the RC,\10\ the TC,\11\ and the Board's 
ability to designate persons to serve on Committees, generally), into 
Article III, Section 4 and adding descriptions of the CPC and AC to 
Article III, Section 4 of its By-Laws in order to provide a more 
transparent, centralized, and unified statement describing all of the 
Board Committees.
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    \10\ The description of the RC in proposed Article III, Section 
4(d) of the By-Laws would reflect changes to OCC's existing policy 
regarding the composition of the RC in order to conform the By-Law 
provision to changes recommended as a result of the annual review of 
the RC Charter (as discussed below). See infra note 15, and related 
text.
    \11\ The Commission recently approved a proposed rule change by 
OCC to adopt a Technology Committee of the Board of Directors. See 
Securities Exchange Act Release No. 77042 (February 3, 2016), 81 FR 
6915 (February 9, 2016) (SR-OCC-2015-018).
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    In addition, OCC will make a non-substantive drafting clarification 
to existing language being relocated from Article III, Section 9 to the 
introductory section of Article III, Section 4 to clarify that the 
Board is required to designate persons to serve on the specifically 
enumerated Committees therein.
    The amended By-Laws description of the AC will reflect existing 
requirements in the AC and GNC Charters that, on an annual basis, the 
Board of Directors shall appoint an AC selected from among the 
directors recommended by the then-constituted GNC after consultation 
with the Executive Chairman and shall serve at the pleasure of the 
Board, provided that no Management Director may serve on the AC. The 
description of the AC will also include a new requirement that the 
chairman of the AC shall be designated by the Board from among the 
Public Director member(s) of the Committee (as described further 
below).
    The description of the CPC will reflect the existing requirement 
that, on an annual basis, the Board of Directors shall appoint a CPC 
and that the CPC generally consists of the Executive Chairman, the 
Member Vice Chairman, and at least one Public Director.\12\ Consistent 
with the preceding sentence, all of the CPC members will be selected by 
the Board from among the directors recommended by the then-constituted 
GNC after consultation with the Executive Chairman and shall serve at 
the pleasure of the Board. The description will also include a new 
requirement that the chairman of the CPC shall be designated by the 
Board from among the Public Director member(s) of the Committee (as 
described further below). OCC believes that consolidating the 
descriptions of all Board Committees into Article III, Section 4 of its 
By-Laws will provide more clarity and transparency to OCC's 
participants regarding the existence and composition of such 
Committees.
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    \12\ The description of the CPC in the By-Laws will include the 
general requirement that CPC shall include the Executive Chairman, 
the Member Vice Chairman, and at least one Public Director. The 
description is not intended to change the more specific CPC 
composition requirements in the CPC Charter that the committee 
consist of a Public Director Chair, the Executive Chairman, the 
Member Vice Chairman, and three or more other directors appointed 
annually by the Board.
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    OCC is amending Article IV, Section 1 of the By-Laws to provide 
that the Board will elect the Executive Chairman and Vice Chairman of 
the Board upon the nomination of the GNC and also elect the President 
of OCC (in addition to the Secretary and Treasurer). In addition, OCC 
is amending Article IV, Section 7 to delete a requirement that the 
Member Vice Chairman preside at the meetings of any Committee of the 
Board of Directors charged with the responsibility for evaluating the 
performance and compensation of officers as the CPC will now be chaired 
by a Public Director. In addition, OCC will make amendments to clarify 
that the Member Vice Chairman will preside over meetings of the Board 
and stockholders in the absence of the Executive Chairman because the 
President cannot preside over meetings of the Board.\13\
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    \13\ See OCC's By-Laws Article IV, Section 8.
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(d) Compensation and Performance Committee and Audit Committee 
Independence
    In addition to the changes described above, OCC will also change 
the Board Committee descriptions in proposed Article III, Sections 4(a) 
and (b) of the By-Laws to reflect the requirement that a Public 
Director \14\ chair the AC and the CPC. The GNC recently performed a 
review of governance trends and best practices among self-regulatory 
organizations as they relate to board-level compensation 
committees.\15\ OCC undertook the review to further the Board's 
oversight of employee compensation and benefits, recognizing that the 
CPC primarily functions as a compensation committee (although it also 
has broad oversight responsibilities for financial and budget matters). 
OCC believes that having the CPC chaired by a Public Director (rather 
than a Member Director,\16\ which is currently the case) will be more 
consistent with governance best practices and practices of other self-
regulatory organizations. OCC believes that such a change will ensure 
that compensation and related decisions are undertaken in a way that is 
likely to support objective judgment and independence unfettered by 
potential conflicts that may exist by having a Member Director chair 
the CPC given OCC's self-regulatory responsibilities.

[[Page 65418]]

The Board agreed with the GNC's recommendation.
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    \14\ See Article III Section 6A of OCC's By-Laws regarding 
Public Directors.
    \15\ The GNC Charter provides, in relevant part, that the 
purpose of the GNC is to review on a regular basis the overall 
corporate governance of OCC and recommend improvements to the Board 
when necessary.
    \16\ See OCC's By-Laws Article III, Section 3 and Section 5.
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    Additionally, the GNC reviewed proposed regulatory standards for 
audit committees of self-regulatory organizations that will require 
such audit committees to be independent based on facts determined by a 
given self-regulatory organization's board of directors. Such review 
caused the GNC to recommend to the Board that a Public Director should 
be required to chair the AC in order to align with governance best 
practices for audit committees and to support the objectivity of the 
AC. The Board agreed with the GNC's recommendation. Moreover, and in 
furtherance of the goal of AC independence, any currently serving 
Management Director(s) will not be eligible to serve on the AC.
(e) Risk Committee Membership
    OCC is amending Article III of its By-Laws to modify the 
composition requirements of OCC's RC. Existing Article III, Section 9 
of OCC's By-Laws currently requires that the RC shall consist of the 
Executive Chairman, the Member Vice Chairman, at least three other 
Member Directors selected on a basis that shall not discriminate 
against any Exchange, and one or more Public Directors. OCC is 
replacing this description of the RC with new Article III, Section 
4(d), which will modify the RC composition requirements to (i) provide 
that an Exchange Director \17\ be a member of the RC and (ii) require 
that at least one Member Director serve on the RC (as opposed to the 
current minimum requirement of four Member Directors) and (iii) remove 
a specific requirement that one of the Member Directors on the RC be 
the Member Vice Chairman.
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    \17\ See Article III Section 6 of OCC's By-Laws regarding 
Exchange Directors.
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    The GNC reviewed the membership composition of the RC and 
determined that one Exchange Director should be a member of the RC. 
Historically, the RC did not include Exchange Directors because Member 
Directors were much more directly concerned with the risk management 
and membership function of OCC due to the mutualization of risk among 
Clearing Members as well as the fact that Clearing Members are 
responsible for the contribution of margin and clearing fund deposits. 
Given the evolution of the markets for which OCC provides clearance and 
settlement services, OCC now believes that an Exchange Director should 
be a member of the RC. OCC believes that Exchange Directors have 
expertise and unique perspective on matters such as market risk as well 
as sophistication as to special risks arising from trading practices, 
strategies and new products.
    In addition, the GNC recommended, and the Board approved, a 
reduction in the minimum composition requirement for Member Directors 
on the RC to allow for greater flexibility in the selection of 
Directors with the requisite skills and expertise to serve on the RC. 
OCC believes that Member Director participation on the RC is vital and 
will continue to require that at least one Member Director serves on 
the RC. OCC also believes, however, that it is necessary and 
appropriate to maintain flexibility to ensure that the RC comprises 
those Directors that have the appropriate mix of knowledge and 
expertise necessary to provide for the prudent oversight of risk 
matters at OCC.
(f) Nomination Process for Member Directors and Public Directors
    OCC is amending Article III, Sections 5 and 6A; Article IV, Section 
1; and adopting Amendment No. 1 to Amended and Restated Stockholders 
Agreement to provide for Board action in the nomination process for 
Member Directors, Public Directors, the Executive Chairman, and Member 
Vice Chairman in conformance with the process set forth in the GNC 
Charter.\18\ Currently, Board action is not a part of the annual 
election process for Member Directors and Public Directors as described 
in the By-Laws and the Amended and Restated Stockholders Agreement. The 
amendments will provide that such persons will be nominated by the GNC 
for purposes of the Board's annual election process and then confirmed 
by the Board. OCC believes that the rule change will help ensure an 
appropriate level of oversight and participation by the full Board in 
determining its own composition and that the composition of the Board 
fulfils its needs for particular skills and qualifications.
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    \18\ The GNC Charter had already been reviewed by OCC in 2014 
and approved by the Commission. See Securities Exchange Act Release 
No. 72564 (July 8, 2014), 79 FR 40824 (July 14, 2014) (SR-OCC-2014-
09).
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(g) Elimination of Public Director Term Limits
    OCC is amending Article III, Section 6A of its By-Laws, Section 
IV.1. of the GNC Charter, and Section II.D. of the Board Charter to 
remove term limits for Public Directors. OCC believes it is appropriate 
to eliminate term limits for Public Directors because the learning 
curve for directors of OCC is significant. OCC also believes that it 
often takes several years for directors who come from outside the 
industry to achieve the particularized degree of knowledge and 
understanding about the business that is necessary to provide 
significant value. Additionally, the GNC reviewed OCC's term limit 
policy for Public Directors in light of benchmark data and governance 
trends and determined that the elimination of term limits for Public 
Directors is consistent with governance arrangements at large 
corporations. Therefore, OCC is proposing to remove its term limits for 
Public Directors in the interest of assuring that OCC has access to the 
full benefit of a Public Director's understanding and learning, with 
respect to OCC and the markets OCC serves, as it develops over time.

(3) Amendments to Board and Board Committee Charters and the Fitness 
Standards

    OCC represents that its amendments to the Board Charter are 
intended to: (i) Harmonize the description of the Board's obligations 
in the Board Charter with the description of the Board's obligations in 
OCC's By-Laws and Rules; (ii) better align the Board Charter with the 
Board's Corporate Governance Principles and By-Laws; (iii) reflect 
recent changes involving Board Committee Charters; (iv) in general, 
restate the Board's oversight responsibilities in a manner designed to 
provide for prudent governance arrangements in light of OCC's role as a 
systemically important financial market utility; and (v) make certain 
non-substantive administrative changes to the Charter.
(a) Membership and Organization of the Board
    OCC is amending Section II of the Board Charter regarding 
membership and organization requirements to reflect the elimination of 
the role of Management Vice Chairman as described above. As a result, 
in the event that the Executive Chairman is absent or disabled, the 
Member Vice Chairman shall preside over meetings of the Board. OCC is 
also making amendments that will allow for additional meetings of the 
Board being called as the Board deems appropriate (such meetings shall 
be called by the Executive Chairman or his designee) and that specify 
that the Executive Chairman shall consult with the Corporate Secretary 
(in addition to other directors or officers) when establishing Board 
meeting agendas.
    OCC is also making amendments intended to strengthen the Board's 
governance framework and practices surrounding meetings in executive

[[Page 65419]]

sessions by providing added structure regarding the convening and 
attendance of executive sessions and promoting the enhanced recordation 
of important meeting events and discussions. In particular, the 
amendments will: (i) Require that the Board meet in executive session 
at each regular meeting of the Board; (ii) allow the Board to determine 
who will participate in such sessions; (iii) provide for the exclusion 
of management, invited guests, and individual directors from executive 
sessions where discussions may involve certain sensitive matters or 
conflicts of interest; and (iv) require the Board to select a Director 
to chair executive sessions in the absence of the Executive Chairman. 
The amendments will also require that Board meeting minutes reflect, at 
least in summary fashion, the general matters discussed in an executive 
session. Specifically, the chair of the executive session will 
determine whether separate minutes of the executive sessions are to be 
recorded as well as the level of detail to be included in such minutes, 
provided that Board meeting minutes must, at a minimum, reflect that an 
executive session was convened and broadly describe the topic(s) 
discussed.
    In addition, OCC is also amending the Board Charter to state that 
the Board comprises one Management Director, rather than two Management 
Directors, in conformance with the proposed Certificate of 
Incorporation and By-Laws changes described above. OCC is also amending 
the Board Charter to reflect an increase in the number of Public 
Directors serving on the Board from three to five.\19\
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    \19\ The Commission approved the increase in the minimum number 
of Public Directors on OCC's Board from three to five in July 2014. 
See Securities Exchange Act Release No. 72564 (July 8, 2014), 79 FR 
40824 (July 14, 2014) (SR-OCC-2014-09).
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    To achieve a balanced representation on the Board among Member 
Directors, OCC is amending the Board Charter to state that the 
considerations involved in determining the nomination of Member 
Directors should include the volume of business transacted with OCC 
during the prior year and the mix of Member Directors that are 
primarily engaged in agency trading on behalf of retail customers or 
individual investors. OCC believes that the amendments reinforce the 
existing requirement in Article III, Section 5 of OCC's By-Laws that 
the GNC shall endeavor to achieve balanced representation among 
Clearing Members on the Board of Directors to assure that: (i) Not all 
Member Directors are representatives of the largest Clearing Member 
Organizations based on the prior year's volume, and (ii) the mix of 
Member Directors includes representatives of Clearing Member 
Organizations that are primarily engaged in agency trading on behalf of 
retail customers or individual investors. OCC is removing geographic 
location of Clearing Members as a factor for consideration because OCC 
believes that location is no longer a significant consideration given 
modern technology and the evolution of the industry. OCC is also adding 
language to the Board Charter (as well as the Committee Charters) to 
discourage Directors from attending meetings of the Board by telephone 
as currently provided in the Code of Conduct for OCC Directors. 
Attendance by telephone will be generally discouraged because OCC 
believes the Board may be less likely to have the kind of interaction 
that leads to fully informed discussions and decisions than if Board 
members were to meet in person.
(b) Responsibilities of the Board
    OCC is making amendments to the Board Charter that are primarily 
intended to: (i) Harmonize the description of the Board's obligations 
in the Board Charter with the description of the Board's obligations in 
OCC's By-Laws and Rules as well as the Board's Corporate Governance 
Principles \20\ and (ii) restate the Board's oversight responsibilities 
in a manner designed to provide for prudent governance arrangements in 
light of OCC's position as a designated systemically important 
financial market utility.
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    \20\ OCC stated that the purpose of the Board's Corporate 
Governance Principles is to assist OCC's Board in monitoring the 
effectiveness of policy and decision making at the Board and 
management levels. In particular, OCC meant the Board's Corporate 
Governance Principles to address OCC's obligations as a systemically 
important financial market utility to have policies and procedures 
in place that promote sound governance, including those policies and 
procedures identified in the Principles for Financial Market 
Infrastructures published by the Committee on Payment and Settlement 
Systems and the International Organization of Securities 
Commissions.
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    In cases when an obligation of the Board is expressed in both the 
Board Charter and OCC's By-Laws and Rules, OCC is will remove the 
obligation from the Board Charter. OCC will replace these charter 
provisions with a general statement that the Board will perform those 
functions as the Board believes appropriate or necessary, or as 
otherwise prescribed by rule or regulation, including OCC's By-Laws and 
Rules.\21\
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    \21\ The change will remove from the Board Charter some of the 
more specific obligations of the Board as already set forth in the 
By-Laws and Rules in favor of a more general statement intended to 
reflect that the Board would perform such functions as necessary or 
appropriate under OCC's Rules, By-Laws and other rules or 
regulations. The Board Charter provisions in question can generally 
be identified by footnote citations to By-Law provisions included in 
the Board Charter in Exhibit 5C.
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    OCC is also making amendments to Section IV of the Board Charter 
designed to provide for prudent governance arrangements emphasizing 
that the Board's oversight role should operate in a manner consistent 
with its responsibilities as a designated systemically important 
financial market utility. Specifically, OCC is amending the Charter to 
state that the responsibilities of the Board include: (i) Overseeing 
management's activities in managing, operating and developing OCC and 
evaluating OCC management's performance in executing its 
responsibilities; (ii) selecting, overseeing and, where appropriate, 
replacing the Executive Chairman of the Board and the President, 
providing counsel and advice to the Executive Chairman and the 
President as well as oversight of the performance of each such officer 
and of OCC in order to evaluate whether the business is being 
appropriately managed; (iii) setting expectations about the tone and 
ethical culture of OCC, and reviewing management's efforts to instill 
an appropriate tone and culture throughout OCC; (iv) providing 
oversight of risk assessment and risk management monitoring processes, 
including with respect to systemic risk and reviewing risk tolerances 
submitted to the Board for approval by its Risk Committee; (v) 
performing an annual self-evaluation of its performance, the 
performance of its Committees, the performance of individual directors 
and Committee members; and evaluating the Corporate Governance 
Principles and Fitness Standards; (vi) reviewing the amount of 
compensation for the Board's Public Directors (i.e., directors who are 
not affiliated with any national securities exchange or national 
securities association or with any broker or dealer) as well as 
reviewing the annual study and evaluation of OCC's system of internal 
accounting controls; (vii) providing oversight of internal and external 
audit processes and financial reporting, including approving major 
changes in auditing and accounting principles and practices; and (viii) 
oversight of OCC's information technology strategy, infrastructure, 
resources and risks.
    In addition, OCC is modifying certain existing Board Charter 
provisions related to the responsibilities of the Board. Specifically, 
OCC is making amendments that will specify that, in

[[Page 65420]]

addition to overseeing major capital expenditures and approving the 
annual budget and corporate plan, the Board is responsible for 
reviewing and approving OCC's financial objectives and strategies, 
capital plan and capital structure, OCC's fee structure, and major 
corporate plans and actions, as well as periodically reviewing the 
types and amounts of insurance coverage available in light of OCC's 
clearing operations. OCC is also making amendments to specify that the 
Board's responsibility for fostering OCC's compliance with applicable 
laws and regulations includes compliance with banking, securities and 
corporation laws and other applicable regulatory guidance and 
standards. Additionally, OCC is amending provisions related to the 
oversight of succession planning and executive compensation to state 
more specifically that the Board is responsible for evaluating and 
fixing the compensation of the Executive Chairman and President; 
overseeing succession planning, human resource programs, and talent 
management processes; and overseeing the development and design of 
employee compensation, incentive and benefit programs.\22\ The 
amendments will also remove a statement that OCC's Board is responsible 
for overseeing OCC's processes and framework for assessing, managing 
and monitoring strategic, financial and operational risk as this 
function is performed by the RC (as reflected in its Charter) with 
oversight from the Board.
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    \22\ OCC noted that a deleted reference to the evaluation of 
senior management is now covered by point (i) described in the 
paragraph above.
---------------------------------------------------------------------------

    OCC is also making non-substantive organizational changes in 
Section IV of the Board Charter. Specifically, OCC will combine 
provisions related to the Board's responsibilities for approving and 
overseeing OCC's business strategies and monitoring OCC's performance 
of clearance and settlement services.
(c) Other Administrative Changes
    In addition to the changes described above, OCC meant certain of 
the amendments to the Board Charter to address non-substantive, 
administrative issues. For example, certain amendments are being 
proposed to Section III of the Board Charter to reflect the adoption of 
the TC the GNC, and renaming of the Performance Committee to the CPC, 
as described herein. In addition, OCC is also amending Section I of the 
Board Charter to more accurately state that the Board is responsible 
for providing direction to and overseeing the conduct of the affairs of 
OCC (as opposed to just managing the business and affairs) and to 
remove an unnecessarily specific list of OCC stakeholders. OCC is also 
making amendments to require an annual (as opposed to the less specific 
``periodic'') review of the Board Charter, including the Corporate 
Governance Principles and Fitness Standards.
(d) Fitness Standards for Directors, Clearing Members and Others
    OCC is also amending the Fitness Standards to remove descriptions 
of the categories of directors represented on the Board and the process 
by which they are nominated for Board service as these descriptions are 
already maintained in Article III of OCC's By-Laws and the relevant 
Committee Charters. Eliminating these redundant descriptions in the 
Fitness Standards will promote efficiency and clarity by eliminating 
the need to ensure consistency of the same information across multiple 
documents. OCC believes that the amendments will underscore that the 
Fitness Standards are intended to facilitate the performance of OCC's 
role as a systemically important financial market utility.
(e) Common Amendments to Each Committee Charter
    OCC is making conforming amendments to the Committee Charters as a 
result of the Commission approving certain changes to the GNC Charter. 
Specifically, OCC is amending each Committee Charter to confirm that 
each Board Committee has access to all books, records, facilities and 
personnel of OCC in carrying out the respective Board Committee's 
purpose and responsibilities. OCC stated that this amendment to the 
Committee Charters will make explicit a longstanding principle under 
which each Committee has operated. Additionally, references to the 
``Governance Committee'' in each Committee Charter will be changed to 
the ``Governance and Nominating Committee'' to reflect the formation of 
the GNC.
    Furthermore, OCC will delete a provision from each Committee 
Charter that grants the Chair of each Board Committee the authority to 
act on behalf of the respective Board Committee in situations in which 
immediate action is required and convening a Board Committee meeting is 
impractical. Although this provision also requires each Chair to report 
such actions to the respective Board Committee for ratification as soon 
as practicable, OCC believes that removing this provision is 
appropriate from a governance perspective because it supports 
deliberation and action by a Board Committee as a whole rather than 
action by a Chair. In addition, OCC represented that, historically, 
each Board Committee has been able to convene when necessary.
    OCC is changing each Committee Charter to strengthen OCC's Board 
Committee governance framework and practices surrounding meetings in 
executive sessions by providing added structure regarding the convening 
and attendance of executive sessions and promoting the enhanced 
recordation of important meeting events and discussions. Specifically, 
each Committee Charter will be amended to: (i) Require that each 
Committee meet in executive session at each regular meeting of the 
Committee; (ii) allow the Committee to determine who will participate 
in such sessions; and (iii) provide for the exclusion of management, 
invited guests, and individual directors from executive sessions where 
discussions may involve certain sensitive matters or conflicts of 
interest. The amendments will also require that each Committee's 
meeting minutes reflect, at least in summary fashion, the general 
matters discussed in an executive session. In particular, the Chair (or 
Acting Chair) will determine whether separate minutes of the executive 
sessions are to be recorded as well as the level of detail to be 
included in such minutes, provided that Committee meeting minutes must, 
at a minimum, reflect that an executive session was convened and 
broadly describe the topic(s) discussed.
    Additionally, the Committee Charters will be amended to permit any 
Board Committee to engage specialists or advisors to assist it in 
carrying out its delegated responsibilities without prior Board 
approval. Generally speaking, Committees must obtain pre-approval from 
the Board to hire advisors. OCC's understanding is that public company 
board committees frequently are authorized to engage advisors without 
board pre-approval at the company's expense to preserve autonomy and 
independence and to assist them in the execution of their 
responsibilities as deemed necessary. Under the amended charters, each 
Committee's engagement of an advisor, including fees and expenses, will 
be referenced in its annual report to the Board. OCC intends these 
amendments to foster Committee independence as well as timely Committee 
access to expertise relevant to the discharge of its delegated 
responsibilities while preserving Board

[[Page 65421]]

oversight via the application of existing reporting mechanisms.
    OCC is also amending its Committee Charters to specify that each 
Committee should evaluate its own and its individual members' 
performances on an annual basis (as opposed to regularly) to provide 
more clarity and specificity regarding the timing of each Committee's 
self-assessment process.

(4) Amendments to the Audit Committee Charter

    OCC is making amendments to the AC Charter intended to, among other 
things: (i) Reinforce the independence of the AC; (ii) more accurately 
memorialize and expand upon the activities of the AC with respect to 
the oversight of OCC's financial reporting processes and enhance the 
independence and objectivity in connection therewith; and (iii) in 
general, provide more explicit descriptions of the AC's functions and 
responsibilities.
(a) Purpose, Membership and Authority
    OCC is changing Sections I, II and III of the AC Charter related to 
the purpose, membership and organization, and authority of the AC. In 
Section I of the AC Charter, OCC is making organizational changes to 
certain statements regarding the AC's responsibility to serve as an 
independent and objective party to oversee OCC's system of internal 
control, compliance environment and processes. OCC stated that these 
changes are non-substantive in nature. OCC is also making various 
textual clarifications, which OCC believes are non-substantive, in 
Section I, including, for example, replacing the term ``independent 
accountants'' with ``external auditors'' and replacing ``Corporation'' 
with ``OCC,'' which will extend throughout the entire AC Charter. OCC 
does not intend for the amendments to change the term ``independent 
accountants'' to ``external auditors'' to signify a change in roles or 
responsibilities.
    OCC is also amending Section II of the AC Charter to reinforce the 
independence of the AC. Specifically, the amendments provide that all 
members of the AC be independent from OCC's management, as determined 
by the Board from time to time, and that the Chair of the AC be a 
Public Director.\23\ Additionally OCC is making amendments to clarify 
that the Management Director, as described in Section 7 of Article III 
of OCC's By-Laws, is ineligible to serve on the AC.\24\ OCC is also 
revising the AC Charter to state that the AC will meet regularly, and 
no less than once annually (as opposed to ``at least annually''), with 
management, OCC's Chief Financial Officer, Chief Audit Executive 
(``CAE'') and Chief Compliance Officer (``CCO'') in executive sessions 
to discuss certain private matters. According to OCC, the purpose of 
this change is to signify that these meetings and interactions occur 
more than once per year. Section II of the AC Charter is amended to 
explicitly provide the authority for the CAE and CCO to communicate 
directly with the Chair of the AC, with respect to any of the 
responsibilities of the AC, outside of regular meetings to further 
underscore their independence. Further, OCC is amending Section II of 
the AC Charter to state that attendance at an AC meeting by telephone 
is discouraged because OCC believes the Committee may be less likely to 
have the kind of interaction that leads to fully informed discussions 
and decisions than if Committee members were to meet in person.
---------------------------------------------------------------------------

    \23\ The change concerning the AC Chair will conform the AC 
Charter to proposed Article III, Section 4(a) of OCC's By-Laws, as 
described above.
    \24\ In the event OCC has a Non-Executive Chairman, such 
individual will not be considered a Management Director.
---------------------------------------------------------------------------

    OCC is also amending the AC Charter to provide that the AC shall 
make such reports to the Board as deemed necessary or advisable for the 
purpose of promoting effective communication between the AC and the 
Board, in line with requirements in other Committee Charters.
    OCC is amending Section III of the AC Charter to confirm that the 
AC's authority to hire advisors includes the authority to approve the 
related fee and retention terms \25\ In addition to more accurately 
reflecting current Committee practice, it would conform the AC charter 
to OCC's other Committee Charters (i.e., the CPC, GNC, RC and TC 
Charters) with respect their authority to hire advisors and approve 
related fees and retention terms. As noted above, each of OCC's 
Committee Charters will be amended to permit any Board Committee to 
engage specialists or advisors to assist it in carrying out its 
delegated responsibilities without prior Board approval in order to 
foster Committee independence as well as timely access to relevant 
expertise from outside specialists or advisors. The amendments will 
clarify that this authority also extends to the approval of related fee 
and retention terms.
---------------------------------------------------------------------------

    \25\ OCC will also remove a statement concerning the AC's 
authority to obtain advice from independent counsel, accountants or 
others as such statement would be replaced by a broader expression 
of the AC's authority to hire advisors.
---------------------------------------------------------------------------

(b) Functions and Responsibilities
    OCC is also making a number of amendments to Section IV of the AC 
Charter intended to reinforce and expand upon the activities of the AC 
with respect to the oversight of OCC's financial reporting processes, 
to enhance the independence and objectivity in connection therewith, 
and to more explicitly describe the AC's functions and 
responsibilities.
Oversight of External Auditor and Financial Reporting
    OCC is amending the AC Charter regarding the AC's oversight of 
financial reporting and external auditors. OCC intends the amendments 
to the AC Charter to more accurately memorialize and expand upon the 
AC's role with respect to financial reporting at OCC. With respect to 
financial statements and financial reporting, the amendments state that 
the AC is responsible for: (i) Discussing with management and external 
auditors OCC's audited and unaudited financial statements; (ii) upon 
management's recommendation, approving OCC's financial statements after 
reviewing with management and external auditors prior to issuance; \26\ 
(iii) reviewing with management, external auditors and OCC's Internal 
Audit Department significant financial reporting issues and judgments 
made in connection with the preparation of financial statements, 
critical accounting policies and estimates, any major issues regarding 
accounting principles and financial statement presentation and the 
effect of regulatory and accounting initiatives; (iv) approving 
material changes to OCC's accounting policies; (v) resolving 
disagreements between management and external auditors regarding 
financial reporting; and (vi) reviewing and discussing with external 
auditors any audit problems or difficulties, and management's response 
thereto.
---------------------------------------------------------------------------

    \26\ OCC intends the amendment to restate, clarify, and expand 
on an existing statement in the AC Charter regarding the AC's review 
of annual audited financial statements, which OCC will delete.
---------------------------------------------------------------------------

    Additionally, to improve the AC's oversight and evaluation of 
external auditors, OCC is amending the AC Charter to require the AC to: 
(i) Discuss with management the timing and process for implementing a 
rotation of the engagement partner of the external auditor and any 
other active audit engagement team partner; (ii) monitor and evaluate 
the qualifications of both the external auditor and engagement partner; 
(iii) consider whether there

[[Page 65422]]

should be a regular rotation of the audit firm itself; and (iv) pre-
approve all services provided by the external auditor (as opposed to 
only non-audit services).
Oversight of Internal Audit, Compliance and Compliance-Related Matters
    OCC is amending Section IV of the AC Charter in order to more 
clearly articulate the AC's responsibility for the oversight of 
Internal Audit. Specifically, OCC is making amendments stating that the 
AC's responsibilities include reviewing and approving the Internal 
Audit Policy on an annual basis and monitoring ongoing internal audit 
activities. OCC is also making amendments stating that the AC is 
responsible for approving OCC's annual internal audit plan and 
approving any CAE recommendations for removing or deferring any audits 
from a previously approved internal audit plan to explicitly codify 
these existing AC practices in the AC Charter. OCC believes that the 
AC, which serves as an independent and objective party tasked with the 
oversight of OCC's system of internal control, auditing, accounting, 
and compliance processes, is the appropriate body to approve OCC's 
internal audit plan and any CAE recommendations for removing or 
deferring any audits from a previously approved internal audit plan. 
OCC believes that the amendments will provide more clarity and 
transparency regarding OCC's governance arrangements by codifying these 
responsibilities found in the AC Charter.
    OCC is also amending to Section IV of the Charter to more clearly 
articulate the AC's responsibility for oversight of compliance and 
compliance-related matters, including: (i) Annually reviewing and 
approving OCC's Compliance Policy and employee Code of Conduct; (ii) 
reviewing and approving the Compliance Department's process for 
establishing the risk-based annual Compliance Testing Plan, monitoring 
progress against the annual Compliance Testing Plan, and approving 
changes to the Compliance Testing Plan recommend by the CCO; and (iii) 
monitoring ongoing compliance activities by reviewing reports and other 
communications prepared by the Compliance Department, including updates 
from the CCO, and inquiring of management regarding steps taken to 
address items raised.
    In addition, OCC is clarifying the AC's responsibilities with 
respect to: (i) Reviewing on a regular basis the significant 
deficiencies and material weaknesses in the design or operation of 
OCC's internal controls (as such issues are identified by or presented 
to the AC); (ii) reviewing fraud involving OCC's management or other 
employees; and (iii) reviewing and approving (as opposed to just 
establishing) OCC's ``whistleblower'' procedures that govern reporting 
of illegal or unethical conduct, accounting irregularities and similar 
matters and discussing any substantive issues identified through such 
procedures with relevant parties.
Oversight of OCC's Chief Audit Executive and Chief Compliance Officer
    OCC is amending Section IV of the AC Charter to provide that the 
CAE and CCO will each report functionally to the AC and 
administratively to the Executive Chairman.\27\ According to OCC, the 
amendments will make more explicit the reporting lines for these 
functions and underscore the independence of the CAE and CCO. In 
addition, OCC is eliminating provisions of the AC Charter that relate 
to the AC's assessment of the performance of the CAE and Internal Audit 
Department, the AC's approval of the compensation of the CAE, and the 
AC's assessment of the Compliance function and replace them with 
provisions that take into account the involvement of the Executive 
Chairman in those functions. As amended, the AC Charter will state that 
the AC, in consultation with the Executive Chairman, will review the 
performance of the Internal Audit function and the CAE, the Compliance 
function and the CCO, and determine whether to accept or modify the 
Executive Chairman's recommendations with respect to the performance 
assessment and annual compensation for each. OCC intends the changes 
related to the performance and compensation setting regime for the CAE 
and CCO to reflect the fact that the CAE and CCO report 
administratively to the Executive Chairman while reporting functionally 
to the AC.
---------------------------------------------------------------------------

    \27\ This change explicitly notes existing reporting lines in 
the AC Charter, but does not revise those reporting lines. These 
provisions mirror a comparable provision in the RC Charter with 
respect to the Chief Risk Officer.
---------------------------------------------------------------------------

(5) Amendments to the Compensation and Performance Committee Charter

    OCC is changing its CPC Charter to explicitly describe the 
Committee's functions and responsibilities with respect to OCC's human 
resources, compensation and employee benefit programs, and insurance 
programs. The amendments will also provide for CPC oversight of OCC's 
Capital Plan in recognition of the importance of providing for Board-
level oversight to ensure OCC's capital and Capital Plan meet or exceed 
minimum regulatory standards.
(a) Purpose, Membership, and Authority
    OCC is renaming the Performance Committee to the CPC to reflect its 
role more accurately. OCC is also amending Section I of the CPC Charter 
to articulate that the CPC is tasked with assisting the Board in the 
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 in light of OCC's systemically important status. 
The CPC Charter will further delineate that the CPC is tasked with (i) 
recommending the compensation of OCC's Executive Chairman and President 
and approving the compensation of certain other officers, as 
appropriate; (ii) overseeing OCC's Capital Plan and financial 
performance; (iii) overseeing OCC's Human Resources program; (iv) 
overseeing the structure and design of the employee compensation, 
incentive and benefit programs; and (v) assisting the Board in 
reviewing OCC's leadership development and succession planning.
    Additionally, OCC is amending Section II of the CPC Charter related 
to the membership and organization of the CPC to conform the CPC 
Charter to proposed Article III, Section 4(b) of OCC's By-Laws to state 
that the Chair of the CPC shall be a Public Director. In addition, OCC 
is changing Section II of the CPC Charter to elaborate on the CPC's 
responsibility to discuss and review the performance and compensation 
levels (including benefits and perquisites such as sign-on bonuses, 
retention arrangements, relocation arrangements and other financial 
commitments of OCC) of members of the Management Committee and certain 
other key officers, as appropriate.
    OCC is also amending Section II to clarify that the CPC will meet 
at least four times per year, which reflects the minimum number of 
regular meetings in a year in a manner consistent with the charters of 
other Board Committees, and to delete a provision of the CPC Charter 
that requires the CPC Chair to meet in private session with the GNC 
Chair to discuss performance of key officers as well as a provision 
stating that the Chairs of the AC and RC will be invited to attend the 
annual meeting to discuss compensation of key officers, including the 
Chief Risk Officer (``CRO'') and CAE.\28\ The CPC Charter is amended to

[[Page 65423]]

require that minutes of Committee meetings be circulated to the Board 
in conformance with general requirements applicable to all Board 
Committees.\29\
---------------------------------------------------------------------------

    \28\ These changes are being made to reflect a consultative 
process as between the Executive Chairman and, as applicable, the RC 
and Board to discuss the performance of key officers including the 
CRO and CAE.
    \29\ This requirement is already included in the AC, GNC, RC, 
and TC Charters.
---------------------------------------------------------------------------

    OCC is also amending the CPC Charter to discourage attendance at a 
CPC meeting by telephone because OCC believes the Committee may be less 
likely to have the kind of interaction that leads to fully informed 
discussions and decisions than if Committee members were to meet in 
person. In addition, other clarifying and textual changes will be made 
including, for the reasons stated above, removal of references to the 
Management Vice Chairman.
    Additionally, OCC will make organizational changes in Section III 
regarding the delegation of authority to the Administrative Committee 
that do not change the meaning of the rule text.
(b) Functions and Responsibilities
    OCC is amending Section IV of the CPC Charter to explicitly 
describe the Committee's responsibilities with respect to OCC's capital 
structure, financial planning and corporate goals and objectives; human 
resources and compensation programs; and employee benefits programs in 
order to provide a more robust framework for the CPC's oversight 
functions. Additionally, OCC will remove explicit requirements in 
Section IV that the CPC review the Corporate Plan and Budget and OCC's 
performance under the Corporate Plan at each regularly scheduled 
meeting in favor of more general descriptions regarding the CPC's 
responsibilities for the oversight of the corporate financial planning 
process, including the corporate budget, and corporate goals and 
objectives. OCC intends the amendments to accommodate CPC review of 
annual Corporate Plans and Budgets and performance thereunder (as 
currently contemplated by the CPC Charter) as well as consideration of 
longer-term horizons and implications in the strategic planning 
process.
Oversight of OCC's Capital Plan
    OCC is amending Section IV of the CPC Charter to explicitly provide 
for the CPC's responsibilities in connection with overseeing OCC's 
capital structure, financial planning, and corporate goals and 
objectives. Specifically, the amendments will state that the CPC's 
responsibilities include oversight of management's processes for 
determining, monitoring and evaluating OCC's Capital Plan,\30\ 
including maintenance of required regulatory capital, and recommending 
approval of such plan to the Board. These amendments will also specify 
that the CPC is responsible for the annual review of OCC's Fee, Refund 
and Dividend Policies and making recommendations to the Board for 
changes to such policies and payments, if any, under the Refund and 
Dividend Policies. In addition, OCC is making amendments to provide 
that the CPC's responsibilities include the review and approval of fee 
changes pursuant to the Capital Plan, review and recommendation to the 
Board of changes to OCC's fee structure, and oversight of OCC's 
corporate financial planning process (including reviewing the corporate 
budget). Moreover, the amendments will provide for the CPC's 
responsibility to review OCC's annual corporate goals and objectives 
and recommend approval thereof to the Board and routinely receive 
reports regarding progress in achieving such goals and objectives. The 
amendments will also provide that the CPC is responsible for the 
periodic review of OCC's insurance program.
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act Release No. 74387 (February 26, 
2015), 80 FR 12215 (March 6, 2015) (SR-OCC-2014-813). See also 
Securities Exchange Act Release No. 74452 (March 6, 2015), 80 FR 
13058 (March 12, 2015) (SR-OCC-2015-02).
---------------------------------------------------------------------------

Oversight of Human Resources and Compensation Programs
    OCC is amending Section IV of the CPC Charter to explicitly state 
that the CPC's responsibilities include review of OCC's Human Resources 
programs and policies, including OCC's talent acquisition, performance 
management, training, benefits and succession planning processes and 
review and approval of the structure, design, and funding as 
applicable, of employee compensation, incentive and benefit programs. 
OCC believes that this amendment will ensure that Board Committee 
oversight for management's processes for hiring, retaining and 
developing qualified staff and is consistent with the CPC's oversight 
of overall succession planning processes. Additionally, OCC is amending 
the CPC Charter to clarify that the CPC annually reviews and approves 
the goals and objectives of the Executive Chairman and President.
    Further, OCC is making amendments to the CPC Charter that will 
require the CPC to periodically (not less than annually) review and 
approve the general strategy, policies and programs with respect to 
salary compensation (including management compensation) and incentive 
compensation and seek to ensure compensation policies meet evolving 
compensation practices so that such policies remain effective to 
attract, motivate and retain executive officers and other key 
personnel. The amendments will also require the CPC to review and 
approve the performance and compensation of key employees, such as 
members of OCC's Management Committee, at the end of each year and to 
make recommendations to the Board regarding the compensation of the 
Executive Chairman and the President. Additionally the amendments will 
require the CPC to review proposed material changes to executive 
management benefits and to periodically review the compensation of 
Public Directors and make recommendations to the Board with respect 
thereto.
    OCC is amending the CPC Charter to remove certain statements 
regarding the review of OCC's performance under the Corporate Plan and 
the oversight of the administration of OCC's compensation plans as 
these responsibilities will be covered under the amended descriptions 
contained therein. OCC believes that it is prudent and appropriate to 
provide for CPC oversight in the areas of human resources, performance, 
and compensation and that the amendments will enhance OCC's overall 
governance arrangements with respect to the oversight and review of 
performance and compensation at OCC.
Oversight of Employee Benefit Programs and Other Responsibilities
    OCC is also making amendments to Section IV of the CPC Charter 
related to the CPC's oversight responsibilities for employee benefit 
programs. Specifically, OCC is amending the CPC Charter to specify the 
CPC's responsibilities for oversight, administration, and operation of 
employee benefit, retiree and welfare benefit plans, including the 
review of funding plan obligations. The amendments will also specify 
the scope of employee welfare plans that the CPC reviews and the CPC's 
right to adopt new compensation, retirement and welfare benefit plans 
or to terminate existing plans other than such plans that require Board 
action to amend or terminate. In addition, the amendments will provide 
more clarity regarding the CPC's responsibilities for monitoring the 
Administrative Committee's duties in connection with retirement and 
retirement savings plans, investment strategy and performance, plan 
design and compliance, prudent selection of investment managers and 
compensation and benefits consultants, and

[[Page 65424]]

performing such other oversight duties as called for in retirement, 
retirement and savings, and welfare plan documents.
    OCC is making further amendments that state that the CPC is 
responsible for providing updates to the Board periodically regarding: 
(i) Actions taken by the CPC with respect to its review of OCC's 
compensation, retirement and employee welfare plans; (ii) the financial 
position and performance of these plans; and (iii) adherence to 
investment guidelines, in each case, where applicable.

(6) Amendments to the Risk Committee Charter

    OCC is amending its RC Charter primarily to enhance OCC's 
governance arrangements with respect to the RC's oversight functions 
and responsibilities. OCC is also making amendments to better align the 
RC Charter with the OCC By-Laws, including changes in the composition 
requirements of the RC (as described above) and to reflect the adoption 
of the TC.
(a) Purpose, Membership and Authority
    OCC is amending Section I of the RC Charter to provide that the RC 
will be responsible for coordinating risk oversight with other Board 
Committees tasked with overseeing certain risks (e.g., the TC, which 
assists the Board in overseeing OCC's information technology risks) to 
achieve comprehensive and holistic oversight of OCC's risk-related 
matters. The amendments will also provide that the RC is responsible 
for the review of material policies and processes associated with risks 
related to new initiatives.
    OCC is amending Section II of the RC Charter to provide that 
attendance at a RC meeting by telephone is discouraged because OCC 
believes the Committee may be less likely to have the kind of 
interaction that leads to fully informed discussions and decisions than 
if Committee members were to meet in person. OCC is also removing from 
the RC Charter, and by extension its rules, a requirement that a RC 
member shall recuse himself from any matter in which his firm has an 
interest, other than a common interest shared with Clearing Members 
generally or a particular class of Clearing Members. Currently, none of 
the Committee Charters, other than the RC Charter, contain a such 
recusal provision.\31\ OCC believes that the identification and 
handling of conflicts of interest are already appropriately addressed 
in its Code of Conduct for OCC Directors, which governs the conduct of 
all directors regardless of category or committee assignment. OCC noted 
that, as a corporation incorporated in the state of Delaware, OCC's 
Directors have a fiduciary duty to protect the interests of the 
corporation and to act in the best interests of its shareholders \32\ 
and are bound by a duty of loyalty to OCC, which demands that there be 
no conflict between duty and self-interest and that the best interest 
of the corporation and its shareholders takes precedence over any 
interest possessed by a director.\33\
---------------------------------------------------------------------------

    \31\ The current CPC Charter includes a narrower provision 
regarding recusal of the Executive Chairman from discussions of his 
individual compensation, benefits, and prerequisites.
    \32\ See Cede & Co. v. Technicolor, 634 A.2d 345, 360-361 (Del. 
1993)
    \33\ See Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
---------------------------------------------------------------------------

    With respect to RC meetings, OCC is amending the RC Charter to 
state that the RC shall meet regularly, and no less than once annually, 
(rather than ``at least annually'') with the CRO and members of 
management (as opposed to other appropriate corporate officers) in 
separate executive sessions to discuss certain private matters. OCC 
stated that the purpose of the change is to signify that these meetings 
occur more frequently than once per year. The changes will also 
specifically require that the RC meet in executive session regularly 
with members of management. The RC will continue to have the discretion 
to invite any other officers it deems appropriate to meetings in 
executive session pursuant to the common charter amendments described 
above. Moreover, and in order to enhance the independence and 
functional reporting relationship of the CRO to the RC, OCC will make 
revisions to explicitly state that the CRO is authorized to communicate 
with the RC Chair outside of regular meetings. OCC is also amending the 
RC composition requirements in Section II to conform to the By-Law 
changes discussed above. Specifically, the RC Charter will be revised 
to state that the RC shall consist of the Executive Chairman, at least 
one Exchange Director, at least one Member Director, and at least one 
Public Director. OCC is also amending Section II to require that the RC 
meet at least six times a year (as opposed to seven) in recognition of 
the fact that the time allotted for each individual RC meeting has been 
expanded. Furthermore, OCC is amending Section II of the RC Charter to 
state that, unless a Chair is elected by the full Board, the members of 
the RC shall designate a Chair by majority vote. OCC stated that this 
amendment is in conformance with OCC's current practices for electing 
Committee Chairs and as described in other Committee Charters.
    OCC is also amending Section III of the RC Charter to provide that, 
in addition to RC subcommittees, the RC may also delegate authority to 
OCC's Management Committee or Enterprise Risk Management Committee. As 
described herein, the RC is responsible for assisting the Board in 
overseeing OCC's policies and processes for identifying and addressing 
strategic, operational, and financial risks and for overseeing the 
overall enterprise risk management framework implemented by management. 
The amendment will allow the RC to delegate authority to the Management 
Committee and Enterprise Risk Management Committee to carry out certain 
tasks and responsibilities in the day-to-day risk management of OCC and 
to implement proposals that the RC has approved in concept where the RC 
deems such delegation of authority to be appropriate.
(b) Functions and Responsibilities
    OCC is amending Section IV of the RC Charter to enhance its 
governance arrangements in connection with the oversight of membership 
requirements, margin requirements, the Enterprise Risk Management 
Program, and a number of other responsibilities.
Oversight of Membership and Margin Requirements
    OCC is amending the RC Charter to provide a broader description of 
the RC's oversight of the adequacy and effectiveness of OCC's framework 
for clearing membership. OCC stated that, in general, these changes are 
not intended to substantively change or eliminate any of the RC's 
existing responsibilities with respect to its oversight of OCC's 
clearing membership framework and will continue to encompass the 
responsibilities currently enumerated in the charter.\34\ Specifically, 
the RC Charter provisions related to the RC's oversight role with 
respect to clearing membership issues will be replaced with a more 
general statement that the RC is responsible for the oversight of OCC's 
framework for clearing membership, including: (i) Periodically 
reviewing and revising, as appropriate, OCC's initial and ongoing 
requirements for clearing

[[Page 65425]]

membership; \35\ (ii) overseeing the processes established for 
reviewing and monitoring clearing membership (including in respect of 
the continuance of potentially problematic members); \36\ and (iii) 
making recommendations to the Board, as applicable, for final 
determination in respect the foregoing.
---------------------------------------------------------------------------

    \34\ For example, individual provisions related to specific 
types of membership categories and requirements will be replaced by 
a broader restatement of the RC's responsibilities, which is 
intended to capture all of the responsibilities enumerated in the 
delete provisions.
    \35\ The provision is a restatement of an existing RC 
responsibility for periodically reviewing and recommending changes 
to the initial and ongoing requirements for membership and will also 
replace and encompass the responsibilities in an existing provision 
of the RC Charter stating that the RC is responsible for 
recommending to the Board membership requirements for non-broker-
dealers.
    \36\ The provision this amendment will replace and encompass the 
RC's responsibilities contained in existing RC Charter provisions 
related to the conducting of hearings for applicants proposed to be 
disapproved by the RC, the review and approval/disapproval of 
requests to participate in the Stock Loan Programs, and the 
approval/disapproval of the continued membership of managed Clearing 
Members.
---------------------------------------------------------------------------

    In addition, OCC is modifying certain provisions related to the 
surveillance of Clearing Members and contingency planning for Clearing 
Member failures. Specifically, OCC will consolidate these provisions to 
restate that the RC is responsible for the oversight of the adequacy 
and effectiveness of OCC's contingency plan for Clearing Member 
failures, including: (i) Reviewing Clearing Member surveillance 
criteria; (ii) overseeing the management processes for managing 
Clearing Members that are subject to closer than normal surveillance or 
are otherwise in or approaching financial or operational difficulty; 
(iii) imposing and modifying restrictions and requirements already 
imposed on Clearing Members in a manner consistent with the By-Laws and 
Rules; \37\ and (iv) making recommendations to the Board in respect of 
the foregoing.
---------------------------------------------------------------------------

    \37\ The provision will replace and encompass the 
responsibilities in an existing RC Charter provision related to the 
RC's responsibility for reviewing and modifying or reversing 
restrictions or additional requirements imposed on Clearing Members 
pursuant to OCC Rule 305.
---------------------------------------------------------------------------

    OCC is making similar amendments to the RC Charter to restate the 
RC's responsibilities in connection with its oversight of margin and 
clearing fund requirements. OCC will remove certain existing provisions 
related to the oversight of margin and clearing fund requirements and 
replace them with a more high level description that will provide that 
the RC oversees OCC's processes for establishing, monitoring and 
adjusting margin consistent with the protection of OCC, Clearing 
Members, or the general public, including: (i) Reviewing and modifying 
OCC's margin formula, the methodologies used for determining margin and 
clearing fund requirements, and making recommendations to the Board, as 
applicable, in respect thereof; \38\ (ii) evaluating (including 
increasing) the amount of margin required in respect of any contract or 
position; (iii) establishing and reviewing guidelines for requiring the 
deposit of additional margin; and (iv) reviewing and approving 
determinations about assets eligible for deposit as margin or clearing 
fund as provided in the By-Laws and Rules.\39\ OCC stated that, in 
general, the amendments are not intended to substantively change the 
RC's responsibilities in the deleted provisions but will instead 
replace them with a broader description intended to encompass those 
responsibilities. OCC will, however, delete an existing RC Charter 
provision specifically requiring the RC to periodically review the 
inputs to OCC's margin formula and modify them to the extent it deems 
such action to be consistent with the protection of OCC, Clearing 
Members, or the general public. While this specific requirement is 
being removed from the Charter, OCC believes that the Charter continues 
to provide an adequate and appropriate oversight framework for the 
monitoring and development of OCC's margin formula and would provide 
the RC with continued authority to modify margin formula inputs if it 
deems such modification to be appropriate.\40\
---------------------------------------------------------------------------

    \38\ This provision will include language from an existing 
Charter provision stating that the RC will review methodologies used 
for calculating margin and clearing fund requirements.
    \39\ This provision will replace and encompass the RC's 
responsibilities contained in existing Charter provisions related to 
the oversight of acceptable margin and clearing fund assets, 
including the approval of classes of GSE securities for deposit as 
margin, prescribing intervals for revaluing debt securities 
deposited as margin of clearing fund, and specifying haircuts for 
securities provided as margin.
    \40\ As noted above, the amendments to the RC Charter will 
provide that the RC is responsible for overseeing the processes 
established for establishing, monitoring and adjusting margin 
consistent with the protection of OCC, Clearing Members, or the 
general public, including reviewing and modifying OCC's margin 
formula.
---------------------------------------------------------------------------

    OCC is also deleting a provision stating that the RC is responsible 
for making determinations regarding approval of non-U.S. institutions 
to issue letters of credit as a form of margin asset because this 
provision does not accurately reflect the RC's responsibilities. While 
the RC is responsible for overseeing standards used to admit non-U.S. 
institutions, OCC's President and Executive Chairman have general 
responsibility for approving financial institutions seeking to become 
non-U.S. letter of credit banks and that meet the requirements of OCC 
Rule 604, Interpretation and Policy .01 (with the exception of certain 
``equivalent country'' and ``equivalent institution'' determinations 
that are required to be made by the RC pursuant to OCC Rule 604, 
Interpretations and Policies .01(b)(3) and .01(b)(4)(b)).
Oversight of OCC's Enterprise Risk Management Program and Risk 
Tolerances
    OCC is making amendments to restate and expand upon the RC's 
responsibility for overseeing OCC's Enterprise Risk Management program. 
Currently, the RC is responsible for overseeing the structure, staffing 
and resources of the Enterprise Risk Management program, reviewing 
periodic reports regarding the Enterprise Risk Management program, and 
annually reviewing and assessing the overall program. OCC is amending 
the RC Charter to restate these existing responsibilities and add new 
responsibilities designed to enhance the risk oversight framework for 
the Enterprise Risk Management program. Specifically, the amendments 
will state that the RC is responsible for overseeing OCC's Enterprise 
Risk Management program, including (in addition to the existing 
responsibilities noted above), reviewing the systems and procedures 
that management has developed to manage the risks to OCC's business 
operations and regularly discussing these systems and procedures with 
management, reviewing with management the interrelated nature of OCC's 
risks, and annually approving the Enterprise Risk Management program's 
goals and objectives. OCC believes that explicitly incorporating these 
responsibilities into the RC Charter will provide for a more 
comprehensive oversight framework for the Enterprise Risk Management 
program.
    OCC is also making amendments to restate and expand upon the RC's 
responsibility for the oversight of OCC's risk appetite and risk 
tolerances. Currently, the RC Charter provides that the RC is 
responsible for reviewing and recommending for Board approval the OCC 
Risk Appetite Statement and reviewing and monitoring OCC's risk profile 
for consistency with OCC's Risk Appetite Statement. The amendments to 
the RC Charter will state that, in addition to these responsibilities, 
the RC will be responsible for reviewing and monitoring determinations 
regarding appropriate risk tolerances, including reviewing with 
management on a regular basis management's view of appropriate risk 
tolerances and assessing whether this view is appropriate, and 
recommending risk

[[Page 65426]]

tolerance parameters to the Board. OCC believes that explicitly 
incorporating these responsibilities into the RC Charter will provide 
for a more comprehensive oversight framework for OCC's risk appetite 
and risk tolerances.
Other Oversight Responsibilities
    Section I of the RC Charter currently provides that the RC is 
responsible for the oversight and review of material policies and 
processes relating to member and other counterparty risk exposure 
assessments. OCC is amending Section IV to further specify that the RC 
oversees the adequacy and effectiveness of OCC's processes for setting, 
monitoring and acting on risk exposures to OCC presented by banks, 
depositories, financial market utilities and trade sources. OCC 
believes that the oversight of such risk exposures is critical to 
ensuring the safety and soundness of OCC and that specifically 
including this responsibility in the RC Charter will provide for 
greater clarity and transparency regarding the RC's role in overseeing 
these risks. Section I of the RC Charter also currently provides that 
the RC is responsible for the oversight and review of material policies 
and processes (i) for identifying liquidity risks and (ii) relating to 
liquidity requirements and the maintenance of financial resources. The 
amendments to Section IV will further specify that the RC oversees the 
processes established by OCC for setting, monitoring and managing 
liquidity needs necessary for OCC to perform its obligations as a 
systemically important financial market utility. OCC believes that 
comprehensive oversight of liquidity risks and liquidity risk 
management is critical to ensuring the safety, soundness, and 
resilience of OCC and that providing more specificity regarding the 
RC's responsibilities with respect to liquidity risk will provide for 
greater clarity and transparency regarding the RC's role in such 
oversight. In addition, OCC is amending the RC Charter to provide that 
the RC and management discuss, on a regular basis, the impact on 
systemic stability that may arise as a result of OCC's actions in 
responding to an extraordinary market event, including the impending or 
actual failure of a Clearing Member, and the development of strategies 
to mitigate these effects. OCC believes it is prudent for management 
and the RC to engage in regular discussions concerning OCC's actions in 
extreme market events and the potential impacts on systemic stability 
given OCC's role as a systemically important financial market utility.
    OCC will also elaborate on the statement that the RC will perform 
the responsibilities delegated to it by the Board under OCC's By-Laws 
and Rules by specifying that this will include the authorization of the 
filing of regulatory submissions pursuant to such delegation. 
Additionally, OCC is making amendments to state that the RC will 
oversee management's responsibility for handling financial (i.e., 
credit, market, liquidity and systemic) risks, including the structure, 
staffing and resources of OCC's Financial Risk Management department. 
In addition, OCC is making amendments to state that the RC's oversight 
responsibilities include: (i) Identifying issues relating to strategic, 
credit, market, operational, liquidity and systemic risks that should 
be escalated to the Board for final action and (ii) reviewing, 
approving and reassessing reporting metrics reflecting the risks for 
which the RC has oversight.
    Further, the amendments will specify that the RC oversees OCC's 
model risk management process, policies and controls, including: (i) 
Overseeing model risk governance; (ii) reviewing the findings of any 
third party engaged by management to evaluate OCC's risk models; and 
(iii) annually reviewing and approving the Model Validation Plan and 
receiving periodic reports thereunder. Moreover, the amendments provide 
that the RC is responsible for reviewing the results of any audits 
(internal and external), regulatory examinations and supervisory 
examination reports as to significant risk items or any other matter 
relating to the areas that the RC oversees, as well as management's 
responses pertaining to matters that are subject to the oversight of 
the RC.
(c) Administrative Changes
    Consistent with the GNC Charter and AC Charter, OCC is amending the 
RC Charter to eliminate provisions under which the RC Chair attends the 
year-end CPC meeting to discuss the performance and compensation levels 
of the CRO. Rather, the RC, in consultation with the Executive 
Chairman, will review the performance of the Enterprise Risk Management 
and Model Validation programs as well as the CRO and determine whether 
to accept or modify the Executive Chairman's recommendations with 
respect to the performance assessment and annual compensation for the 
CRO.\41\ This change reflects the reporting of the CRO to the Executive 
Chairman for administrative purposes, while preserving functional 
reporting to the Committee.
---------------------------------------------------------------------------

    \41\ This change is consistent with comparable changes to the AC 
Charter with respect to the annual compensation of the CAE and CCO, 
respectively.
---------------------------------------------------------------------------

    Further, the amendments will confirm that the RC has the 
responsibility for ratifying, modifying, or reversing action taken by 
OCC officers that have been delegated authority to consider requests by 
Clearing Members to expand clearing activities to include additional 
account types and/or products. Moreover, OCC is amending the RC Charter 
to clarify that the RC has the authority to authorize the filing of a 
regulatory submission pursuant to authority delegated to it by the 
Board.

(7) Amendments to the Governance and Nominating Committee Charter

    OCC is amending the GNC Charter to reflect the elimination of term 
limits for Public Directors as discussed above and to state that 
attendance of GNC meetings by telephone is discouraged because OCC 
believes the Committee may be less likely to have the kind of 
interaction that leads to fully informed discussions and decisions than 
if Committee members were to meet in person. OCC will also delete a 
provision stating that a designated officer of management shall serve 
to assist the Committee and act as a liaison between staff and the 
Committee because OCC believes based on its experience that designating 
a formal role for a liaison was unnecessary. Deleting this requirement 
will also maintain uniformity across all Committee Charters, as no 
other Committee has a formally designated liaison.
    OCC is also amending the GNC Charter to specify that the Chair (or 
the Chair's designee) shall consult with the Corporate Secretary, in 
addition to management, to prepare an agenda in advance of each GNC 
meeting as the Corporate Secretary is responsible for coordinating the 
preparation and distribution of Board and Board Committee meeting 
agendas. In addition, OCC is making non-substantive drafting changes 
regarding: (i) The numbering of certain provisions in Section I of the 
GNC Charter and (ii) the requirements for GNC Committee reports to the 
Board in Section II of the Charter.

(8) Amendments to the Technology Committee Charter

    OCC is amending its TC Charter to require that the TC meet 
regularly, and no less than once annually, with OCC's Chief Security 
Officer (``CSO'') and to provide that the CSO is authorized to 
communicate directly with the Chair of the TC in between meetings of 
the

[[Page 65427]]

Committee in order to strengthen the autonomy and independence of the 
CSO role at OCC. OCC is also amending the TC Charter to provide that 
the TC shall make such reports to the Board as deemed necessary or 
advisable. This change promotes effective communication between the TC 
and the Board is in line with requirements in other Committee Charters.
    OCC is also making non-substantive amendments to Section III of the 
TC Charter to eliminate a provision that referenced approval of non-
audit services, which appeared to be an inadvertent carry-over from the 
Audit Committee Charter and to Section IV of the Charter to change the 
term ``the Company'' to ``OCC'' and ``Board of Directors'' to 
``Board.''

II. Discussion

    Section 19(b)(2)(C) of the Act \42\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the rule change, as proposed, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, inter alia, that the 
rules of a clearing agency be designed, in general, to protect 
investors and the public interest.\43\ Further, Rule 17Ad-22(d)(8) of 
the Act requires that a clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to, as 
applicable, have governance arrangements that are clear and transparent 
to fulfill the public interest requirements in Section 17A of the Act 
applicable to clearing agencies, to support the objectives of owners 
and participants, and to promote the effectiveness of the clearing 
agency's risk management procedures.\44\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78q-1(b)(3)(F).
    \44\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    OCC's proposal relates to OCC's governance arrangements. The 
proposal comprises changes to OCC's Certificate of Incorporation, By-
Laws and Rules, Amended and Restated Stockholders Agreement, Board 
Charter, AC Charter, CPC Charter, RC Charter, GNC Charter, TC Charter, 
and Fitness Standards (collectively, ``Governing Documents''), as 
described in greater detail above in section I, Description of the 
Proposed Rule Change. These changes fall broadly into the following 
categories: (1) Board and Committee composition; (2) Committee 
authority and procedures; (3) Board and Committee meeting management; 
(4) Board and Committee responsibilities and functions; and (5) 
administrative textual changes.

(1) Board and Committee Composition

    OCC will revise its By-Laws, Amended and Restated Stockholders 
Agreement, and Board Charter to reduce the number of Management 
Directors on its Board from two to one and remove references to the 
Management Vice Chairman. OCC stated that the position of the second 
Management Director, which is meant to be filled by the Management Vice 
Chairman, recently has been vacant. According to OCC, all of the 
Management Vice Chairman's obligations have been appropriately managed 
in the absence of a Management Vice Chairman. Further, OCC historically 
operated with only one Management Director until 2013.
    OCC will also amend its By-Laws, AC Charter, and CPC Charter to 
require that the AC and the CPC each be chaired by Public Directors. 
The role of Public Director Chairs is to contribute to the objectivity 
and independence of the AC and CPC. The Commission believes that the 
changes to OCC's governing documents facilitating inclusion of the 
perspectives provided by OCC's Public Directors should support the 
protection of the public interest because such Public Directors are not 
affiliated with and therefore should not have conflicts obligating them 
to represent the views of any national securities exchange, 
association, broker, or dealer. Further, OCC is revising certain 
Governing Documents, as described in section I above, to remove term 
limits for Public Directors in recognition of the time necessary to 
develop the knowledge and understanding of OCC's business and because 
OCC believes that such directors provide significant value in the 
governance process. Therefore, the Commission finds that the changes 
described in section I above relating to the removal of the second 
Management Director, requiring that the AC and CPC each be chaired by 
Public Directors, and the removal of term limits for Public Directors, 
are consistent with the requirement under Section 17A(b)(3)(F) of the 
Act that the rules of a clearing agency be designed, among other 
things, to protect the public interest.\45\
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    To enhance the independence of the oversight of OCC's control 
functions, OCC will revise the By-Laws and the AC Charter to provide 
that no Management Director may serve on the AC. Additionally, OCC will 
revise the By-Laws and RC Charter to require that at least one Exchange 
Director serve on the RC and to reduce the minimum number of Member 
Directors on the RC. These changes to the RC composition are intended 
to incorporate the expertise and perspective of OCC's owner Exchanges 
while allowing for greater flexibility in the selection of directors 
with the requisite skill and expertise to serve on the RC. The 
Commission believes that independence and expertise are important in 
the composition of the committees responsible for overseeing OCC's 
control and risk management functions. Therefore, the Commission finds 
that the changes to OCC's governing documents described above providing 
that no Management Director may serve on the AC, requiring at least one 
Exchange Director to serve on the RC, and reducing the minimum number 
of Member Directors on the RC, are consistent with the requirement in 
Rule 17Ad-22(d)(8) \46\ that each registered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear and 
transparent, among other things, to fulfill the public interest 
requirements in Section 17A of the Act applicable to clearing agencies 
and to promote the effectiveness of the clearing agency's risk 
management procedures.
---------------------------------------------------------------------------

    \46\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    As described in section I above, OCC intends to describe more 
clearly in its By-Laws, Amended and Restated Stockholders Agreement, 
Board Charter, and Fitness Standards the process for nominating Member 
Directors, Public Directors, the Executive Chairman, and the Member 
Vice Chairman. These changes are designed to provide for a consistent 
description across OCC's Governing Documents, as applicable, of the 
nomination process and the Board's participation in the process. The 
Commission finds that the changes described above to OCC's Governing 
Documents regarding the process for nominating Member Directors, Public 
Directors, and Executive Chairman, and the Member Vice Chairman are 
consistent with the requirement in Rule 17Ad-22(d)(8) \47\ that each 
registered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to have governance 
arrangements that are clear and transparent to fulfill the public 
interest requirements in Section 17A of the Act applicable to clearing 
agencies, to support the objectives of owners and participants, and to 
promote

[[Page 65428]]

the effectiveness of the clearing agency's risk management procedures.
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

    Additionally, OCC will make changes to certain Governing Documents, 
as described in section I above, related to the composition of the RC. 
Specifically, the changes will provide that the RC shall consist of the 
Executive Chairman, at least one Exchange Director, at least one Member 
Director, and at least one Public Director. In addition, the changes 
will provide for the election of the RC Chair by the RC members in the 
event that the Board does not designate a Chair. The Commission finds 
that changes to OCC's Governing Documents to clearly provide for the 
composition of the RC and for eventualities such as the failure of 
OCC's Board to designate the Chair of the RC, are consistent with the 
requirement in Rule 17Ad-22(d)(8) \48\ that each registered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent, among other things, to support the objectives of 
owners and participants and to promote the effectiveness of the 
clearing agency's risk management procedures.
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    As described in section I(7) above, OCC will also remove the 
requirement for a management liaison to the GNC from its GNC Charter 
because OCC believes that no such position is necessary based on its 
experience and because no other Board Committee has a formal management 
liaison. The Commission finds that revising the design of a clearing 
agency's policies and procedures related to its governance arrangements 
by removing an unnecessary position from the composition requirements 
of its governing bodies is consistent with the requirement in Rule 
17Ad-22(d)(8) \49\ that each registered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear and 
transparent, among other things, to fulfill the public interest 
requirements in Section 17A of the Act applicable to clearing agencies 
and to support the objectives of owners and participants.
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

(2) Committee Authority and Procedures

    As described in section I(3)(e) above, OCC will remove language 
from each Board Committee's Charter regarding the authority of the 
Chair of each Board Committee to act on behalf of its respective Board 
Committee in situations in which immediate action is required and 
convening a Board Committee meeting is impractical. OCC stated that it 
has been able to convene committee meetings when necessary and that the 
change will promote fully informed, deliberate decision making. 
Removing the authority of a Chair to act on behalf of a committee in 
this manner should support the incorporation of various stakeholder 
perspectives, which may include OCC's owners and participants as well 
as the public. The Commission finds the changes to each Board 
Committee's Charter to remove the authority of each Chair to act on 
behalf of its respective Board Committee, as described in greater 
detail in section I(3)(e) above, are consistent with the requirement in 
Rule 17Ad-22(d)(8) \50\ that each registered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear and 
transparent, among other things, to support the objectives of owners 
and participants, because such changes should support the incorporation 
of stakeholder perspectives that may include OCC's owners and 
participants.
---------------------------------------------------------------------------

    \50\ Id.
---------------------------------------------------------------------------

    OCC will also make changes to certain Governing Documents that are 
intended to enhance generally the quality of its governance 
arrangements. As described in section I(3)(e) above, changes to each 
Committee's Charter will allow each Committee to hire specialists 
without prior Board authorization, and have access to all books, 
records, facilities and personnel of OCC. As described in greater 
detail in sections I(4), I(5), and I(8) above, the charters of the AC, 
TC, and GNC will be revised to provide for more reporting to the full 
Board, and the CPC Charter will be revised to require the CPC to 
provide its full minutes to the Board. The Commission believes that 
providing the authority to hire specialists should enhance committee 
independence, while enhanced reporting requirements should support 
Board oversight. The Commission finds that the changes to the Committee 
Charters (i) to provide authority for Board Committees to hire 
specialists and access OCC books, records, facilities and personnel, 
and (ii) to provide for enhanced reporting requirements to the Board 
are consistent with the requirement of Rule 17Ad-22(d)(8) \51\ that 
each registered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to have 
governance arrangements that are clear and transparent, among other 
things, to fulfill the public interest requirements of Section 17A of 
the Act applicable to clearing agencies.
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

    Revisions to the RC Charter, described in greater detail in section 
I(6)(a) above, will permit the RC to delegate authority to the 
Management Committee and Enterprise Risk Management Committee while 
specifying that the RC is responsible for ratifying the actions taken 
under such delegated authority. Additionally, revisions to the RC 
Charter, described in section I(6)(c) above, will confirm the RC's 
authority to file certain regulatory submissions pursuant to 
delegations of authority from the Board. The Commission believes that 
the delegation of day-to-day risk management and implementation of RC-
approved proposals may better support the clearing agency's risk 
management procedures by allowing the RC to better utilize its time and 
expertise. Therefore, the Commission finds that the changes to the RC 
Charter to allow the RC to delegate authority while requiring RC 
ratification of delegated actions and to confirm the RC's authority to 
authorize the filing of certain regulatory submissions pursuant to 
delegated authority from the Board, as described in sections I(6)(a) 
and (c) above, are consistent with the requirement in Rule 17Ad-
22(d)(8) \52\ that each registered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear and 
transparent, among other things, to promote the effectiveness of the 
clearing agency's risk management procedures.
---------------------------------------------------------------------------

    \52\ Id.
---------------------------------------------------------------------------

(3) Board and Committee Meeting Management

    OCC will remove from the RC Charter certain mandatory recusal 
requirements designed to apply to Member Directors of the RC as 
described in section I(6)(a) above. OCC makes available on its Web site 
its Code of Conduct for OCC Directors, which addresses the 
identification and management of conflicts of interest.\53\ OCC 
believes that this specific recusal requirement contained in the RC 
charter is unnecessary in light of the existing requirements under 
Delaware law and OCC's Code of Conduct for OCC Directors. The 
Commission finds that revising OCC's governing documents by 
incorporating the identification and

[[Page 65429]]

management of conflicts of interest in a single policy or procedure 
related to the governance of a clearing agency is consistent with the 
requirement in Rule 17Ad-22(d)(8) \54\ that each registered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent, among other things, to fulfill the public 
interest requirements of Section 17A of the Act applicable to clearing 
agencies because such revised documents will continue to include 
requirements for the identification and management of director 
conflicts of interest.
---------------------------------------------------------------------------

    \53\ OCC has not filed its Code of Conduct for OCC Directors 
with the Commission as a rule under Section 19 of the Act.
    \54\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    OCC also will make several revisions the Board Charter and 
Committee Charters regarding the meeting structure and frequency of its 
Board and Committees. As described in sections I(3)(a) and I(3)(e) 
above, OCC will make revisions to the Board Charter and Committee 
Charters intended to enhance the framework for holding and recording 
executive sessions of the Board and Committees. The amended Board 
Charter will require the Executive Chairman, in consultation with the 
Corporate Secretary, to establish an agenda in advance of each Board 
meeting, and revisions to the GNC Charter will similarly require the 
GNC Chair, in consultation with the Corporate Secretary, to establish 
an agenda in advance of each GNC meeting. Revisions to the Board 
Charter and Committee Charters will discourage attendance by telephone 
at Board and Committee meetings to promote fully informed discussions 
and decisions. In addition, OCC will amend the Board Charter to 
authorize the Board to hold additional meetings, as it deems 
appropriate. Finally, as described in sections I(5)(a) and I(6)(a), 
respectively, OCC will amend the CPC Charter to specify that the CPC 
will meet four times per year, as opposed to in advance of each Board 
meeting, and will amend the RC Charter to specify that the RC will meet 
six, as opposed to seven, times per year. The Commission finds that 
changes to OCC's governing documents to clearly describe Board and 
Committee meeting practices and require the Board and Committees to 
hold and record executive sessions as described in this paragraph are 
consistent with the requirement in Rule 17Ad-22(d)(8) \55\ that each 
registered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to have governance 
arrangements that are clear and transparent, among other things, to 
fulfill the public interest requirements of Section 17A of the Act.
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

(4) Board and Committee Responsibilities and Functions

    As described above, OCC is amending the Board Charter and Committee 
Charters regarding the functions and responsibilities of the Board and 
its Committees. The revised Board Charter will describe the Board's 
responsibilities in light of OCC's role as a systemically important 
financial market utility, as detailed in section I(3)(b) above. As 
described in section I(3)(c) above, amendments to the Board Charter 
will require the Board to review its Charter, OCC's Corporate 
Governance Principles, and Fitness Standards annually. Additional 
revisions to the Board Charter are intended to specify that, in 
addition to overseeing major capital expenditures and approving the 
annual budget and corporate plan, the Board is responsible for 
reviewing and approving OCC's financial objectives and strategies, 
capital plan and capital structure, OCC's fee structure, and major 
corporate plans and actions, as well as periodically reviewing the 
types and amounts of insurance coverage available in light of OCC's 
clearing operations. The Commission finds that changes to OCC's Board 
Charter designed to document OCC's recognition of its responsibilities 
as a systemically important financial market utility, to require the 
Board to review certain OCC governing documents annually, and to 
specify further the Board's responsibilities are consistent with the 
requirement in Rule 17Ad-22(d)(8) \56\ that each registered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent, among other things, to fulfill the public 
interest requirements of Section 17A of the Act applicable to clearing 
agencies.
---------------------------------------------------------------------------

    \56\ Id.
---------------------------------------------------------------------------

    As described in section I(3)(e) above, OCC is amending the Board 
Charter and Committee Charters to require the Board and the Committees 
to perform annual self-evaluations, and require the Board to evaluate 
individual directors annually. The Commission finds that changes to 
OCC's Board Charter and Committee Charters to require OCC's governing 
bodies to perform such evaluations should support the effectiveness of 
OCC's governing bodies and thus are consistent with the requirement in 
Rule 17Ad-22(d)(8) \57\ that each registered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear and 
transparent, among other things, to fulfill the public interest 
requirements of Section 17A of the Act applicable to clearing agencies, 
to support the objectives of owners and participants, and to promote 
the effectiveness of the clearing agency's risk management procedures.
---------------------------------------------------------------------------

    \57\ Id.
---------------------------------------------------------------------------

    Revisions to the Board Charter are intended to make the RC, as 
opposed to the Board, responsible for overseeing OCC's framework for 
managing strategic, financial, and operational risk, with continued 
oversight from the Board. OCC stated that this function is already 
performed by the RC (as reflected in the RC Charter). The Commission 
finds that changes to the Board and RC Charters intended to clarify the 
RC's responsibility for the oversight of the risk management matters, 
as described in section I(3)(b) above, are consistent with the 
requirement in Rule 17Ad-22(d)(8) \58\ that each registered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent, among other things, to promote the effectiveness 
of the clearing agency's risk management procedures.
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    \58\ Id.
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    OCC will revise the AC, RC, and TC Charters to clarify the 
reporting lines of certain officers to their respective Board 
Committees. In addition, the revised Committee Charters, among other 
things, will require that the AC meets regularly, but no less than 
annually with the CFO, CAE, and CCO; that the RC meets regularly, but 
no less than annually with the CRO; and that the TC meets regularly, 
but no less than annually with the CSO. Additionally, the revised 
Committee Charters will authorize the officers listed above, other than 
the CFO, to communicate directly with the Chairs of their respective 
Board Committees. The Commission finds that these changes to OCC's 
Committee Charters to clarify reporting lines of officers responsible 
for OCC's control and risk management functions, as described in 
sections I(4)(a), I(6)(a), and I(8) above, are consistent with the 
requirement in Rule 17Ad-22(d)(8) \59\ that each registered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and

[[Page 65430]]

transparent, among other things, to promote the effectiveness of the 
clearing agency's risk management procedures.
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    \59\ Id.
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    As noted above, OCC will revise certain Committee Charters 
regarding the reporting lines of the CRO, CAE, and CCO. Consistent with 
these changes, OCC will also revise the RC and AC Charters such that 
the RC will set compensation for the CRO, and the AC will set 
compensation for the CAE and CCO. Relatedly, OCC will amend the CPC 
Charter to remove a requirement that the CPC meet with the RC Chair or 
AC Chair in executive session regarding the compensation of the CRO, 
CAE, or CCO. As described above in sections I(4)(b), I(5)(a), and 
I(6)(c) above, these changes are intended to underscore the 
independence of the CRO, CAE, and CCO. The Commission finds that these 
changes are consistent with the requirement in Rule 17Ad-22(d)(8) \60\ 
that each registered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to have 
governance arrangements that are clear and transparent, among other 
things, to promote the effectiveness of the clearing agency's risk 
management procedures.
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    \60\ Id.
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    OCC is amending the AC Charter regarding the AC's responsibilities. 
The amended charter, among other things, will restate and revise the 
AC's responsibility for oversight of the external auditor and financial 
reporting; the Internal Audit department, Compliance department, and 
compliance related matters; and OCC's Chief Audit Executive and Chief 
Compliance Officer.
    As described in greater detail in section I(4)(b) above, the 
amendments are intended to reinforce and expand upon the AC's oversight 
responsibilities, which should support OCC's control framework. The 
Commission believes that the governance of OCC's control framework is 
important to OCC's overall functioning. Therefore, the Commission finds 
that the changes to the AC Charter to restate and revise the AC's 
responsibility for oversight of OCC's control functions and the 
officers responsible for managing such functions, as described above, 
are consistent with the requirement in Rule 17Ad-22(d)(8) \61\ that 
each registered clearing agency establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to have 
governance arrangements that are clear and transparent, among other 
things, to promote the effectiveness of the clearing agency's risk 
management procedures.
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    \61\ Id.
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    OCC is amending the CPC Charter regarding the CPC's 
responsibilities. Under the revised CPC Charter, among other things, 
the CPC will be responsible for assisting the Board with oversight of 
OCC's overall performance as well as capital and leadership planning, 
approving the goals and objectives of the Executive Chairman, and 
reviewing the compensation of the Management Committee. The amended CPC 
Charter will restate and revise the CPC's responsibility for oversight 
of OCC's Capital Plan; human resources and compensation programs; and 
employee benefit programs, including the monitoring of the 
Administrative Committee.
    Under the revised CPC Charter, the CPC will also be responsible for 
providing periodic updates to the Board regarding CPC actions with 
respect to compensation, retirement, and employee welfare plans, 
financial position and performance of such plans, and adherence to 
investment guidelines. The Commission finds that changes to OCC's CPC 
Charter as described in detail in section I(5)(b) above are consistent 
with the requirement in Rule 17Ad-22(d)(8) \62\ that each registered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to have governance 
arrangements that are clear and transparent, among other things, to 
fulfill the public interest requirements of Section 17A of the Act 
applicable to clearing agencies, among other things, to support the 
objectives of owners and participants.
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    \62\ Id.
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    OCC is amending the RC Charter to clarify and expand the RC's 
responsibilities. Under the revised RC Charter, the RC will be 
responsible for coordinating with the other Committees to achieve 
comprehensive oversight of OCC's risk-related matters, among other 
things. The amended RC Charter will restate and revise the RC's 
responsibility for oversight of membership and margin requirements; 
OCC's Enterprise Risk Management program and risk tolerances; 
contingency planning and model risk management; the process for 
managing exposures to banks, depositories, financial market utilities, 
and trade sources as well as the process for managing liquidity needs; 
and management's handling of the Financial Risk Management group, 
review of OCC's risk reporting metrics, and identification of risk 
issues for escalation to the Board.
    The amended RC Charter will also restate and revise the RC's 
responsibility for discussing, with management, the impact on systemic 
stability that could arise out of OCC's responses to extraordinary 
market events. The Commission finds that the changes to the RC Charter 
as described in detail in section I(5)(b) above clarify and expand the 
RC's responsibilities for coordination of risk-related matters, 
oversight of membership requirements and risk management, and 
discussion of the potential impact of OCC's responses to extraordinary 
market events, and are consistent with the requirement in Rule 17Ad-
22(d)(8) \63\ that each registered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear and 
transparent, among other things, to promote the effectiveness of the 
clearing agency's risk management procedures.
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    \63\ Id.
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(5) Administrative Textual Changes

    OCC will make a number of textual changes to its governing 
documents that are not intended to change the meaning of those 
documents. Such changes include the following:
     As described in section I(2)(c) above, OCC will 
consolidate the current By-Law provisions describing its Board 
Committees. OCC will also add By-Law provisions to describe those Board 
Committees not currently described in the By-Laws.
     As described in section I(3)(a) above, OCC will revise the 
Board Charter, consistent with existing rules, to reflect an increase 
in the number of Public Directors on OCC's Board from three to five. As 
described in section I(3)(b) above, OCC will replace language in the 
Board Charter concerning the Board's obligations that duplicates 
language currently in OCC's By-Laws with a general statement that the 
Board will perform functions, as it believes necessary, or as 
prescribed by rules or regulation, and will reorganize section IV of 
the Board Charter. As described in section I(3)(c) above, OCC will 
remove the list of stakeholders from the introductory language of the 
Board Charter, and will revise the language throughout the charter to 
recognize the TC.
     As described in greater detail in section I(3)(d) above, 
OCC will remove, from its Fitness Standards, descriptions of the 
categories of directors represented on the Board because they are 
maintained in Article III of the By-Laws.

[[Page 65431]]

     Across all of the charters, OCC will replace references to 
the ``Performance Committee'' and the ``Governance Committee'' with 
references to the ``Compensation and Performance Committee'' and 
``Governance and Nominating Committee,'' respectively.
     In certain Committee Charters, OCC will add broad 
statements that encompass and replace current language concerning the 
respective Committee's functions and responsibilities. The AC Charter 
will state that the AC oversees internal controls and compliance. OCC 
will remove language regarding review of the Corporate Plan and 
administration of compensation plans from the CPC charter. OCC will 
broaden the RC Charter description of the RC's oversight of the 
clearing membership framework.
     As described in section I(4)(a), OCC will replace the term 
``independent accountant'' with ``external auditor'' in the AC Charter. 
As described in section I(5)(a), OCC will reword the delegation of 
authority to the Administrative Committee in the CPC Charter. As 
described in section I(7), OCC will renumber sections in the first 
paragraph of the GNC Charter.
     As described in section I(6)(b), OCC will remove language 
from the RC Charter regarding the approval of non-U.S. institutions to 
issue letters of credit because this language contradicts OCC's By-
Laws. OCC will remove language from the TC Charter related to audit 
because that language was inadvertently carried-over from the AC 
Charter.
    The Commission believes that the foregoing changes clarify the 
language of OCC's governing documents. The Commission finds that 
changes designed to clarify the language of a clearing agency's 
governing documents are consistent with the requirement in Rule 17Ad-
22(d)(8) \64\ that each registered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to have governance arrangements that are clear and 
transparent, among other things, to support the objectives of owners 
and participants.
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    \64\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of Act, and in particular, 
with the requirements of Section 17A of the Act and the rules and 
regulations thereunder.\65\
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    \65\ 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,\66\ that the proposed rule change (SR-OCC-2016-002), as modified 
by Amendment No. 1, be, and it hereby is, approved.
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    \66\ 15 U.S.C. 78s(b)(2).
    \67\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\67\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22792 Filed 9-21-16; 8:45 am]
 BILLING CODE 8011-01-P