Document ID: SEC-2023-0323-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2023-03-21T04:00Z

[Federal Register Volume 88, Number 54 (Tuesday, March 21, 2023)]
[Notices]
[Pages 17046-17065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05689]

[[Page 17046]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97150; File No. SR-OCC-2023-002]

Self-Regulatory Organizations; the Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change by the Options Clearing 
Corporation Concerning the Amendment of Its Clearing Membership 
Standards

March 15, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 6, 2023, the Options Clearing Corporation 
(``OCC'') filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by OCC. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change would concern proposed changes to OCC's 
Clearing Membership Standards. The proposed rule change is submitted in 
Exhibits 5A and 5B to SR-OCC-2023-002. Material proposed to be added to 
OCC's By-Laws or Rules is marked by underlining and material proposed 
to be deleted is marked by strikethrough text. All terms with initial 
capitalization that are not otherwise defined herein have the same 
meaning as set forth in OCC's By-Laws and Rules.\3\
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    \3\ OCC's current By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
    The Options Clearing Corporation (``OCC'') acts as the central 
counterparty clearing house (``CCP'') for all U.S. option exchanges and 
certain U.S. futures exchanges. OCC provides clearing services for 
options on equities, indices, Exchange Traded Funds (``ETFs'') and for 
certain futures products and options on futures products. Organizations 
become OCC Clearing Members to facilitate the clearing and settlement 
of their customer transactions or proprietary transactions through OCC. 
OCC also provides certain Clearing Members with the ability to novate 
stock loan transactions by acting as the counterparty to both sides of 
the transactions, guaranteeing that these obligations are fulfilled.
    Over the past two decades, industry best practices as well as 
financial, operational, and systems/data obligations applicable to 
market participants and financial entities have continuously evolved. 
As part of this evolution, OCC was designated in 2012 as a systemically 
important financial market utility, or ``SIFMU,'' and along with this 
designation came heightened regulatory expectations. With these 
heightened expectations, there has been an increased focus on OCC and 
Clearing Member liquidity resources and uses, the ability to meet 
obligations during stressed market conditions, the ability to meet 
larger margin and Clearing Fund obligations due to growth in options 
trading, and a requirement to have a documented and robust risk 
management framework. After a comprehensive review of OCC's By-Laws and 
Rules in conjunction with changes in regulations, member risk practices 
and processes as well as other CCP Clearing Member standards, OCC 
determined it was necessary to amend, enhance and reorganize certain 
Clearing Member requirements to keep pace with these changes and ensure 
OCC continues to maintain a high level of market stability.
    OCC's proposed changes to membership standards comprehensively 
address the heightened expectations around financial, operational and 
systems/data obligations. More specifically, the proposed rule changes 
would amend OCC's By-Laws and Rules addressing OCC's membership 
standards, including but not limited to regulation and regulatory 
authorization, governance, financial condition, financial reporting, 
staffing, third-party arrangements, general operational capabilities, 
statutory disqualifications, notification requirements and protective 
measures, as well as the minor rule violation framework. The proposed 
rule changes would improve OCC's existing financial and operational 
membership standards to further mitigate counterparty credit risk 
introduced by Clearing Members.
    The proposed rule changes take a holistic review of existing 
membership standards, as opposed to one-off changes in response to new 
regulatory requirements. The proposed rule changes will enhance OCC's 
risk mitigation processes and practices by, for example, requiring 
Clearing Members to meet higher standards intended to mitigate risk, 
e.g., through increased minimum capital requirements and heightened 
requirements around the qualification of financial, operational, and 
risk management personnel. Additionally, by proposing rules to expand 
OCC membership to new entity types and in additional jurisdictions, OCC 
will have the potential to increase the diversity of its Clearing 
Member population. Furthermore, proposing more robust notification 
requirements and expanded protective measures will allow more assurance 
that OCC is able to protect itself, its members, and the general public 
from emerging counterparty risks. OCC also believes that the proposed 
rule changes will provide greater clarity to Clearing Members and the 
broader public through the consolidation and simplification of OCC's 
membership requirements in OCC's By-Laws and Rules.
    In particular, while the membership standards that OCC proposes to 
change are described in further detail herein, thematically, they 
consist of the following:
     expanding the list of institutions that may be eligible 
for membership as a Clearing Member; \4\
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    \4\ See infra description of proposed Rule 201.
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     expanding the available regulatory authorizations that may 
be granted to each type of institution that has been admitted to become 
a Clearing Member; \5\
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    \5\ Id.
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     streamlining the membership application review and 
admission procedures; \6\
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    \6\ See infra descriptions of proposed Rules 203 and 204.
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     amending the financial responsibility standards by 
consolidating initial and ongoing standards, raising the capital floor 
for existing categories of institutions and

[[Page 17047]]

adopting capital standards for new categories of institutions; \7\
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    \7\ See infra description of proposed Rule 301.
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     amending the event-based and periodic reporting 
requirements for Clearing Members; \8\
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    \8\ See infra descriptions of proposed Rules 306, 306A and 306B.
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     amending Clearing Member staffing requirements; \9\
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    \9\ See infra descriptions of proposed Rules 302 and 303.
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     amending books and records requirements; \10\
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    \10\ See infra description of proposed Rule 208.
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     amending operational capability standards; \11\
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    \11\ See infra description of proposed Rule 302 and 303.
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     revising the process by which OCC reviews a notification 
that the Clearing Member is subject to statutory disqualification; \12\
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    \12\ See infra descriptions of proposed Rules 204, 306A and 308.
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     updating the minor rule violation disciplinary process; 
\13\ and
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    \13\ See infra description of proposed Rule 1203.
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     providing various other clarifying changes.
    The proposed rule change generally would reflect each of these 
changes in the By-Laws and the Rules by modifying the provisions 
currently set forth in Article V of the By-Laws and Chapters II and III 
of the Rules and consolidating such provisions in new Chapters II and 
III of the Rules.\14\ Below is a description of the proposed changes 
under the section headers reflecting the proposed new rules in Chapters 
II and III.\15\
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    \14\ In addition, a minor subset of the changes would appear in 
various other portions of the Rules, including Rules 101, 609, 1006, 
1203, and 2201. The proposed rule change would eliminate Article V 
of the By-Laws.
    \15\ Id.
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Proposed Rule 201--Eligibility
Paragraphs (a) and (b)--Types of Memberships and Activities
    Types of Clearing Members. Existing Article V of the By-Laws 
currently permits three different types of institutions to be eligible 
for clearing membership: (i) a broker-dealer registered in such 
capacity under section 15(b)(1) or (2) of the Exchange Act (a ``fully 
registered broker-dealer''); (ii) a futures commission merchant (an 
``FCM'') registered in such capacity under section 4f(a)(1) of the 
Commodity Exchange Act (the ``CEA'') (a ``fully registered FCM''); and 
(iii) a Non-U.S. Securities Firm,\16\ including but not limited to a 
Canadian investment dealer authorized and regulated in such capacity by 
the Investment Industry Regulatory Organization of Canada 
(``IIROC'').\17\
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    \16\ Existing Article I of the By-Laws presently defines ``Non-
U.S. Securities Firm,'' in relevant part, as a ``securities firm: 
(1) formed and operating under the laws of a country other than the 
United States; (2) with its principal place of business in that 
country; and (3) that is subject to the regulatory authority of that 
country's government or an agency or instrumentality thereof, or 
subject to the regulatory authority of an independent organization 
or exchange in that country. The term ``Non-U.S. Securities Firm'' 
shall not include any broker-dealer registered, or required to be 
registered, with the Securities and Exchange Commission pursuant to 
section 15 of the Securities Exchange Act of 1934, as amended or any 
futures commission merchant registered, or required to be 
registered, as such pursuant to section 4d of the Commodity Exchange 
Act, as amended.'' Under the proposed rule change, the provisions of 
this definition would be moved to Rule 101. See infra discussion on 
Additional Proposed Changes to Terms.
    \17\ The proposed rule change would incorporate in Rule 101 the 
definition of ``Canadian Investment Dealer'' as a Non-U.S. 
Securities Firm formed and operating under the laws of Canada or a 
province or territory thereof that is investment dealer under such 
laws, that is a dealer member of IIROC, and that has its principal 
place of business in Canada.
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    The proposed rule change would relocate the list of eligible 
institutions from Article V of the By-Laws to new Rule 201(a)(1) 
through (a)(3) (including a minor clarification to specifically 
reference Canadian Investment Dealers in proposed subparagraph (a)(3)) 
and expand the list of eligible institutions to include certain banks. 
Specifically with respect to banks, proposed Rule 201(a)(4) would 
provide that the following banks are eligible to become a Clearing 
Member: (i) a U.S. national bank registered with the Office of the 
Comptroller of the Currency for full-service operations; (ii) a U.S. 
state-chartered bank that is a member of the Federal Reserve System; 
and (iii) a similar non-U.S. bank registered with its home country 
national regulatory authority that conducts its activity with OCC 
through a Federal or State Branch or Agency (as defined in the 
International Banking Act of 1978) located in the United States 
(collectively, the ``eligible banks''). In order to be eligible, the 
bank must provide adequate assurance to OCC that it does not engage in 
activity that would require registration as a broker-dealer, FCM or any 
other relevant registration status. Such assurance would help ensure 
that an eligible bank is not violating applicable laws with respect to 
failing to register as a financial intermediary or any otherwise. 
Likewise, the bank must provide adequate assurance to OCC that it is 
not prohibited from contributing to OCC's Clearing Fund. Additionally, 
as a result of the relocation of Section 1 of Article V to proposed 
Rules, removal of reference to the first two sentences of Section 1 of 
Article V must be moved from Section 1 of Article XI.\18\
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    \18\ Section 1 of Article XI, which requires approval of holders 
of OCC Common Stock for amendment to certain By-Law provisions as 
named in that section, states that stockholder approval is required 
to amend the first two sentences of Section 1 of Article V of OCC's 
By-Laws. With the relocation of Section 1 of Article V to proposed 
OCC Rules, shareholder consent to amend the first two sentences of 
Section 1 of Article V will no longer be required and therefore 
Section 1 of Article XI must be amended to remove reference to the 
first two sentences of Section 1 of Article V.
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    Types of Activities. Various provisions in Article V of the By-Laws 
set forth the categories of products and other regulatory 
authorizations that each type of institution that is a Clearing Member 
may engage in. As a general matter, the proposed rule change would 
incorporate such provisions in new Rule 201(b) (and Rule 302(e) with 
respect to Stock Loan programs), subject to minor modifications. More 
specifically:
     proposed Rule 201(b)(1) would provide that transactions in 
options other than over-the-counter (``OTC'') index options, futures 
options or commodity options may be cleared by a Clearing Member that 
is (i) a fully-registered broker-dealer, (ii) a Canadian Investment 
Dealer or other Non-U.S. Securities Firm, or (iii) an eligible bank;
     proposed Rule 201(b)(2) would provide that transactions in 
commodity futures, options and commodity futures options may be cleared 
by a Clearing Member that is (i) a fully registered FCM or (ii) 
otherwise exempt from such registration under the CEA and regulations 
of the Commodity Futures Trading Commission (the ``CFTC'');
     proposed Rule 201(b)(3) would provide that security 
futures transactions may be cleared by a Clearing Member that is (i) a 
fully registered broker-dealer that is also (A) a fully registered FCM, 
(B) a notice-registered as an FCM under section 4f(a)(2) of the CEA (a 
``notice-registered FCM'') or (C) not required to register as an FCM 
under the CEA and the regulations of the CFTC, (ii) a fully registered 
FCM that is notice-registered as a broker-dealer under section 
15(b)(11)(A) of the Exchange Act (a ``notice-registered broker-
dealer''), (iii) a Canadian Investment Dealer or other Non-U.S. 
Securities Firm, or (iv) an eligible bank;
     proposed Rule 201(b)(6) would provide that OTC index 
options transactions may be cleared by a Clearing Member that (i) is a 
fully registered broker-dealer, a Canadian Investment Dealer or other 
Non-U.S. Securities Firm or an eligible bank, (ii) executes and 
maintains in effect the relevant agreements and other

[[Page 17048]]

documents required by OCC, (iii) is a user of or participant in an OTC 
Trade Source for the purpose of affirming and submitting confirmed 
trades to OCC for clearance and (iv) meets such other requirements as 
OCC may specify;
     proposed Rule 201(b)(5) would provide that Stock Loans 
(which includes both Hedge Loans and Market Loans under the Stock Loan/
Hedge Program and the Loan Market program, respectively) may be cleared 
by a Clearing Member that is (i) a fully-registered broker-dealer, (ii) 
a Canadian Investment Dealer or other Non-U.S. Securities Firm or (iii) 
an eligible bank;
     proposed Rule 302(f)(1) would provide that a Clearing 
Member participating in the Stock Loan/Hedge Program must (i) be a 
member of The Depository Trust Company (``DTC'') or be a Canadian 
Clearing Member on behalf of which the CDS Clearing and Depository 
Services Inc. (``CDS'') maintains an identifiable sub-account in a CDS 
account at the DTC and (ii) execute such agreements and other documents 
required by OCC; \19\ and
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    \19\ See infra discussion on proposed Rule 302.
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     proposed Rule 302(f)(2) would provide that a Clearing 
Member participating in the Loan Market program must meet the Stock 
Loan/Hedge Program participation requirements set forth above and (i) 
be a U.S. Clearing Member or Clearing Member from any foreign country 
or jurisdiction approved by the Risk Committee, (ii) be a subscriber to 
such Loan Market with full access to services provided by the Loan 
Market, (iii) be a member of the DTC that has provided the DTC with 
written authorization to honor instructions issued by OCC against such 
Clearing Member's account at the DTC and (iv) execute such agreements 
and other documents required by OCC.\20\
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    \20\ Id.
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    Importantly, proposed Rule 201 would provide additional 
clarifications. In particular, proposed Rule 201(a)(4)(i) and (a)(5)(i) 
would restrict eligible banks to clear the products and participate in 
the programs listed above on a proprietary basis only. In addition, 
proposed Rule 201(b) would continue to require that Clearing Members be 
in compliance with all registration and other regulatory requirements 
applicable to clearing particular product types. Similarly, proposed 
Rule 201(b)(4) would maintain the existing requirement (relocated from 
Article V, Section 1(b) of the By-Laws) that no notice-registered 
broker-dealer may clear transactions or carry positions in cleared 
securities other than security futures. These clarifications are 
intended, in part, to help prevent a Clearing Member from violating the 
Exchange Act, the CEA or other applicable laws by acting as an 
unregistered intermediary on OCC.
    Separately, similar to existing Article V, Section 1, paragraph (d) 
of the By-Laws, proposed Rule 201(b)(2) would require a Clearing Member 
that holds positions in physically settled futures or futures options 
other than security futures to be a member of the Exchange on which the 
products are traded.
Paragraph (c)--Approval Required for Each Type of Product
    The proposed rule change would adopt as new Rule 201(c) the 
provisions currently set forth in existing Article V, Section 1, 
paragraph (c) of the By-Laws without any changes. Specifically, new 
Rule 201(c) would provide that the procedures of OCC may provide that a 
Clearing Member may not clear transactions in a particular type of 
product unless, in addition to satisfying any specific requirements 
applicable to such type of product set forth in the By-Laws and Rules, 
OCC has specifically approved the Clearing Member to clear such type of 
product.
Paragraphs (d) and (e)--Additional Standards
    The proposed rule change would adopt as new Rules 201(d) and (e) a 
portion of the provisions currently set forth in existing Article V, 
Section 1, paragraph (a) and Interpretation and Policy .04 of the By-
Laws with minor changes to reflect that the provisions apply to all 
Clearing Members (and not simply to applicants). The proposed rule 
change also would modify the provisions to specifically reference risk 
management capabilities and other standards as set forth in the Rules 
or such other qualifications and standards as OCC may promulgate.
    Proposed Rule 201(d) would require each Clearing Member to meet 
such non-discriminatory standards of financial responsibility, 
operational capability, risk management capability, experience and 
competence as may from time to time be prescribed in the rules of OCC. 
Proposed paragraph (e) also would provide that in addition to the 
standards of financial responsibility, operational capability, risk 
management capability, and experience and competence, OCC will consider 
the criteria of the Fitness Standards for Directors, Clearing Members 
and Others, as adopted or amended by the Board of Directors from time 
to time, before approving any application for clearing membership and 
other standards as set forth in the Rules or such other qualifications 
and standards as OCC may promulgate.
Proposed Rule 202--Non-U.S. Entities and Foreign Financial Institution 
(``FFI'') Clearing Members
    The proposed rule change would relocate existing Article V, Section 
1, paragraph (e) of the By-Laws and Rule 310(d) to new Rule 202 with 
certain modifications designed to accommodate the admission of Non-U.S. 
Clearing Members other than Canadian Clearing Members. New Rule 202(a) 
and (b)(1) would amend existing Article V, Section 1, paragraph (e) of 
the By-Laws and Rule 310(d)(1) to more generally require that an 
applicant that, if admitted, would meet the definition of an FFI 
Clearing Member, must not conduct transactions or activities with or 
through OCC unless such transaction and activities will not result in 
the imposition of taxes or withholding or reporting obligations with 
respect to amounts paid or received by OCC (other than U.S. federal and 
state income taxes imposed on the net income of OCC), and if such taxes 
or obligations would be imposed with respect to amounts paid or 
received by OCC but for the qualification of the applicant for a 
special U.S. or foreign tax status, such as a FATCA Compliant Qualified 
Intermediary Assuming Primary Withholding Responsibility, then the 
applicant's initial and ongoing membership will be conditioned on the 
applicant or Member qualifying for, maintaining, and documenting such 
status to the satisfaction of OCC. Under appropriate circumstances, 
where the applicant's regulatory and financial requirements are closely 
related to U.S. regulations, an applicant meeting the requirements of 
this section for the purposes of some products, such as stock loan or 
for give-up execution, but not others, or for transactions or 
activities in a specific capacity, such as an intermediary, may be 
admitted to conduct transactions or activities under limitations 
imposed by OCC. OCC also proposes to relocate existing Rules 310(d)(2)-
(5) to new Rules 202(b)(2)-(5) with minor conforming changes. In 
addition, OCC would remove references to the defined terms Section 
871(m) Effective Date and Section 871(m) Implementation Date as these 
Section 871(m) phase-in dates are no longer required in OCC's 
Rules.\21\
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    \21\ IRS Notice 2016-76 provides for staged implementation of 
Section 871(m). A copy of the Notice can be found here: (https://www.irs.gov/pub/irs-drop/n-16-76.pdf). The OCC issued Information 
Memo #40288 which announces the Section 871(m) Implementation Date 
as December 23, 2016. The information memo can be found on OCC's 
website: (https://infomemo.theocc.com/infomemo/search-memo).

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[[Page 17049]]

    OCC also proposes to add new Rule 202(d) to require that OCC will 
only admit Clearing Members that are non-U.S. entities from foreign 
jurisdictions that have been approved by the Risk Committee.\22\ The 
proposed rule change would also adopt new paragraph (c) of Rule 202, 
which would require every Non-U.S. Clearing Member to provide all 
communications (oral or written), financial reports and other 
information requested by OCC in English, and to state monetary amounts 
in U.S. dollar equivalents indicating the conversion rate and date 
used.
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    \22\ Risk Committee review and approval would be based on the 
recommendation of OCC management after completing a non-U.S. 
jurisdiction review of regulatory, legal, and tax issues for each 
jurisdiction and product type.
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Proposed Rule 203--Admission Procedures
    The proposed rule change would consolidate in new Rule 203 the 
admission procedures and requirements currently set forth in existing 
Article V, Section 2 and Article V, Section 1, Interpretation and 
Policy .03, clause (e) of the By-Laws and modify such admission 
procedures and requirements. More specifically, similar to existing 
Article V, Section 2, paragraph (a), proposed Rule 203(a) would require 
Clearing Member applications to be in the form and contain such 
information as prescribed by OCC. Likewise, similar to existing Article 
V, Section 2, paragraph (a), proposed Rule 203(a) would authorize the 
Risk Committee or its designated delegates or agents to examine the 
books, records and workpapers of an applicant, take such evidence as 
they may deem necessary or employ such other means as they may deem 
desirable or appropriate to ascertain relevant facts bearing upon the 
applicant's qualifications.
    Proposed Rule 203(a) also would designate the Risk Committee with 
responsibility to approve or disapprove applications for clearing 
membership. As set forth in proposed Rule 203(a), the procedures for 
disapproving an application would be the same as described in existing 
Article V, Section 2, paragraph (a). Specifically, if the Risk 
Committee proposes to disapprove an application, then OCC must adhere 
to the following procedures:
    i. the Risk Committee must first furnish the applicant with a 
written statement of its proposed recommendation and the specific 
grounds for proposing to disapprove the application;
    ii. the Risk Committee must give the applicant an opportunity to be 
heard and to present evidence on its own behalf;
    iii. if the Risk Committee determines to disapprove the 
application, written notice of its decision, accompanied by a statement 
of the specific grounds for disapproval, must be mailed or delivered to 
the applicant;
    iv. the applicant must have the right to present evidence as it may 
deem relevant to its application; and
    v. a verbatim record must be kept of any hearing held pursuant 
hereto.
    However, in contrast with existing Article V, Section 2, paragraph 
(a), the proposed rule change would remove the automatic delegation of 
authority to the CEO and COO to approve Clearing Member applications. 
This change is intended to help streamline the application review 
process and permit the Risk Committee to maintain discretion on which 
person(s) to delegate authority for purposes of review. The proposed 
rule change also would remove the requirement in existing Article V, 
Section 2, paragraph (c) to inform the Board of Directors of all 
applications for membership at its regularly scheduled meeting as all 
applications would now be approved by the Risk Committee as opposed to 
delegation to OCC management.
    The proposed rule change also would adopt a new process for 
approving an applicant on an expedited basis under limited 
circumstances. Specifically, proposed Rule 203(b) would provide that 
the Risk Committee may approve an application on an expedited basis as 
appropriate for the protection of investors and the public interest. In 
connection with an expedited approval process, certain exceptions may 
be granted (i) for the applicant's compliance with OCC's membership 
standards for a reasonable period of time and/or (ii) from the general 
requirements set forth in OCC's internal policies, procedures and due 
diligence processes in reviewing Clearing Member applicants. This 
expedited approval process is intended to grant OCC flexibility under 
various unforeseen circumstances. Furthermore, because of the 
infrequent nature of these types of scenarios, OCC cannot envision or 
describe all events in which expedited approval would be required. 
Nevertheless, the use of expedited approval would be limited to 
scenarios in which time is of the essence for the protection of OCC, 
other OCC Clearing Members, and the public. For example, expedited 
approval would be appropriate in a circumstance where a suitable non-
Clearing Member candidate seeks to take on the entire business of an 
existing Clearing Member that is in distress. In this example, 
expedited approval would serve to protect OCC, other OCC Clearing 
Members, and the public against the ramifications from the likely 
default of the Clearing Member in distress. In the event there was a 
significant financial impact in one of these scenarios, the ability to 
provide expedited approval would make it less likely that OCC would 
have to employ the resources--OCC's Minimum Contribution and other OCC 
liquid assets, the Clearing Fund, the EDCP Unvested Balance--that 
otherwise would have been used in the event the Clearing Member in 
distress defaulted. Additionally, the customers of the Clearing Member 
in distress would have certainty around the status and security of 
their accounts.
    In addition, the proposed rule change would modify the provisions 
applicable to Clearing Members seeking to engage in clearing activities 
beyond the scope of their current authorizations with OCC. In 
particular, under proposed Rule 203(c), a Clearing Member's business 
expansion request may be reviewed and approved or disapproved by the 
CEO or the COO pursuant to OCC procedures. The Risk Committee must be 
notified at least ten business days in advance of any such approval/
disapproval to determine whether the business expansion request should 
be reviewed by the Risk Committee.
Proposed Rule 204--Conditions to Admission
    The proposed rule change would consolidate in new Rule 204 the 
conditions to admission provisions currently set forth in existing 
Article V, Section 3 and various other portions of Article V of the By-
Laws. Each paragraph of proposed Rule 204 is described below.
Paragraph (a)--General Statement
    Proposed Rule 204(a) would clarify that the Risk Committee will not 
approve any application for clearing membership if the applicant fails 
to meet the membership requirements and standards set forth in the 
Rules. This clarifying statement would replace many of the similar 
statements currently set forth in Article V of the By-Laws, including 
Section 1, Interpretations and Policies .01, .02, .03.
Paragraph (b)--Initial Contribution and Agreements
    Proposed Rule 204(b) would adopt the provisions currently set forth 
in Article V, Section 3 of the By-Laws with only minor clarifying 
changes. Specifically,

[[Page 17050]]

proposed paragraph (b) would provide that, prior to admission as a 
Clearing Member, an applicant must deposit with OCC its initial 
contribution to the Clearing Fund in the amount required by the Risk 
Committee in accordance with Chapter X of the Rules. As compared to the 
provisions set forth in existing Article V, Section 3 of the By-Laws, 
proposed Rule 204(b) would clarify the Risk Committee's role in 
requiring the initial contribution.
    In addition, proposed Rule 204(b) would require the applicant to 
sign and deliver to OCC an agreement:
    i. to clear through OCC, either directly or through another 
Clearing Member, all of its confirmed trades and all other transactions 
which the By-Laws or the Rules may require to be cleared through OCC;
    ii. to abide by all provisions of the By-Laws and the Rules and by 
all policies and procedures adopted pursuant thereto;
    iii. that the By-Laws and the Rules constitute a part of the terms 
and conditions of every confirmed trade or other contract or 
transaction which the applicant, while a Clearing Member, may make or 
have with OCC, or with other Clearing Members in respect of cleared 
contracts, or which may be cleared or required to be cleared through 
OCC;
    iv. to grant OCC all liens, rights and remedies set forth in the 
By-Laws and the Rules;
    v. to pay to OCC all fees and other compensation provided by or 
pursuant to the By-Laws and the Rules for clearance and for all other 
services rendered by OCC to the applicant while a Clearing Member;
    vi. to pay such fines as may be imposed on it in accordance with 
the By-Laws and the Rules;
    vii. to permit inspection of its books, records, and workpapers at 
all times by the representatives of OCC and to furnish OCC with all 
information in respect of the applicant's business and transactions as 
OCC or its officers may require;
    viii. to make such payments to or in respect of the Clearing Fund 
as may be required from time to time;
    ix. to comply, in the case of Canadian Investment Dealers and other 
Non-U.S. Securities Firms, with the guidelines and restrictions imposed 
on domestic broker-dealers regarding the extension of credit, as 
provided by Section 7 of the Exchange Act and Regulation T promulgated 
thereunder by the Board of Governors of the Federal Reserve System, 
with respect to any customer account that includes cleared contracts 
issued by OCC; and
    x. to comply, in the case of Canadian Investment Dealers and other 
Non-U.S. Securities Firms, with the Rules of the Financial Industry 
Regulatory Authority (``FINRA'') governing maintenance margin and cut-
off times for the submission of exercise notices by customers.
    As compared to the provisions set forth in existing Article V, 
Section 3 of the By-Laws, proposed Rule 204(b) would explicitly 
reference Canadian Investment Dealers in items ix and x above. In 
addition, OCC would eliminate the requirement in Article V, Section 3 
of the By-Laws that Non-U.S. Securities Firms consent to the 
jurisdiction of Illinois courts and to the application of United States 
law in connection with any dispute with OCC arising from membership 
because this requirement is already addressed in Article IX, Section 10 
of the By-Laws.
Paragraph (c)--Statutory Disqualifications
    Proposed paragraph (c) would adopt and modify the statutory 
disqualification membership requirements currently set forth in 
existing Article V, Section 1(a). Specifically, proposed paragraph (c) 
would provide that the Risk Committee may disapprove an application of 
any applicant or person of the applicant subject to a ``Statutory 
Disqualification.'' In turn, the proposed rule change would revise Rule 
101 to define the term ``Statutory Disqualification'' as (i) in the 
case of a fully registered broker-dealer, a statutory disqualification 
as defined in section 3 of the Exchange Act, (ii) in the case of a 
fully registered FCM, the applicant or Clearing Member or a principal 
thereof, as defined in CEA section 8a(2), is subject to statutory 
disqualification under CEA section 8a(2)-(4), or (iii) in the case of a 
Non-U.S. Securities Firm or bank, any similar provision of the laws or 
regulations applicable to such applicant or Clearing Member. In 
addition, similar to existing Article V, Section 1, paragraph (a) of 
the By-Laws, proposed Rule 204(c)(1) would provide that in cases in 
which the SEC, by order, directs as appropriate in the public interest, 
OCC will disapprove an application for clearing membership by any 
applicant or person of the applicant subject to a statutory 
disqualification. Separately, proposed subparagraph (c)(2) would 
obligate every applicant to notify OCC in writing if the applicant is 
or becomes subject to a statutory disqualification in accordance with 
the requirements of new Rule 306A(c).\23\
---------------------------------------------------------------------------

    \23\ See infra discussion on proposed Rule 306A.
---------------------------------------------------------------------------

Paragraph (d)--Just and Equitable Principles of Trade
    Proposed paragraph (d) would adopt with no substantive changes the 
provisions currently set forth in existing Article V, Section 1, 
Interpretation and Policy .03, clause (b). Specifically, proposed 
paragraph (d) would permit the Risk Committee to disapprove an 
application if the applicant or any natural person associated with the 
applicant has engaged and there is a reasonable likelihood he will 
again engage in acts or practices inconsistent with just and equitable 
principles of trade.
Paragraph (e)--Satisfaction of Conditions
    Proposed Rule 204(e) would provide that an applicant that has been 
approved for clearing membership subject to satisfaction of specified 
conditions must meet all conditions applicable to its admission within 
nine months from the date on which its application was approved, unless 
the Risk Committee prescribed an earlier date at the time the applicant 
was approved for clearing membership. As compared to Article V, Section 
3, Interpretation and Policy .01, this proposed paragraph (e) would 
increase the maximum number of months from six months to nine months. 
The proposed rule change also would eliminate the authority to extend 
the deadline to no later than one year from the date on which the 
application originally was approved. These changes are intended to 
standardize and streamline the application process.
Paragraph (f)--Information From Other Regulators
    Proposed paragraph (f) would permit the Risk Committee to take into 
consideration information provided by an applicant's Designated 
Examining Authority, designated self-regulatory organization (in the 
case of an applicant primarily regulated as an FCM), and other self-
regulatory organizations to which an applicant is a member or has 
applied for membership when considering an applicant's compliance with 
OCC's membership requirements and standards and overall fitness to be a 
Clearing Member. As compared with existing Article V, Section 1, 
Interpretation and Policy .02, clause (c) of the By-Laws, proposed 
paragraph (f) would clarify that the Risk Committee may take such 
information into consideration irrespective of whether the Designated 
Examining Authority, designated self-regulatory organization or other 
self-regulatory organization

[[Page 17051]]

objects to the application. Proposed paragraph (f) also would clarify 
that the Risk Committee may take into consideration information from a 
self-regulatory organization that is not the applicant's Designated 
Examining Authority or designated self-regulatory organization, as the 
case may be.
Paragraph (g)--Additional Temporary Requirements
    Proposed paragraph (g) would provide that if the Risk Committee 
determines an applicant's financial condition, operational capability, 
risk management capability, or experience and competence in relation to 
the business that the applicant is expected to transact with OCC, makes 
it necessary or advisable, for the protection of OCC, Clearing Members, 
or the general public, the Risk Committee may impose additional, 
temporary requirements for membership including, but not limited to, 
the imposition of protective measures pursuant to Rule 307.\24\ 
Proposed paragraph (g) also would clarify that additional membership 
criteria may be imposed until the heightened risk presented by the 
Clearing Member is sufficiently reduced. In contrast with existing 
Article V, Section 1, Interpretation and Policy .06, proposed paragraph 
(g) and proposed Rule 307 \25\ would set forth OCC's rights to impose 
protective measures under a uniform standard applicable to both 
applicants and existing Clearing Members.
---------------------------------------------------------------------------

    \24\ See infra description of proposed Rule 307.
    \25\ Id.
---------------------------------------------------------------------------

Proposed Rule 205--Evidence of Authority
    The proposed rule change would move the provisions set forth in 
existing Rule 202 to new Rule 205 and modify the language to clarify 
that OCC may rely on an electronic (or similar means) signature rather 
than relying on an original signature. Such a signature will have the 
same effect as a valid and binding original signature. This change is 
intended to better reflect evolving technology and the means by which 
signatures generally may be accepted.
Proposed Rule 206--Bank Accounts
    The proposed rule change would move the provisions set forth in 
existing Rule 203 to new Rule 206 with no substantive changes.
Proposed Rule 207--Submission to and Retrieval of Items to the 
Corporation
    The proposed rule change would combine and modify the provisions 
currently set forth in existing Rules 205 and 206 and move such 
provisions to new Rule 207. Specifically, the provisions in existing 
paragraphs (a) and (b) of Rules 205 and 206 would be combined and 
modified in proposed Rule 207(a), which would require Clearing Members 
to submit and retrieve instructions, notices, reports, data, and other 
items to or from OCC in accordance with procedures prescribed or 
approved by OCC. As compared to existing Rules 205(a)-(b) and 206(a)-
(b), proposed Rule 207(a) would apply uniformly to items submitted or 
retrieved via electronic and non-electronic means. In addition, 
proposed paragraph (a) would clarify that items submitted to or 
retrieved by OCC by electronic data entry will be deemed to constitute 
``writings'' for purposes of any applicable law. Similar to the changes 
to the provisions in proposed Rule 205, the changes in this proposed 
Rule 207(a) are intended to better reflect evolving technology.
    Similarly, existing paragraphs (c) and (d) of Rule 205 would be 
combined and modified in proposed Rule 207(b), which would require 
timely submissions to OCC and permit OCC to disregard any untimely 
submission or correction. In addition, proposed paragraph (b) would 
provide that if unusual or unforeseen conditions prevent a Clearing 
Member from making a timely submission to OCC, then OCC may in its 
discretion (i) require the Clearing Member to submit the item by other 
means, and/or (ii) extend the applicable cut-off time by such period as 
OCC deems reasonable, practicable, and equitable under the 
circumstances. As compared to existing Rule 205(d), proposed Rule 
207(b) would further clarify that it applies to any unusual or 
unforeseen conditions that, in fact, prevent a Clearing Member from 
making a timely submission via electronic or non-electronic means. 
Proposed paragraph (b) also would clarify that cut-off times for 
submission of exercise notices at expiration are governed by Rule 805, 
and by Article VI, Section 18 of the By-Laws.
    Finally, existing Rule 206(c) would be modified and moved to 
proposed Rule 207(c), which would provide that if unusual or unforeseen 
conditions (including but not limited to power failures or equipment 
malfunctions) prevent OCC from making any timely submission or other 
notification to a Clearing Member, then OCC may in its discretion (i) 
make such item available to such Clearing Member by other means, and/or 
(ii) extend the applicable time frame by such period as OCC deems 
reasonable, practicable, and equitable under the circumstances. As 
compared to existing Rule 206(c), proposed Rule 207(c) would apply to 
submissions or other notifications via electronic or non-electronic 
means.
Proposed Rule 208--Records
    The proposed rule change would move the provisions set forth in 
existing Rule 207 to new Rule 208 and streamline such provisions to 
clarify that the Clearing Member records retention requirements apply 
to all confirmed trade data required pursuant to the By-Laws and Rules, 
including confirmed trade information reported to OCC under Rule 401. 
The remaining provisions currently set forth in existing Rule 207 would 
remain unchanged (aside from relocating to new Rule 208).
Proposed Rule 209--Security Measures
    The proposed rule change would move the provisions set forth in 
existing Rule 212 to new Rule 209 with modifications to remove 
references to authorization stamps, including the deletion of existing 
paragraph (b) and the removal of authorization stamp references in 
existing paragraph (c) as they are no longer used by OCC. The remaining 
provisions presently set forth in existing Rule 212 would remain 
unchanged (aside from relocating to new Rule 209).
Proposed Rule 210--Payment of Fees and Charges
    The proposed rule change would move the provisions set forth in 
existing Rule 209 to new Rule 210 with modifications to clarify that 
any fine levied by OCC for a minor rule violation that has not been 
timely contested, as described in new Rule 1203(a), or fine levied 
pursuant to Chapter XII of the Rules will be due and payable 
immediately upon notice as opposed to within five business days 
following the end of each calendar month. The remaining provisions 
currently set forth in existing Rule 209 would remain unchanged (aside 
from relocating to new Rule 210).
Proposed Rule 211--Reports and Notices by the Corporation
    The proposed rule change would combine and modify the provisions 
currently set forth in existing Rules 208, 211 and 213 and move such 
provisions to new Rule 211. Specifically, the provisions set forth in 
existing Rule 208 would be moved to proposed Rule 211(a) without any 
changes.
    The provisions set forth in existing Rule 211 (including the 
Interpretation and Policy) would be moved to proposed Rule 211(b) and 
modified to clarify that OCC will provide all

[[Page 17052]]

Clearing Members and other registered clearing agencies with the text 
or a description of any proposed rule change filed with the SEC or the 
CFTC and a statement of its purpose and effect on Clearing Members by 
posting proposed rule changes on its website. As compared to existing 
Rule 211 (including the Interpretation and Policy), proposed Rule 
211(b) would eliminate the requirement to post the proposed rule change 
prior to filing the proposed rule change with the SEC or the CFTC, or 
as soon as possible thereafter.
    Finally, the provisions in existing Rule 213 would be moved to 
proposed Rule 211(c) and modified to clarify that OCC will make 
available (rather than furnish) to each Clearing Member the audited 
financial statements and independent public accountant's report 
described in proposed paragraph (c). The remaining provisions currently 
set forth in existing Rules 211 and 213 would remain unchanged (aside 
from relocating to new Rule 211(b) and (c)).
Proposed Rule 212--Voluntary Termination of Membership
    The proposed rule change would adopt new Rule 212 to address 
circumstances in which a Clearing Member may elect to voluntarily 
terminate its membership. Proposed paragraph (a) would provide that a 
Clearing Member may elect to voluntarily terminate its membership by 
providing written notice to OCC (``Voluntary Termination Notice'') that 
specifies a desired date for its withdrawal from membership 
(``Termination Date''). The terminating Clearing Member must close out 
or transfer all open positions with OCC by the Termination Date. 
Pursuant to proposed paragraph (c), if the Clearing Member does not 
close out or transfer all open positions by the specified Termination 
Date, the terminating Clearing Member must notify OCC of a new 
Termination Date, unless otherwise agreed upon by OCC.
    With respect to the treatment of Clearing Fund deposits, proposed 
paragraph (b) would provide that OCC will retain the terminating 
Clearing Member's Clearing Fund contribution at least until final 
billing is complete during the calendar month immediately following the 
Termination Date. During this time, OCC may debit from the terminating 
Clearing Member's Clearing Fund contribution any outstanding payment 
obligations owed and not paid to OCC.
    Proposed paragraph (b) also would clarify that a terminating 
Clearing Member's Clearing Fund contribution may be subject to a 
proportionate charge or use for purposes of a borrowing pursuant to 
Rule 1006 until the next monthly or intra-month sizing of the Clearing 
Fund. In such instance, OCC may retain the Clearing Member's Clearing 
Fund contribution until such time as it is no longer needed to satisfy 
its purpose and use under Rule 1006. However, a terminating Clearing 
Member will not be subject to replenishment or assessments under Rule 
1006(h).
    Finally, proposed paragraph (d) would clarify that any Voluntary 
Termination Notice provided during a cooling-off period implemented 
pursuant to Rule 1006(h) would be subject to the requirements of Rule 
1006(h). Separately, the proposed rule change would revise Rule 1006(h) 
to specifically refer to ``Voluntary Termination Notice'' and make 
other administrative clean up changes.
Proposed Rule 301--Financial Responsibility
    OCC's capital standards applicable to Clearing Members currently 
are set forth in existing Chapter III of the Rules. More specifically, 
existing Rule 301 sets forth the initial capital requirements that must 
be met by applicants for clearing membership, whereas existing Rule 302 
sets forth the ongoing capital requirements that must be met by each 
Clearing Member.
    The proposed rule change would replace existing Rules 301 and 302 
with new Rule 301 and eliminate the distinction between initial and 
ongoing capital requirements. The proposed rule change also would 
modify the capital requirements for existing types of Clearing Members 
and introduce capital requirements for the new types of Clearing 
Members. Below is a description of each of the paragraphs in proposed 
Rule 301.
Paragraph (a)--General
    Paragraph (a) of proposed Rule 301 would adopt a new general 
statement that clarifies that each Clearing Member, including an 
applicant for clearing membership, is required to meet the financial 
resource and responsibility requirements set forth in these Rules and 
such other qualifications and standards as OCC may promulgate. In 
addition, proposed paragraph (a) would provide that dollar amounts in 
Rule 301 refer to U.S. dollars.
Paragraph (b)--Minimum Capital
    Proposed paragraph (b) would require Clearing Members to maintain 
the applicable minimum capital requirements set forth in subparagraphs 
(b)(1) through (b)(5). Proposed paragraph (b) also would incorporate 
the language currently set forth in existing Rule 302(a) that prohibits 
a Clearing Member with capital below its respective minimum capital 
requirement to clear an opening purchase transaction or opening sale 
transaction or enter into a Stock Loan. To provide time for existing 
Clearing Members to meet the proposed changes, OCC will provide a six-
month grace period upon approval by the SEC of the proposal.
    Below is a description of the minimum capital requirements that 
would be applicable to each type of Clearing Member. The proposed 
minimum capital requirements are intended to balance fair and open 
access to OCC with prudent financial qualifications for members and 
enhance the overall strength and resiliency of OCC and its ability to 
mitigate risk as a systemically important financial market utility.
    Fully Registered Broker-Dealers. Existing Rule 301 sets forth 
initial requirements for fully registered broker-dealers to maintain 
minimum net capital equal to or greater than (i) $2.5 million, (ii) in 
the case of a broker-dealer not electing to operate pursuant to the 
alternative net capital requirements, 12\1/2\ percent of its aggregate 
indebtedness, or (iii) in the case of a broker-dealer electing to 
operate pursuant to the alternative net capital requirements, 5 percent 
of its aggregate debit items. Existing Rule 301 also sets forth an 
initial requirement that the aggregate principal amount of a Clearing 
Member's satisfactory subordination agreements (excluding those treated 
as equity capital) cannot initially exceed 70% of its debt equity 
total. The initial requirements apply until the later of (1) three 
months after the firm's admission to as a clearing member, or (2) 
twelve months after the firm commenced doing business as a broker-
dealer. Separately, existing Rule 302 sets forth ongoing requirements 
for fully registered broker-dealers to maintain minimum net capital 
equal to or greater than (i) $2 million, (ii) in the case of a broker-
dealer not electing to operate pursuant to the alternative net capital 
requirements, 6\2/3\ percent of its aggregate indebtedness, or (iii) in 
the case of a broker-dealer electing to operate pursuant to the 
alternative net capital requirements, 2 percent of its aggregate debit 
items.
    Under proposed Rule 301(b)(1), there would be no differentiation 
between initial and ongoing standards. The single standard, applicable 
on both an initial and ongoing basis, would provide

[[Page 17053]]

that every Clearing Member that is a fully registered broker-dealer 
must maintain minimum net capital at least equal to the greater of (i) 
$10 million, (ii) in the case of a broker-dealer not electing to 
operate pursuant to the alternative net capital requirements, 6\2/3\ 
percent of its aggregate indebtedness (i.e., aggregate indebtedness 
cannot exceed 1500% of net capital), or (iii) in the case of a broker-
dealer electing to operate pursuant to the alternative net capital 
requirements, 2 percent of its aggregate debit items. OCC determined 
that the proposed minimum net capital requirement of $10 million was an 
appropriate amount based on OCC's clearance and risk management of non-
linear products where volatility strongly influences margin and 
settlement obligation of Clearing Members. OCC selected an amount that 
provided greater security to ensure that Clearing Members have 
sufficient capital to meet margin, liquidity, and clearing fund 
obligations, but that also avoided creating an overly burdensome 
requirement on the vast majority of the existing OCC Clearing Member 
population.
    Fully Registered FCMs. Existing Rule 301 sets forth initial 
requirements for fully registered FCMs to maintain minimum net capital 
at least equal to the greater of (i) $2.5 million, or (ii) any 
additional minimum financial requirements as are established by CFTC 
regulations. The initial standards apply until the later of (1) three 
months after the firm's admission as a clearing member, or (2) twelve 
months after the firm commenced doing business as an FCM. Separately, 
existing Rule 302 sets forth ongoing requirements for fully registered 
FCMs to maintain minimum net capital at least equal to the greater of 
(i) $2 million, or (ii) any additional minimum financial requirements 
as are established under the CEA.
    Under proposed Rule 301(b)(2), there would be no differentiation 
between initial and ongoing standards. The single standard, applicable 
on both an initial and ongoing basis, would provide that every Clearing 
Member that is a fully registered FCM must maintain minimum net capital 
equal to the greater of (i) $10 million or (ii) any other minimum 
financial requirements established by regulation of the CFTC.
    Canadian Investment Dealers. Existing Rule 301 sets forth initial 
requirements for Canadian Clearing Members to maintain an early warning 
reserve at least equal to (i) $2.5 million or (ii) such other amount 
determined by OCC. This initial standard applies until the later of (1) 
three months after the firm's admission as a clearing member, or (2) 
twelve months after the firm commenced doing business as a broker or 
dealer, as applicable. Separately, existing Rule 302 sets forth ongoing 
requirements for Canadian Clearing Members to maintain an early warning 
reserve at least equal to the greater of (i) $2 million or (ii) 2% of 
the Clearing Member's total margin required.
    Under proposed Rule 301(b)(3)(i), there would be no differentiation 
between initial and ongoing standards. The single standard, applicable 
on both an initial and ongoing basis, would provide that every Clearing 
Member that is a Canadian Investment Dealer must maintain risk adjusted 
capital equal to the greater of (i) $10 million or (ii) 2% of total 
margin required.
    Other Non-U.S. Securities Firms. Existing Rules 301 and 302 provide 
that each exempt Non-U.S. Clearing Member must comply with initial and 
ongoing requirements for the ratio of net capital to aggregate 
indebtedness as OCC may specify.
    Proposed Rule 301(b)(3)(ii) would set forth a single standard, 
applicable on both an initial and ongoing basis, that requires every 
Non-U.S. Securities Firm that is not a Canadian Investment Dealer to 
maintain capital substantially similar to (adjusted) net capital 
required for fully-registered broker-dealers or fully-registered 
futures commission merchants equal to the greater of (i) $10 million or 
(ii) the amount required by the firm's applicable regulatory minimum 
requirements, including any and all required buffers, established by 
the regulatory authority of that country's government or an agency or 
instrumentality thereof. Further, proposed Rule 301(b)(3)(ii) would 
provide that if the Risk Committee prohibits the use of the non-U.S. 
jurisdiction's regulatory minimum requirements or chooses to supplement 
a non-U.S. jurisdiction's regulatory minimum requirements, then the 
Non-U.S. Securities Firm must maintain total equity greater than $25 
million.
    OCC initially intends to limit the admission of Non-U.S. Clearing 
Members to entities located in three Group of 7 jurisdictions--the 
United Kingdom, France, and Germany--because of the robust regulatory 
frameworks in each of those jurisdictions. However, in the future OCC 
may reevaluate whether it should consider admitting Non-U.S. Clearing 
Members from other jurisdictions, provided that if, after conducting a 
review of any such jurisdiction, OCC determines the jurisdiction 
supports a rigorous regulatory framework similar to the three countries 
mentioned above and satisfies any other risk related jurisdiction 
reviews undertaken during the member application process.
    Banks. Existing OCC rules do not have minimum capital requirements 
for Clearing Members that are banks. Pursuant to the proposed rule 
change, new Rule 301(b)(4) would require each Clearing Member that is a 
U.S. bank (i) to maintain Tier 1 Capital of at least $500 million, (ii) 
to maintain a Tier 1 Capital Ratio greater than 6%, and (iii) be 
``adequately-capitalized'' as measured by prompt corrective action 
(``PCA'') capital category ratios for National Banks and Federal 
Savings Associations. In addition, every U.S. branch of a non-U.S. bank 
that is a Clearing Member must be a branch of a non-U.S. bank that 
maintains (1) Tier 1 Capital of at least $500 million (or its 
equivalent in the relevant home country currency), (ii) a Tier 1 
Capital Ratio greater than 6%, and (iii) that remains at least 
adequately capitalized as calculated or defined pursuant to the 
regulatory capital rules of the applicable banking regulatory authority 
of its home country.
Paragraph (c)--Dually Registered Clearing Members
    Proposed paragraph (c) would clarify that if a Clearing Member is 
registered as a broker-dealer under section 15(b)(1) of the Exchange 
Act and also as an FCM under CEA section 4f(a)(1), the Clearing Member 
must comply with all applicable capital requirements.
Paragraph (d)--Extreme but Plausible Events and Contingency Planning
    Existing Article V, Section 1, Interpretation and Policy .01 
requires an applicant (i) to meet the initial financial requirements 
set forth in the Rules, (ii) to not have sustained certain pre-tax 
losses, (iii) to not be listed in a special surveillance list with the 
Securities Investor Protection Corporation (or not be subject to 
similar special financial surveillance procedures in accordance with 
the CEA), and (iv) to have access to sufficient financial resources to 
meet obligations arising from clearing membership in extreme but 
plausible market conditions, as determined by OCC. Existing Rule 301(d) 
also requires every Clearing Member to have access to sufficient 
financial resources to meet obligations arising from clearing 
membership in extreme but plausible market conditions and maintain 
adequate procedures, including but not limited to contingency funding, 
to ensure that it is able to meet its obligations arising in connection 
with clearing membership when such obligations arise.

[[Page 17054]]

    Proposed Rule 301(d) would replace existing Article V, Section 1, 
Interpretation and Policy .01 and Rule 301(d) and set forth a single 
standard, applicable on both an initial and ongoing basis, that 
requires every Clearing Member to have access to sufficient financial 
resources to meet obligations arising from clearing membership in 
extreme but plausible market conditions, as determined by OCC for such 
purposes, and maintain adequate procedures, including but not limited 
to contingency funding, to ensure that it is able to meet its 
obligations arising in connection with clearing membership when such 
obligations arise. Proposed Rule 301(d) would also be revised to 
clarify that contingency planning includes maintaining alternate 
settlement bank arrangements.
Interpretations and Policies
    Existing Rule 307 sets forth definitions for the terms ``net 
capital,'' ``aggregate indebtedness,'' ``aggregate debit items,'' 
``Examining Authority'' and ``customer.'' Proposed Rule 301, 
Interpretation and Policy .01 would adopt these definitions. Existing 
Rule 307 also sets forth definitions for the terms ``debt-equity 
total,'' ``satisfactory subordination agreement,'' and ``alternative 
net capital.'' Proposed Rule 306A, Interpretation and Policy .01, would 
adopt the definitions of ``debt-equity total'' and ``satisfactory 
subordination agreement.'' The term ``alternative net capital'' is not 
referenced in any OCC Rules and therefore, the definition of 
``alternative net capital'' is being removed from OCC Rules due to the 
lack of any reference to this term.
    Separately, proposed Rule 301, Interpretation and Policy .02 would 
adopt the provisions presently set forth in existing Rule 307, 
Interpretation and Policy .01 but strike the reference to Clearing 
Members that were Clearing Members on June 13, 2005 as no longer 
relevant.
Proposed Rule 302--Operational Capability
    Clearing Members currently are subject to operational capability, 
experience, and competence standards set forth in various provisions in 
the By-Laws and the Rules, including Article V, Section 1, 
Interpretations and Policies .02, .07 and .07A of the By-Laws and Rule 
201. The proposed rule change would consolidate these provisions in new 
Rule 302 and modify the provisions as described below.
Paragraph (a)--General
    Paragraph (a) of proposed Rule 302 would adopt a new general 
statement that clarifies that each Clearing Member, including 
applicants for clearing membership, is required to meet the operational 
capability, experience, and competence standards set forth in the Rules 
and such other qualifications and standards as OCC may promulgate.
Paragraph (b)--Offices
    Proposed paragraph (b) would incorporate the language currently set 
forth in existing Rule 201(a) to require each Clearing Member to 
maintain facilities for conducting business with OCC. Proposed 
paragraph (b) also would modify the language currently set forth in 
existing Rule 201(a) to eliminate the requirement that the 
representative must be at the Clearing Member's facilities and to 
reference regular and overnight business hours. Taken together, 
proposed paragraph (b) would require each Clearing Member to make 
available during hours specified by OCC, a representative of the 
Clearing Member authorized in the name of the Clearing Member to take 
all action necessary for conducting business with OCC during regular 
and overnight business hours. As revised, this provision is intended to 
reflect the realities and needs of Clearing Members and OCC by 
permitting the representative to work remotely during regular and 
overnight business hours.
Paragraph (c)--Books and Records
    Proposed paragraph (c) would amend the language currently set forth 
in existing Article V, Section 1, Interpretation and Policy .02, clause 
(a) and simplify and standardize (to the extent possible) the 
recordkeeping requirements applicable to each type of Clearing Member. 
Under proposed paragraph (c), each Clearing Member would be required to 
maintain books and records in accordance with the requirements of its 
applicable regulatory agency, including but not limited to any 
applicable requirements under the Exchange Act, the CEA, or the 
requirements of any non-U.S. regulatory agency, and with such 
additional requirements as OCC may impose. Taken together, this 
proposed paragraph (c) is intended to prevent unnecessary regulatory 
burdens by permitting each Clearing Member to maintain applicable 
records in accordance with its existing regulatory requirements, as 
applicable.
Paragraph (d)--Ability To Discharge Responsibilities
    Proposed paragraph (d) would adopt the language currently set forth 
in existing Article V, Section 1, Interpretation and Policy .02, clause 
(b) with minor changes to clarify that the provision applies to the 
facilities, systems and procedures of each Clearing Member. Proposed 
paragraph (d) also would clarify that each Clearing Member must be able 
to participate in applicable operational and default management 
activities.
    Specifically, under proposed paragraph (d), each Clearing Member 
would be required to maintain facilities, systems and procedures that 
are operationally sufficient to discharge its functions as a Clearing 
Member in a timely and efficient manner, including (i) the ability to 
process expected volumes and values of transactions cleared by the 
Clearing Member within required time frames, including at peak times 
and on peak days; (ii) the ability to fulfill collateral, payment, and 
delivery obligations as required by OCC; and (iii) the ability to 
participate in applicable operational and default management 
activities, including auctions, as may be required by OCC and in 
accordance with applicable laws and regulations.
Paragraph (e)--Physically-Settled Equity Options and Stock Futures
    OCC Rule 901(a) requires that every Stock Clearing Member and every 
Clearing Member that effects transactions in physically-settled stock 
futures be a participant in good standing of the correspondent clearing 
corporation,\26\ however this does not apply to (i) an Appointing 
Clearing Member that has an effective agreement with an Appointed 
Clearing Member, or (ii) a Canadian Clearing Member on behalf of which 
CDS maintains an identifiable subaccount in a CDS account at the 
correspondent clearing corporation. OCC proposes to relocate Rule 
901(a) to proposed paragraph (e) with minor modifications. OCC would 
also make conforming updates throughout the Rules to update cross-
references to various provisions of revised Rule 901.
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    \26\ Article I, Section I.C(33) of the OCC By-Laws defines 
``correspondent clearing corporation'' to mean the National 
Securities Clearing Corporation or any successor thereto which, by 
agreement with the Corporation, provides facilities for settlements 
in respect of exercised option contracts or BOUNDs or in respect of 
delivery obligations arising from physically-settled stock futures.
---------------------------------------------------------------------------

Paragraph (f)--Stock Loan Programs
    Proposed paragraph (f) would adopt the language currently set forth 
in existing Article V, Section 1, Interpretations and Policies .07 and 
.07A and modify the language to refer to

[[Page 17055]]

Clearing Members ``participating in the Stock Loan/Hedge Program'' or 
``participating in the Market Loan Program,'' as the case may be, 
rather than referring to ``Hedge Clearing Members'' and ``Market Loan 
Clearing Members.'' Proposed paragraph (e) also would clarify that each 
Clearing Member participating in OCC's Stock Loan programs must meet 
the additional operational requirements set forth in subparagraph 
(e)(1) and/or (e)(2), as applicable. The proposed change would also 
clarify that participants in the Market Loan Program must be either a 
U.S. Clearing Member or be located in any other foreign country or 
jurisdiction approved by the Risk Committee. The proposed change would 
allow OCC to approve Non-U.S. Clearing Members for the Market Loan 
Program provided that the Risk Committee has completed a comprehensive 
review of regulatory, legal, and tax issues for the relevant non-U.S. 
jurisdiction.\27\
---------------------------------------------------------------------------

    \27\ See supra note 20.
---------------------------------------------------------------------------

Proposed Rule 303--Financial, Operations, and Risk Management Personnel
    OCC's financial, operations and risk management personnel 
requirements currently are set forth in various provisions of the By-
Laws and the Rules, including existing Article V, Section 1, 
Interpretations and Policies .03 and .05 of the By-Laws and Rule 214. 
The proposed rule change would consolidate and modify these 
requirements in new Rule 303. Below is a description of each of the 
paragraphs in proposed Rule 303.
Paragraph (a)--Substantial Experience
    Proposed paragraph (a) would adopt certain of the provisions 
currently set forth in existing Article V, Section 1, Interpretations 
and Policies .03 and .05 of the By-Laws and modify the provisions to 
reference both applicants and Clearing Members. In addition, proposed 
paragraph (a) would contemplate ``third-party service providers'' more 
generally and eliminate references to facilities management agreements 
and Managing/Managed Clearing Members.
    More specifically, proposed paragraph (a) would provide that every 
applicant and Clearing Member must employ personnel or maintain 
contractual arrangements with third-party service providers acceptable 
to OCC with substantial experience in clearing the kind(s) of cleared 
contracts applicable to the applicant or Clearing Member. Proposed 
paragraph (a) also would require every Clearing Member to maintain 
supervisory authority over all internal staff conducting business with 
the Corporation and over the activities and functions performed by 
third-party vendors.
    The elimination of references to facilities management agreements 
and Managing/Managed Clearing Members is intended to provide greater 
flexibility on the provision of third-party services. However, 
notwithstanding this greater flexibility, Clearing Members are required 
to maintain supervisory authority over any third-party arrangements. In 
addition, such arrangements would be subject to the additional 
requirements set forth in proposed paragraph (d) of Rule 303.
Paragraph (b)--FinOps, CFOs and Similar Personnel
    Proposed paragraph (b) would adopt certain of the provisions 
currently set forth in existing Article V, Section 1, Interpretation 
and Policy .03 and further specify the roles required for each type of 
Clearing Member. More specifically, proposed paragraph (b) would 
require each Clearing Member to employ personnel who are responsible 
for such Clearing Member's compliance with applicable net capital, 
recordkeeping, and other financial, operational, and risk management 
rules or maintain contractual arrangements with third-party service 
providers to perform such activities or functions. The employed 
personnel are:
     in the case of a fully registered broker-dealer, an 
individual registered with FINRA as a ``Limited Principal--Financial 
and Operations'';
     in the case of a fully registered FCM or other registrant 
registered under CEA section 4f that is not a fully registered broker-
dealer, an individual serving as chief financial officer (``CFO'') or 
otherwise has the appropriate qualifications and is responsible for 
supervising the preparation of the applicant's financial reports; and
     in the case of a bank, Canadian Investment Dealer or other 
Non-U.S. Securities Firm, an individual serving as CFO or otherwise has 
the appropriate qualifications and is responsible for supervising the 
preparation of the applicant's financial reports.
    Relatedly, the proposed rule change would remove the more 
prescriptive requirements currently set forth in Article V, Section 1, 
Interpretation and Policy .03, clause (d) relating to associated 
persons and/or key operations personnel serving as full-time employees. 
These amendments are intended to provide greater flexibility and reduce 
administrative burdens for OCC and its Clearing Members.\28\
---------------------------------------------------------------------------

    \28\ For example, the proposed change would eliminate the need 
for certain staffing exemptions/waivers currently contemplated by 
Article V, Section 1, Interpretation and Policy .03.
---------------------------------------------------------------------------

Paragraph (c)--Clearing Operations Personnel
    Proposed paragraph (c) would adopt certain of the provisions 
currently set forth in existing Rule 214(c) and (d) and modify the 
provisions to refer to both clearing operations personnel and adequate 
contractual arrangements with third-party service providers. Proposed 
paragraph (c) also would clarify that a Clearing Member must be able to 
discharge its functions in a timely and efficient manner. More 
specifically, proposed paragraph (c) would require each Clearing Member 
to ensure that it employs an appropriate number of clearing operations 
personnel or maintains adequate contractual arrangements with third-
party service providers with the requisite capability, experience, and 
competency such that the Clearing Member can reasonably ensure that it 
is able to discharge its functions as a Clearing Member in a timely and 
efficient manner, including the ability to process expected volumes and 
values of transactions cleared by the Clearing Member within required 
time frames, including at peak times and on peak days; the ability to 
fulfill collateral, payment, and delivery obligations as required by 
OCC, and the ability to participate in applicable operational and 
default management activities, including auctions, as may be required 
by OCC and in accordance with applicable laws and regulations. Proposed 
paragraph (c) also would require that each Clearing Member must submit 
to the OCC a list of the clearing operations personnel it employs in 
such form as is acceptable to OCC, including, without limitation, the 
names, titles, primary offices, email addresses, and business phone 
numbers for all such personnel.
Paragraph (d)--Contractual Arrangements With Third-Party Personnel
    Proposed paragraph (d) would adopt certain of the provisions 
currently set forth in existing Article V, Section 1, Interpretation 
and Policy .05 and further provide for ``third-party service 
providers'' more generally, beyond the facilities management 
arrangements as currently described in OCC's By-Laws and Rules, and 
require related arrangements to permit due diligence by OCC. Proposed 
paragraph (d) also

[[Page 17056]]

would clarify that it applies to contractual arrangements with third-
party service providers used to satisfy the requirements of Rule 302 
and this Rule 303. Under proposed paragraph (d), any such arrangement 
must (1) clearly set forth the specific services to be performed by the 
third-party service providers on behalf of a Clearing Member and the 
respective duties and obligations of the third-party service provider 
and Clearing Member, (2) provide that the agreement will not be 
terminated until 30 days after written notice of such termination is 
provided by the Clearing Member to OCC and (3) provide OCC with the 
authority and ability to perform initial and ongoing due diligence on 
the service provider.
Paragraph (e)--Replacing Relevant Personnel and Other Arrangements
    Proposed paragraph (e) would adopt certain of the provisions 
currently set forth in existing Rule 214, Interpretation and Policy .02 
and clarify that it applies to the separation or termination of 
personnel and third-party service providers. In particular, proposed 
paragraph (e) would provide that upon a separation or termination of 
agreement with a third-party service provider between the only 
personnel or third-party service provider who meets the requirements of 
Rule 303(b) and the Clearing Member, then the Clearing Member is 
granted a grace period of three months to return to compliance with the 
Rule.
Proposed Rule 304--Operational and Default Management Testing
    Existing Rule 218 sets forth various requirements relating to 
business continuity and disaster recovery testing and default 
management testing. The proposed rule change would move the provisions 
in existing Rule 218 to new Rule 304 with only minor changes. 
Specifically, proposed Rule 304(a) would contain a new introductory 
sentence that clarifies that OCC will periodically designate Clearing 
Members required to participate in business continuity and disaster 
recovery testing. The remaining provisions contained in proposed Rule 
304(a) would be substantively identical to the provisions contained in 
existing Rule 218(a) and (b). Similarly, the provisions contained in 
proposed Rule 304(b) would be substantively identical to the provisions 
currently set forth in existing Rule 218(c).
    Proposed Rule 304(c) would set forth a new paragraph that provides 
that OCC may require Clearing Members to participate in other 
operational and connectivity testing and related reporting requirements 
(such as reporting the test results to OCC in a manner specified by 
OCC) that OCC deems necessary to ensure the continuing operational 
capability of the Clearing Members and the continuing ability of OCC to 
perform its clearing, settlement, and risk management activities.
Proposed Rule 305--Clearing Member Risk Management
    Existing Rule 311 sets forth requirements pertaining to the risk 
management program obligations of Clearing Members. The proposed rule 
change would move the provisions in existing Rule 311 to new Rule 305 
and modify the provisions consistent with CFTC Rule 
39.13(h)(5)(ii).\29\ More specifically, similar to existing Rule 
311(a), proposed Rule 305(a) would require each Clearing Member to 
maintain current written risk management policies and procedures that 
address the risks the Clearing Member may pose to OCC. In addition, 
proposed Rule 305(a) would contain an additional provision that is not 
contained in existing Rule 311(a), which clarifies that OCC may review 
the risk management policies, procedures, and practices of each 
Clearing Member on a periodic basis and may take appropriate action to 
address concerns identified in such reviews, including but not limited 
to the imposition of protective measures pursuant to Rule 307. This 
additional provision would be added to better address the requirements 
applicable to registered derivatives clearing organizations under CFTC 
Rule 39.13(h)(5)(ii).
---------------------------------------------------------------------------

    \29\ 17 CFR 39.13(h)(5(ii).
---------------------------------------------------------------------------

    Proposed Rule 305(b) would require each Clearing Member to provide 
to OCC such information and documentation as may be requested by OCC 
from time to time regarding such Clearing Member's risk management 
policies, procedures, and practices. As compared to existing Rule 
311(b), the language in proposed Rule 305(b) would be streamlined to 
not include any examples of such information and documentation 
addressed by this paragraph.
    Proposed Rule 305(c) would be identical to the provisions set forth 
in existing Rule 311(c).
Proposed Rule 306--Notification and Reporting Requirements
    OCC's notification and reporting requirements currently are set 
forth in various provisions of the By-Laws and the Rules, including 
existing Article V, Section 1, Interpretations and Policies .03 and .07 
of the By-Laws and Rules 201(b), 215, 216, 217(b), 303, 306, 308 and 
310(a)-(c). The proposed rule change would consolidate and modify these 
requirements in new Rules 306, 306A and 306B.
    Proposed Rule 306 would set forth a broad statement clarifying that 
each Clearing Member must provide to OCC such notices, reports, 
documentation, or other information required in the Rules and any other 
requirements promulgated by OCC.
    Proposed Rules 306A and 306B are described below.
Proposed Rule 306A--Event-Based Reporting
    Proposed Rule 306A would set forth the event-based reporting 
requirements and incorporate and modify the provisions currently set 
forth in existing Article V, Section 1, Interpretations and Policies 
.03 (clause (c)) and .07 of the By-Laws and existing Rules 201(b), 215, 
217(b) and 303. Each paragraph in proposed Rule 306A is described 
below.
Paragraph (a)--Early Warning Notices
    Proposed paragraph (a) would adopt many of the provisions in 
existing Rule 303 and set forth the early warning notice requirements 
for Clearing Members. Under proposed paragraph (a), a Clearing Member 
would be required to notify an officer of OCC promptly, and in any 
event, prior to 3:00 p.m. Central Time (4:00 p.m. Eastern Time) of the 
next business day in writing, if any of the circumstances described in 
subparagraphs (a)(1) through (a)(6) are met, as applicable. As compared 
to existing Rule 303(a), proposed Rule 306A(a) would simplify the 
notification requirement by specifying that one (rather than two) 
notices must be provided to an officer of OCC prior to the applicable 
deadline.
    Proposed subparagraph (a)(1) would apply broadly to all types of 
Clearing Members, whereas proposed subparagraphs (a)(2) through (a)(6) 
would apply to specific types of Clearing Members. Each proposed 
subparagraph is described in greater detail below.
    All Clearing Members. Proposed subparagraph (a)(1) would apply to 
all Clearing Members and is mostly identical to existing Rule 303(a). 
Under proposed subparagraph (a)(1), the early warning notice 
requirement would be triggered if a Clearing Member notifies, is 
required to notify, or receives notice from, any regulatory 
organization (as currently defined in the Rule 303, Interpretation and 
Policy .01 and would be relocated to Chapter I of the Rules) of any 
financial difficulty affecting the

[[Page 17057]]

Clearing Member or of any failure by the Clearing Member to be in 
compliance with the financial responsibility rules or capital 
requirements of any regulatory organization. The new rule would be 
revised to clarify that it would apply to operational difficulty/
responsibilities in addition to financial. Further, proposed 
subparagraph (a)(1) would clarify that any notice, whether written or 
otherwise, from a regulatory organization informing a Clearing Member 
that it may fail to be in compliance with the financial responsibility 
rules or capital requirements of the regulatory organization unless it 
takes corrective action, or informing it that it has triggered any 
provision in the nature of an early warning provision contained in any 
such rule or regulation, constitutes a notice for purposes of this 
subparagraph. The early warning notification to OCC must include a copy 
of any written notice provided or received by the Clearing Member from 
the regulatory organization.
Fully Registered Broker-Dealers
    Proposed subparagraph (a)(2) would apply to fully registered 
broker-dealer Clearing Members and adopt many of the provisions set 
forth in existing Rule 303(b). Under proposed subparagraph (a)(2)(A), 
the early warning notice requirement would be triggered if the Clearing 
Member's net capital becomes less than the greater of (i) $12 million, 
(ii) in the case of a Clearing Member electing to operate pursuant to 
the aggregate indebtedness standard, 10 percent of its aggregate 
indebtedness (i.e., aggregate indebtedness exceeds 1000% of net 
capital), or (iii) in the case of a Clearing Member electing to operate 
pursuant to the alternative standard, 5% of its aggregate debit items. 
As compared to existing Rule 303(b)(1), proposed Rule 306A(a)(2)(A)(i) 
would require early warning notification to the extent that net capital 
becomes less than $12 million (rather than $2.5 million) to reflect the 
change in net capital requirements as described in the description of 
proposed Rule 301 above.
    Under proposed subparagraph (a)(2)(B), the early warning notice 
requirement would be triggered if the aggregate principal amount of 
such Clearing Member's satisfactory subordination agreements (other 
than such agreements which qualify as equity capital under SEC Rule 
15c3-1(d)) exceeds 70% of such Clearing Member's debt-equity total. 
This new subparagraph (a)(2)(B) would be substantively identical to 
existing Rule 303(b)(2).
    Under proposed subparagraph (a)(2)(C), the early warning notice 
requirement would be triggered if the Clearing Member carries accounts 
of listed options specialists in accordance with SEC Rule 15c3-
1(c)(2)(x) or has elected to operate pursuant to SEC Rule 15c3-1(a)(6), 
and the sum of deductions and required equity, as applicable, exceeds 
1000% of such Clearing Member's net capital. This new subparagraph 
(a)(2)(C) would replace the provisions currently set forth in existing 
Rule 303(b)(3)-(4).
    Under proposed subparagraph (a)(2)(E), the early warning notice 
requirement would be triggered if the Clearing Member's Examining 
Authority has granted to such Clearing Member, pursuant to SEC Rule 
15c3-1(c)(2)(v)(C), an extension of any time period provided for 
resolving short securities differences under SEC Rule 15c3-
1(c)(2)(v)(A). This new subparagraph (a)(2)(E) would be substantively 
identical to existing Rule 303(b)(5).
    Under proposed subparagraph (a)(2)(F), the early warning notice 
requirement would be triggered if the Clearing Member has provided any 
notice as required by SEC Rule 15c3-1(e)(1)(iv). Proposed subparagraph 
(a)(2)(F) also would require the Clearing Member to provide OCC with a 
copy of the notice so provided. This new subparagraph (a)(2)(F) would 
be substantively identical to existing Rule 303(b)(6).
    Fully Registered FCMs. Proposed subparagraph (a)(3) would apply to 
fully registered FCM Clearing Members and replace the provisions set 
forth in existing Rule 303(c). Under proposed subparagraph (a)(3)(A), 
the early warning notice requirement would be triggered if the Clearing 
Member's adjusted net capital becomes less than the greater of $12 
million or the early warning adjusted net capital requirements 
established by CFTC Rule 1.12(b). Under proposed subparagraph 
(a)(3)(B), the early warning notice requirement would be triggered if 
the Clearing Member has provided any notice as required by CFTC Rule 
1.12(c), (d), (f)(3), (f)(4), (g) or (m). Proposed subparagraph 
(a)(3)(B) also requires the Clearing Member to provide OCC with a copy 
of the notice so provided.
    Canadian Investment Dealers. Proposed subparagraph (a)(4)(A) would 
apply to Canadian Investment Dealer Clearing Members and (together with 
proposed subparagraph (a)(4)(B)) replace the provisions set forth in 
existing Rule 303(d). Under proposed subparagraph (a)(4)(A), the early 
warning notice requirement would be triggered if the Clearing Member's 
risk adjusted capital is less than $12 million or 5% of total margin 
required or if it subject to an early warning designation under the 
financial and operational rules established by IIROC.
    Other Non-U.S. Securities Firms. Proposed subparagraph (a)(4)(B) 
would apply to all other Non-U.S. Securities Firm (i.e., non-Canadian 
Investment Dealer) Clearing Members and (together with proposed 
subparagraph (a)(4)(A)) replace the provisions set forth in existing 
Rule 303(d). Under proposed subparagraph (a)(4)(B)(i), the early 
warning notice requirement would be triggered if the Clearing Member's 
net capital equivalent is less than the greater of (a) $12 million or 
(b) the early warning amount required by the firm's applicable 
regulatory requirements established by the regulatory authority of that 
country's government or an agency or instrumentality thereof.
    Under proposed subparagraph (a)(4)(B)(ii), the early warning notice 
requirement would be triggered if the Clearing Member's total equity is 
less than $30 million and the Risk Committee has prohibited the 
Clearing Member from using its non-U.S. jurisdiction's regulatory 
minimum and early warning requirements or otherwise requires the 
Clearing Member to supplement its non-U.S. jurisdiction's regulatory 
minimum or early warning requirements.
All Non-U.S. Securities Firms
    Under proposed subparagraph (a)(4)(C), the early warning notice 
requirement would be triggered if the Clearing Member violates any rule 
or regulation relating to financial responsibility or protection of 
customer property of its Non-U.S. Regulatory Agency (or any other 
governmental agency or instrumentality or independent organization or 
exchange to whose authority it is subject).
    Under proposed subparagraph (a)(4)(D), the early warning notice 
requirement would be triggered if the Clearing Member receives any 
notice (whether written or otherwise) from its Non-U.S. Regulatory 
Agency (or any other agency, instrumentality, organization or exchange) 
(a) alleging a violation of any such rule or regulation, (b) informing 
it that it may violate any such rule or regulation unless it takes 
corrective action, or (c) informing it that it has triggered any 
provision in the nature of an early warning provision contained in any 
such rule or regulation.
    Finally, proposed subparagraph (a)(4)(D) would permit OCC to 
specify other events that may trigger an early warning notice 
requirement.

[[Page 17058]]

    Banks. Proposed subparagraph (a)(5) would apply to all Clearing 
Members that are Banks. Under proposed subparagraph (a)(5)(A), the 
early warning notice requirement would be triggered if the Clearing 
Member's Tier 1 Capital is less than $600 million. Under proposed 
subparagraph (a)(5)(B), the early warning notice requirement would be 
triggered if the Clearing Member's Tier 1 Capital Ratio is less than 
the greater of (i) 7% or (ii) its Tier 1 Capital Ratio regulatory 
requirement plus 1%, or if the Clearing Member is deemed 
undercapitalized as calculated or defined pursuant to the regulatory 
capital rules of the applicable banking regulatory authority of its 
home country. Under proposed subparagraph (a)(5)(C), the early warning 
notice requirement would be triggered if the Clearing Member violates 
any rule or regulation relating to financial responsibility or 
protection of customer property of its regulatory agency (or any other 
governmental agency or instrumentality or independent organization or 
exchange to whose authority it is subject). Under proposed subparagraph 
(a)(5)(D), the early warning notice requirement would be triggered if 
the Clearing Member receives any notice (whether written or otherwise) 
from such agency (or any other agency, instrumentality, organization or 
exchange) (a) alleging a violation of any such rule or regulation, (b) 
informing it that it may violate any such rule or regulation unless it 
takes corrective action, or (c) informing it that it has triggered any 
provision in the nature of an early warning provision contained in any 
such rule or regulation. Finally, proposed subparagraph (a)(5)(E) would 
permit OCC to specify other events that may trigger an early warning 
notice requirement. In addition, the provisions of existing Rule 303, 
Interpretation and Policy .01 would be relocated to Chapter I of the 
Rules. Existing Rule 303, Interpretation and Policy .02 would be 
removed given that OCC no longer maintains different standards for 
exempt Non-U.S. Clearing Members.
Paragraph (b)--Notice of Material Changes and Information Requests
    Proposed paragraph (b) would adopt many of the provisions in 
existing Rule 215 and set forth the notice requirements for material 
changes and other information requests. New subparagraphs (b)(1) 
through (b)(6) are described in greater detail below.
    Subparagraph (b)(1). Proposed subparagraph (b)(1) would adopt the 
provisions currently set forth in existing Rule 215(a) without any 
changes. Under proposed subparagraph (b)(1), each Clearing Member would 
be required to provide OCC with prompt prior written notice of any 
enumerated material change in its form of organization or ownership 
structure.
    Subparagraph (b)(2). Proposed subparagraph (b)(2) would modify and 
expand on the provisions currently set forth in existing Rule 215(b). 
Specifically, proposed subparagraph (b)(2) would require each Clearing 
Member to give OCC prompt written notice \30\ of material operational 
or financial changes, including: (A) a change in location of clearing 
operations; \31\ (B) a change in location of its facilities or offices 
maintained pursuant to Rule 302; \32\ (C) a change in any personnel of 
the Clearing Member responsible for ensuring that the Clearing Member 
is able to fulfill its obligations as a Clearing Member pursuant to 
Rule 303(c); \33\ (D) a new or revoked stock settlement relationship 
with another Clearing Member or CDS; (E) a change in the Clearing 
Member's independent public accountant; (F) a change in Non-U.S. 
Clearing Member's regulatory capital standards; (G) experiencing 
operational difficulties or is non-compliant with operational 
capability requirements; (H) current or hindsight customer reserve or 
customer segregation deficiencies; (I) a change in registration status 
or regulatory authorization; (J) current or hindsight net capital 
deficiencies; (K) a change in date for its fiscal year-end; or (L) if a 
Canadian Clearing Member participating in the Stock Loan/Hedge Program 
knows or reasonably expects that CDS will cease, or if CDS has ceased, 
to act on behalf of the Canadian Clearing Member with respect to 
effecting delivery orders for stock loan and stock borrow 
transactions.\34\
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    \30\ As compared to existing Rule 215(b), proposed Rule 
306A(b)(2) would require ``prompt'' written notice (rather than 30-
day prior written notice). This change is intended to grant greater 
flexibility and reduce burdens associated with providing advance 
notice. Moreover, OCC believes certain changes that currently 
require prior notice (i.e., planned changes) generally are not 
planned so prior notice is not practical.
    \31\ As compared to existing Rule 215(b)(1), proposed Rule 
306A(b)(2)(A) would not require advance notification of planned 
changes. This change is intended to grant greater flexibility and 
reduce burdens associated with providing advance notice. Also, in 
OCC's experience, these changes are generally not planned so prior 
notice is not practical.
    \32\ As compared to existing Rule 215(b)(2), proposed Rule 
306A(b)(2)(B) would not require advance notification of planned 
changes. This change is intended to grant greater flexibility and 
reduce burdens associated with providing advance notice. Also, in 
OCC's experience, these changes are generally not planned so prior 
notice is not practical. Proposed Rule 306A(b)(2)(B) also would 
clarify that it applies to both facilities and offices, and 
therefore would replace existing Rule 201(b) and existing Rule 
215(b)(2).
    \33\ As compared to existing Rule 215(b)(3), proposed Rule 
306A(b)(2)(C) would not require advance notification of planned 
changes. This change is intended to grant greater flexibility and 
reduce burdens associated with providing advance notice. Also, in 
OCC's experience, these changes are generally not planned so prior 
notice is not practical.
    \34\ Proposed Rule 306A(b)(2)(L) would modify and replace a 
portion of existing Article V, Section 1, Interpretation and Policy 
.07.
---------------------------------------------------------------------------

    Subparagraph (b)(3). Proposed subparagraph (b)(3) (together with 
proposed subparagraph (b)(4)) would replace existing Rule 215(c). Under 
proposed subparagraph (b)(3), each Clearing Member must give OCC prompt 
prior written notice of its intention to enter into, terminate, or 
alter its outsourcing activities.
    Subparagraph (b)(4). Proposed subparagraph (b)(4) (together with 
proposed subparagraph (b)(3)) would replace existing Rule 215(c). Under 
proposed subparagraph (b)(4), each Clearing Member must give OCC prompt 
written notice if separation or termination of an agreement occurs 
between the only personnel, associated person, or third-party provider 
who performs activities necessary to meet the requirements of the Rules 
or is otherwise critical to ensuring that the Clearing Member is able 
to clear and settle confirmed trades in account types for which it is 
approved.
    Subparagraph (b)(5). Proposed subparagraph (b)(5) would add a new 
event-based reporting requirement that each Clearing Member notify OCC 
within 30 days (i) of its independent auditor issuing a qualified 
opinion of its financial statements or (ii) of notification by its 
independent auditor that the independent auditor has identified a 
material weakness in an internal control over financial reporting.
    Subparagraph (b)(6). Proposed subparagraph (b)(6) would modify 
existing Rule 215(d) to provide that each Clearing Member must, within 
the time period reasonably prescribed by OCC, furnish to OCC such 
documents and information as OCC may from time to time require pursuant 
to Chapters II and III of the Rules.
Paragraph (c)--Statutory Disqualifications
    Proposed paragraph (c) would adopt and modify the provisions in 
existing Rule 217(b) and set forth the statutory disqualification 
notification requirements for Clearing Members. Under proposed 
paragraph (c), a Clearing Member, or applicant for clearing membership, 
that is or becomes subject to a statutory disqualification

[[Page 17059]]

must notify OCC in writing as soon as practicable upon learning of such 
statutory disqualification and in any event within 20 business days 
thereafter. As compared to existing Rule 217(b), proposed Rule 306A(c) 
would require notification within 20 business days (rather than 5 
business days).
    Proposed paragraph (c) also would require the Clearing Member to 
further accompany such notification with information and forms, 
including amendments thereto, related to the statutory disqualification 
received from or provided to the SEC, the CFTC or any self-regulatory 
organization and clarify that this includes (i) a copy of the order, 
judgment, letter of acceptance, waiver and consent, or other document 
evidencing the event that gave rise to the statutory disqualification, 
and (ii) any amended Form BD, FINRA Form MC-400A, any written response 
to a National Futures Association (``NFA'') Rule 504 Notice of Intent 
or other written request for relief addressed to such self-regulatory 
organization. Clearing Members that are not members of FINRA or NFA are 
required to provide OCC with, at a minimum, the information contained 
in FINRA Form MC-400A in addition to any forms filed with any self-
regulatory organization or regulatory agency with respect to a 
statutory disqualification or similar provision of the laws or 
regulations applicable to such Clearing Member or applicant. OCC would 
eliminate the requirement that the member or applicant provide OCC 
notification of whether or not the Clearing Member is seeking to 
continue being a Clearing Member notwithstanding the statutory 
disqualification as this is assumed in most cases.
Proposed Rule 306B--Periodic Reporting
    Proposed Rule 306B would set forth the periodic reporting 
requirements and incorporate and modify the provisions presently set 
forth in existing Rules 216, 306, 308 and 310(a)-(c). Each paragraph in 
new Rule 306B is described below.
Paragraph (a)--Financial Reports
    Proposed paragraph (a) would replace existing portions of Rules 306 
and 310(a)-(c) with a more concise set of requirements applicable to 
each type of Clearing Member. Proposed paragraph (a) also would clarify 
that OCC has broad discretion in requiring each Clearing Member to 
submit statements of its financial condition at such times and in such 
manner as shall be prescribed by OCC. Below are the requirements 
applicable to each type of Clearing Member.
    Fully Registered Broker-Dealers. Every Clearing Member that is a 
fully registered broker-dealer would be required to file with OCC a 
true and complete copy of Part II, IIA, or any other variation of SEC 
Form X-17A-5 within 20 business days after the end of each month 
(regardless of whether or not such Clearing Member is required to 
prepare or file such report on a monthly basis with another regulatory 
or self-regulatory organization). As compared to existing Rule 306, 
proposed Rule 306B(a) would include a 20-business-day filing deadline 
that is standardized for Clearing Members that are fully registered 
broker-dealers, FCMs or Canadian Investment Dealers.
    Fully Registered FCMs. Every Clearing Member that is a fully 
registered FCM would be required to file with OCC a true and complete 
copy of CFTC Form 1-FR-FCM within 20 business days after the end of 
each month (regardless of whether or not such Clearing Member is 
required to prepare or file such report on a monthly basis with another 
regulatory or self-regulatory organization). As noted above, proposed 
Rule 306B(a) would include a 20-business-day filing deadline that is 
standardized for Clearing Members that are fully registered broker-
dealers, FCMs or Canadian Investment Dealers.
    Canadian Investment Dealers. Every Clearing Member that is a 
Canadian Investment Dealer would be required to file with OCC a true 
and complete copy of its Form 1 of the International Financial 
Reporting Standards within the later of (i) 20 business days after the 
end of each month or (ii) monthly deadlines established by IIROC. As 
noted above, proposed Rule 306B(a) would include a 20-business-day 
filing deadline that is standardized for Clearing Members that are 
fully registered broker-dealers, FCMs or Canadian Investment Dealers.
    Other Non-U.S. Securities Firms. Every Clearing Member that is a 
Non-U.S. Securities Firm (excluding Canadian Investment Dealers) would 
be required to file with OCC true and complete copies of such financial 
reports specified by OCC at the same time such report is filed with a 
primary regulatory authority. The financial reports must be prepared in 
accordance with its non-U.S. regulatory requirement.
    U.S. Banks. Every Clearing Member that is a U.S. national bank or 
state-chartered bank would be required to file with OCC a copy of its 
Consolidated Report of Condition and Income (``Call Report'') and (to 
the extent not contained within such Call Reports) information 
containing each of its capital levels, ratios, and requirements due at 
same time it is filed with primary regulatory authority. If the 
Clearing Member is not required to file a Call Report, then it must 
file with OCC a copy of its unaudited quarterly financial statements as 
provided to the state regulatory authority having jurisdiction over the 
participant, containing each of its capital levels, ratios, and 
requirements.
    Non-U.S. Banks. Every Clearing Member that is a non-U.S. bank would 
be required to file with OCC true and complete copies of such financial 
reports specified by OCC at the same time such report is filed with a 
primary regulatory authority. The financial reports must be prepared in 
accordance with its non-U.S. regulatory requirements. OCC would also 
relocate Rule 306, Interpretation and Policy .03, which requires that 
OCC deliver to the CFTC upon request any financial report provided to 
OCC pursuant to Rule 306 by a Clearing Member that is not an FCM, to 
new Rule 306B(a)(8).
Paragraph (b)--Annual Audited Financial Statements
    Proposed paragraph (b) would replace existing Rule 308 with an 
annual requirement that is standardized across types of Clearing 
Members. Specifically, proposed paragraph (b) would require each 
Clearing Member to provide to OCC a complete copy of its annual audited 
financial statements, including reports on material inadequacies and 
internal control, prepared in accordance with its regulatory 
requirements and with generally accepted auditing standards of the 
country in which such Clearing Member has its principal place of 
business within 60 calendar days of the end of its fiscal year.
Paragraph (c)--Early or More Frequent Reporting
    Proposed paragraph (c) would replace portions of existing Rule 306 
with standardized requirements relating to early and more frequent 
reporting. Specifically, if a Clearing Member is required to file a 
financial report on an earlier date or on a more frequent basis than is 
required under Rule 306B, then the Clearing Member is required to file 
with OCC a true and complete copy of each such report at the same time 
it is filed with its relevant regulatory authority. In addition, 
proposed paragraph (c) would provide that OCC may, in its discretion, 
require more frequent financial reporting in such form as OCC may 
specify or other financial statements in such form or detail as may be 
prescribed by OCC, including for purposes of assessing

[[Page 17060]]

whether the Clearing Member is meeting the financial requirements for 
clearing membership on an ongoing basis.
Paragraph (d)--Extensions
    Proposed paragraph (d) would replace a portion of existing Rule 
308(e) with a standardized provision that permits OCC, in its 
discretion, to recognize an extension or later deadline granted by the 
Clearing Member's relevant regulatory authority for financial reports 
required under Rule 306B, provided that such extension is not issued on 
a permanent basis and a copy of such extension is filed with OCC in a 
timely manner.
Paragraph (e)--Large Trader Reports
    Proposed paragraph (e) would adopt the provisions set forth in 
existing Rule 216 with no substantive changes.
Proposed Rule 307--Protective Measures
    Existing Rules 304 and 305 set forth certain restrictions on 
distributions, transactions, positions and activities. The proposed 
rule change would adopt a more comprehensive set of protective measures 
in proposed Rules 307, 307A, 307B and 307C and incorporate, as 
appropriate, the provisions presently set forth in existing Rules 304 
and 305.
    Proposed Rule 307 would grant broad authority to OCC to impose 
protective measures on any Clearing Member or applicant for clearing 
membership that (i) is approaching or does not meet OCC's minimum 
membership standards or fails to provide information required under 
Chapters II and III of the Rules such that OCC is unable to determine 
whether it meets the minimum membership standards, (ii) presents 
increased credit or liquidity risk to OCC, (iii) is subject to enhanced 
monitoring and surveillance under OCC's watch level reporting process, 
or (iv) whose financial condition, operational capability, or risk 
management capability otherwise makes it necessary or advisable, for 
the protection of OCC, other Clearing Members, or the general public.
    Below is a description of proposed Rules 307A, 307B and 307C.
Rule 307A--Restrictions on Distributions
    The provisions in existing Rule 304 have been moved to new Rule 
307A and modified to clarify that it applies to all qualified 
regulatory capital and to eliminate separate distribution restriction 
requirements for Non-U.S. Clearing Members. Proposed Rule 307A(a) would 
prohibit a Clearing Member from withdrawing qualified regulatory 
capital (by dividend, distribution, or otherwise) without the prior 
written authorization of OCC if, after giving effect to such 
withdrawal, an early warning condition specified in Rule 306A(a)(2), 
through (6) would exist with respect to such Clearing Member, or such 
withdrawal would be inconsistent with a Clearing Member's regulatory 
requirements. In turn, proposed Rule 307A(b) would provide that OCC may 
prohibit Clearing Members from withdrawing qualified regulatory capital 
(by dividend, distribution, or otherwise) if such Clearing Member is 
subject to enhanced monitoring and surveillance under OCC's watch level 
reporting process or the distribution in question could result in 
increased credit or liquidity risk to OCC.
    Existing Rule 304C(c) and Rule 304, Interpretations and Policies 
.01 through .03, which set forth provisions applicable to exempt Non-
U.S. Clearing Members, have been removed given the broad applicability 
of new Rule 307B(a) and (b) to all Clearing Members and the elimination 
of the concept of ``exempt Non-U.S. Clearing Members'' in OCC's Rules. 
OCC believes that proposed changes would simplify and clarify its Rules 
concerning restrictions on distributions and ensure that these 
protective measures are being applied consistently for all Clearing 
Members.
Rule 307B--Restrictions on Certain Transactions, Positions and 
Activities
    The provisions in existing Rule 305 would be moved to proposed Rule 
307B and modified to improve general readability and to further clarify 
OCC's broad authority to impose protective measures with respect to 
transactions, open positions and related activities. In particular, the 
provisions in existing Rule 305(a) and (b) would be combined in 
proposed Rule 307B(a) and streamlined to provide that if circumstances 
warrant the imposition of protective measures under Rule 307, then the 
CEO or COO (or if unavailable, a Designated Officer) may impose the 
following restrictions on a Clearing Member:
    i. prohibit or impose limitations on clearing transactions that 
increase credit or liquidity risk;
    ii. require such Clearing Member to reduce, eliminate, or hedge any 
existing positions presenting increased credit, liquidity or 
operational risk to OCC;
    iii. require such Clearing Member to transfer any existing 
positions or accounts maintained or carried by such Clearing Member to 
another Clearing Member; and/or
    iv. restrict such Clearing Member's outsourced activities or 
activities as an Appointed Clearing Member or prohibit such Clearing 
Member from engaging in such activities or to impose such limitations 
on such activities as such officer deems necessary or appropriate in 
the circumstances.
    The provisions set forth in existing Rule 305(c) and (d) have been 
moved to new Rule 307B(b) and (c) with no substantive changes. 
Separately, existing Rule 305, Interpretations and Policies .01 through 
.12, which provide a non-exhaustive list of examples of situations in 
which OCC may take protective measures under existing Rule 305, have 
been removed to improve general readability of the Rule and to further 
clarify the breadth of OCC's authority to impose protective measures 
with respect to transactions, open positions and related activities.
Rule 307C--Additional Operational, Personnel, Financial Resource and 
Risk Management Requirements
    The proposed rule change would adopt new Rule 307C to permit OCC to 
impose protective measures in the form of additional operational, 
personnel, financial resource or risk management requirements. Proposed 
Rule 307C also sets forth a non-exclusive list of such protective 
measures, including:
    i. requiring Clearing Members to maintain higher minimum capital 
amounts than those required by Rule 301;
    ii. requiring Clearing Members to adjust the amount or composition 
of margin or Clearing Fund deposits, including but not limited to 
requiring the deposit of additional margin or requiring Clearing 
Members to satisfy a specified portion of their margin or Clearing Fund 
requirements in cash or other assets with comparatively less risk; \35\
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    \35\ This proposed change would in part incorporate authority in 
existing Rule 604(g), which allows OCC to require Clearing Members 
to deposit a specified amount of cash to satisfy its margin 
requirements as a protective measure if such Clearing Member is 
determined to present increased credit risk and is subject to 
enhanced monitoring and surveillance under OCC's watch level 
reporting process. As a result, Rule 604(g) would be deleted from 
OCC's Rules.
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    iii. requiring Clearing Members to add new personnel or provide 
additional training to existing personnel to enhance the capability, 
experience, and competence of operational, financial reporting, or risk 
management personnel;
    iv. requiring Clearing Members to execute an agreement with a 
third-party service provider determined to be acceptable to OCC that 
will be in effect

[[Page 17061]]

until such time that the Clearing Member is able to comply with OCC's 
operational, personnel or risk management standards;
    v. requiring Clearing Members to enhance its risk management 
policies, procedures and practices;
    vi. requiring alternate methods of electronic connection (e.g., 
lease line) due to operational risk concerns; and
    vii. requiring additional reporting of its financial or operational 
condition at such intervals and in such detail as determined by OCC.
    OCC believes the proposed protective measures are necessary and 
appropriate to ensure that OCC is able to manage the range of risks 
(including credit risk, liquidity risk, and operational risk) that may 
be presented by Clearing Members that do not comply, or are in danger 
of no longer complying, with OCC's minimum membership standards, 
present increased credit or liquidity risk to OCC, or are otherwise 
experiencing difficulties in their financial condition, operational 
capability, or risk management capability.
Rule 308--Statutory Disqualification
    Existing Rule 217 sets forth OCC's requirements with respect to 
Clearing Members (or their principals in the case of CFTC-registered 
FCMs) subject to a statutory disqualification. The proposed rule change 
would relocate or otherwise eliminate the provisions set forth in Rule 
217 as follows:
     The provisions set forth in existing Rule 217(a) would be 
moved to proposed Rule 308(a) and revised to further provide that in 
the event a Clearing Member is or becomes subject to a Statutory 
Disqualification,\36\ OCC may impose protective measures under Rule 307 
or conduct a hearing or institute a disciplinary proceeding in 
accordance with Chapter XII of the Rules to determine whether to no 
longer permit such Clearing Member to continue its membership. Proposed 
paragraph (a) also would clarify that OCC will not permit such Clearing 
Member to continue its membership if so ordered by the SEC.
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    \36\ As noted above in the description of proposed Rule 204, 
Rule 101 has been revised to define the term ``Statutory 
Disqualification'' as (i) in the case of a fully registered broker-
dealer, a statutory disqualification as defined in section 3 of the 
Exchange Act, (ii) in the case of a fully registered FCM, the 
applicant or Clearing Member or a principal thereof, as defined in 
CEA section 8a(2), is subject to statutory disqualification under 
CEA section 8a(2)-(4), or (iii) in the case of a Non-U.S. Securities 
Firm or bank, any similar provision of the laws or regulations 
applicable to such applicant or Clearing Member.
---------------------------------------------------------------------------

     As discussed in the description of proposed Rule 306A, the 
provisions in existing Rule 217(b) would be moved to proposed Rule 
306A(c) with modifications.
     The provisions in existing Rule 217(f) would be moved to 
proposed Rule 308(b) and modified to clarify that OCC may ``delay a 
final decision regarding a Clearing Member's Statutory 
Disqualification'' (rather than waiving provisions of existing Rule 
217) until any proceeding before another self-regulatory organization 
is concluded. The remaining portions of existing Rule 217(f) would 
remain unchanged (aside from relocating to proposed Rule 308(b)).
     The provisions in existing Rule 217(c)-(e) and (g) would 
be removed as unnecessary for two reasons: (1) proposed paragraph (a) 
provides broad authority to conduct a hearing or institute a 
disciplinary proceeding in accordance with Chapter XII of the Rules to 
determine whether to no longer permit such Clearing Member to continue 
its membership; and (2) OCC's minor rule violation plan in proposed 
Rule 1203 would include any failure to timely notify OCC of any 
Statutory Disqualification under new Rule 306A(c).
Proposed Changes to Rule 609--Intra-Day Margin
    OCC proposes minor modifications to Rule 609, including conforming 
changes to clarify that OCC may require the deposit of intra-day margin 
in response to changes in a Clearing Member's operational or risk 
management condition in addition to its financial condition. The 
proposed change is intended to reflect the more expansive protective 
measure rules proposed in new Rule 307C. OCC would also remove 
references to unspecified ``officers'' of OCC as these details are 
included in OCC's internal policies and procedures.
Proposed Rule 1203--Minor Rule Violations
    The rules applicable to minor rule violations currently are set 
forth primarily in existing Rule 1201(b), Rule 215(f), and 
Interpretation and Policy .01 of Rule 215(f). Existing Rule 1201(b) 
sets forth OCC's ``plan'' (within the meaning of Rule 19d-1(c)(2)) for 
the disposition of ``minor rule violations'' and generally provides 
that OCC may impose a fine of $2,500 or less for any violation 
designated in the By-Laws or the Rules as a minor rule violation. Any 
such fine for a minor rule violation would be in lieu of commencing a 
disciplinary proceeding pursuant to Rule 1201(a). Existing Rule 1201(b) 
also sets forth processes for imposing and contesting fines for minor 
rule violations. The proposed rule change would move the provisions set 
forth in existing Rule 1201(b) to new Rule 1203(a) with no substantive 
changes.
    The proposed rule change also would remove existing Rule 215, 
Interpretation and Policy .01 and replace it with new Rule 1203(b) and 
(c), which modify the list of violations that may constitute a minor 
rule violation to include the following:
     a violation of Rule 205 (relating to the filing of a 
certified list of authorized signatories);
     a violation of Rule 208 (relating to maintaining records 
of confirmed trade data);
     a violation of Rule 210 (relating to the payment of fees 
and charges);
     a violation of Rule 302(b)-(d) (relating to the 
operational capability to maintain offices, books and records and the 
ability to appropriately discharge responsibilities);
     a violation of Rule 303(c) (relating to the timely 
provision of information concerning personnel);
     a violation of Rule 306A(a)(2)(e) (relating to providing 
OCC with a copy of any notice required under paragraph (e)(1)(iv) of 
Rule 15c3-1);
     a violation of Rule 306A(b) (relating to providing notice 
of material changes and information requests);
     a violation of Rule 306A(c) (relating to providing notice 
of any statutory disqualification);
     a violation of Rule 306B (relating to the filing of 
periodic reports); and
     any failure to provide such other requested documents and 
information in connection with the requirements of Chapters II and III 
of the Rules, including, but not limited to, financial, regulatory and 
other information, as OCC may in its discretion require.
    In addition, proposed Rule 1203(e) would stipulate that OCC may 
institute disciplinary proceedings against a Clearing Member pursuant 
to Chapter XII of the Rules for a violation of any of the requirements 
listed above.
    The proposed rule change also would replace the existing fine 
schedule with a simplified fine schedule in new Rule 1203(c) that 
imposes $1,500 for the first minor rule violation and $2,500 for a 
second violation occurring within a rolling 24-month period. 
Additionally, three or more violations within a rolling 24-month period 
would result in a disciplinary proceeding in accordance with Chapter 
XII of the Rules. Proposed paragraph (d) also would clarify that fines 
will be levied for offenses within a rolling 24-month period beginning 
with the first occasion.

[[Page 17062]]

Proposed Rule 1204--Discipline by Other Self-Regulatory Organizations
    Under the proposed rule change, existing Rule 1203 would be 
renumbered as Rule 1204 with no other substantive changes.
Proposed Rule 2201--Instructions to the Corporation
    Portions of existing Article V, Section 1, Interpretation and 
Policy .07 currently set forth requirements applicable to Canadian 
Hedge Clearing Members on behalf of which CDS maintains an identifiable 
sub-account at DTC. The proposed rule change would move these 
provisions to new paragraphs (c) and (d) of Rule 2201 and eliminate 
references to ``Canadian Hedge Clearing Member'' given that term would 
no longer be defined. There are no other substantive changes to these 
provisions.
Additional Proposed Changes to Terms
    The proposed rule change would move various defined terms from the 
By-Laws to Chapter I of the Rules, including Canadian Clearing Member, 
FATCA, FATCA Compliant, FFI Clearing Member, Non-U.S. Regulatory 
Agency, Non-U.S. Securities Firm, Qualified Intermediary Assuming 
Primary Withholding Responsibility, Qualified Derivatives Dealer. The 
defined terms Section 871(m) Effective Date and Section 871(m) 
Implementation Date would be removed because these dates have passed so 
the defined terms are no longer necessary.
    The proposed rule change also would adopt a new definition for the 
term Statutory Disqualification.\37\
---------------------------------------------------------------------------

    \37\ See supra discussion on proposed Rule 204.
---------------------------------------------------------------------------

    Finally, the proposed rule change would eliminate various distinct 
categories of Clearing Members and their respective definitions or 
other usage from the By-Laws, including, Canadian Hedge Clearing 
Member, Domestic Clearing Member, exempt Non-U.S. Clearing Member, 
futures-only affiliated Clearing Member, Hedge Clearing Member, Managed 
Clearing Member, Managing Clearing Member and Market Loan Clearing 
Member. References to these terms in the text of the By-Laws or the 
Rules would be replaced with general references to ``Clearing Member'' 
and all Clearing Members would be subject to the consistent standards 
set forth in the proposed rule change.
    OCC would continue to maintain the concept of Appointing Clearing 
Members and Appointed Clearing Members; however, these members would no 
longer be subject to distinct or different membership standards.
Additional Proposed Deletions
Existing Rule 204
    The proposed rule change would remove existing Rule 204, which 
pertains to designating physical locations as clearing offices of the 
Clearing Member. As a practical matter, this Rule is no longer relevant 
to the operations of OCC or its Clearing Members given the migration of 
trading, clearance and settlement activities to electronic means.
Existing Rule 309
    The proposed rule change would remove existing Rule 309, which sets 
forth certain requirements for Managed Clearing Members and Managing 
Clearing Members. More generally, the proposed rule change would remove 
references to facilities management agreements, Managing Clearing 
Members and Managed Clearing Members. These rules would be replaced by 
the more general rules proposed for outsourcing to third-party service 
providers.\38\
---------------------------------------------------------------------------

    \38\ See supra discussion on proposed Rule 303.
---------------------------------------------------------------------------

Existing Rule 309A
    The proposed rule change would remove existing Rule 309A, which 
sets forth minimum capital and other requirements for Appointed 
Clearing Members. The concept of Appointing and Appointed Clearing 
Members would remain in OCC's rules, but they would no longer be a 
distinct ``membership type.'' Any Clearing Member serving an Appointed 
Clearing Member capacity would be subject to the same minimum capital 
requirements as all other Clearing Members (as set forth in proposed 
Rule 301).\39\ OCC would also revise the definition of Appointed 
Clearing Member to clarify that an Appointed Clearing Member must be 
authorized to clear physically-settled equity options and stock futures 
to ensure they have the appropriate operational capability and 
expertise to settle such transactions on behalf of other Clearing 
Members.
---------------------------------------------------------------------------

    \39\ See supra discussion on proposed Rule 301.
---------------------------------------------------------------------------

(2) Statutory Basis
    OCC believes that the proposed rule change is consistent with 
section 17A of the Act \40\ and the rules thereunder applicable to OCC. 
Section 17A(b)(3)(B) of Act \41\ provides that the rules of a clearing 
agency may permit, among other things, a registered broker-dealer, bank 
or other person or class of persons as is appropriate to the 
development of a national system for the prompt and accurate clearance 
and settlement of securities transactions to become a participant in 
such clearing agency. As described in greater detail above, the 
proposed rule change expands the list of types of entities eligible for 
clearing membership in proposed Rule 201 to include eligible banks. As 
described herein, the proposed rule change sets forth robust financial 
and operational membership standards applicable to eligible banks that 
are consistent with the financial and operational membership standards 
applicable to existing types of institutions that are eligible for 
clearing membership. As such, OCC believes that eligible banks that 
meet the membership standards do not pose additional risks relative to 
existing types of institutions that are eligible for clearing 
membership and may appropriately participate in the prompt and accurate 
clearance of securities transactions at OCC consistent with section 
17A(b)(3)(B) of Act.\42\ Moreover, OCC believes that the prudent 
expansion of types of institutions that are eligible for clearing 
membership will broaden the clearing membership base and potentially 
mitigate counterparty concentration risk consistent with the risk-based 
approach prescribed in Rule 17Ad-22(e)(18) \43\ as described below.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1.
    \41\ 15 U.S.C. 78q-1(b)(3)(B).
    \42\ Id.
    \43\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------

    Section 17A(b)(4)(B) of Act \44\ permits a clearing agency to deny 
participation to, or condition the participation of, any person if such 
person does not meet such standards of financial responsibility, 
operational capability, experience, and competence as are prescribed by 
the rules of the clearing agency. In addition, section 17A(b)(4)(B) of 
Act \45\ permits a registered clearing agency to examine and verify the 
qualifications of an applicant to be a participant in accordance with 
procedures established by the rules of the clearing agency. As 
described in greater detail herein, the proposed rule change 
consolidates and modifies the admission procedures and conditions to 
admission addressed in proposed Rules 203 and 204 to better assist OCC 
in reviewing, examining, verifying and ultimately approving or 
disapproving applications for clearing membership. Under the proposed 
rule change, OCC retains its authority to deny or otherwise condition 
the participation of any person that does not meet the

[[Page 17063]]

applicable membership standards. As such, OCC believes that the 
proposed rule change promotes the purposes of section 17A(b)(4)(B) of 
Act.\46\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78q-1(b)(4)(B).
    \45\ Id.
    \46\ Id.
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of Act \47\ requires, among other things, that 
the rules of a clearing agency are not designed to permit unfair 
discrimination in the admission of participants or among participants 
in the use of the clearing agency. As appropriate, the proposed rule 
change seeks to consolidate and modify the admission procedures and 
conditions to admission addressed in proposed Rules 203 and 204. Where 
appropriate, the proposed rule change adopts uniform standards in 
Chapters II and III of the Rules that apply to each type of institution 
that is eligible for clearing membership. This consolidation and 
uniformity is intended to (among other things) help OCC to continue to 
promote fair and open access and non-discrimination among Clearing 
Members and applicants for clearing membership. Likewise, under 
proposed Rule 201, the proposed rule change seeks to maximize the types 
of products and other activities that each type of Clearing Member may 
potentially be eligible. As such, OCC believes that the proposed rule 
change promotes the purposes of section 17A(b)(3)(F) of Act.\48\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78q-1(b)(3)(F).
    \48\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(7) \49\ provides that a clearing agency is required 
to ``[p]rovide a person that maintains net capital equal to or greater 
than $50 million with the ability to obtain membership at the clearing 
agency, provided that such persons are able to comply with other 
reasonable membership standards, with any net capital requirements 
being scalable so that they are proportional to the risks posed by the 
participant's activities to the clearing agency; provided, however, 
that the clearing agency may provide for a higher net capital 
requirement as a condition for membership at the clearing agency if the 
clearing agency demonstrates to the Commission that such a requirement 
is necessary to mitigate risks that could not otherwise be effectively 
managed by other measures and the Commission approves the higher net 
capital requirement as part of a rule filing or clearing agency 
registration application.'' As described in greater detail herein, the 
proposed rule change sets forth in proposed Rule 201 a capital floor of 
at least $500 million in Tier 1 Capital for eligible banks and at least 
$10 million for all other types of institutions eligible for clearing 
membership. With respect to eligible banks, this higher capital floor 
is intended to account for the larger capital base normally maintained 
by eligible banks as compared to other types of eligible institutions. 
Given the nature of the capital base normally maintained by eligible 
banks, OCC believes that the capital floor of at least $500 million in 
Tier 1 Capital for eligible banks is necessary to mitigate risks that 
could not otherwise be effectively managed by other measures in 
accordance with Rule 17Ad-22(b)(7).\50\ In addition, the capital floor 
of at least $10 million for all other types of institutions eligible 
for clearing membership is consistent with Rule 17Ad-22(b)(7).\51\
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(b)(7).
    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) \52\ requires a clearing agency, among other 
things, to ``[e]stablish objective, risk-based, and publicly disclosed 
criteria for participation'' that ``permit fair and open access'' and 
``require participants to have sufficient financial resources and 
robust operational capacity to meet obligations arising from 
participation in the clearing agency.'' The purpose of the proposed 
rule change is to improve upon OCC's existing financial and operational 
membership standards to continue to permit fair and open access and to 
further mitigate counterparty credit risk introduced by Clearing 
Members. With respect to financial resources, the proposed rule change 
increases the minimum capital requirements for existing types of 
Clearing Members and introduces minimum capital requirements for each 
of the new types of Clearing Members in proposed Rule 301. The proposed 
rule change also enhances and otherwise clarifies OCC's early warning 
notice and periodic reporting requirements for Clearing Members under 
proposed Rules 306, 306A and 306B. Likewise, the proposed rule change 
adopts additional protective measures, including enhancing restrictions 
on capital distributions by Clearing Members, under proposed Rules 307, 
307A, 307B and 307C. With respect to operational capacity, the proposed 
rule change adopts or otherwise modifies the provisions set forth in 
proposed Rules 302, 303 and 304 to enhance OCC's operational 
capability, experience, and competence standards and related resources 
for Clearing Members, including, among other things, requirements 
relating to facilities, personnel and third-party arrangements. 
Importantly, the proposed rule change subjects Clearing Members to each 
of these financial and operational membership standards in a non-
discriminatory manner under the Rules. As such, OCC believes that these 
enhanced financial and operational membership standards promote the 
requirements of Rule 17Ad-22(e)(18).\53\
---------------------------------------------------------------------------

    \52\ 17 CFR 240.17Ad-22(e)(18).
    \53\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18) \54\ also requires a clearing agency to monitor 
for compliance with its participation requirements on an ongoing basis. 
The proposed rule change amends the notification and reporting 
requirements in proposed Rules 306, 306A and 306B to enhance the event-
based reporting and periodic reporting obligations imposed on Clearing 
Members. OCC believes that these changes will better assist OCC in 
monitoring for compliance with its clearing membership requirements 
consistent with Rule 17Ad-22(e)(18).\55\
---------------------------------------------------------------------------

    \54\ Id.
    \55\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(21) \56\ requires a clearing agency, among other 
things, to be efficient and effective in meeting the requirements of 
its participants and the markets it serves. In furtherance of this 
requirement, the proposed rule change sets forth several changes 
intended to increase efficiency and effectiveness, including but not 
limited to the following: (i) the allowance of electronic, optical or 
similar signatures under proposed Rule 205; (ii) enhancements with 
respect to requirements applicable to submissions to and retrieval of 
items under proposed Rule 207; and (iii) the removal of authorization 
stamp references in proposed Rule 209. OCC believes that these changes 
are consistent with Rule 17Ad-22(e)(21).\57\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17Ad-22(e)(21).
    \57\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4) \58\ requires, among other things, a clearing 
agency to manage its credit exposures to participants. The proposed 
rule change adopts new Rule 212 to address circumstances in which a 
Clearing Member voluntarily terminates its membership. Among other 
things, proposed Rule 212 sets forth procedures for the closing out or 
transfer of all open positions and the treatment of the Clearing 
Member's Clearing Fund contribution during the withdrawal period. OCC 
believes that proposed Rule 212 is consistent with its requirement to 
manage its credit exposures to

[[Page 17064]]

participants under Rule 17Ad-22(e)(4).\59\
---------------------------------------------------------------------------

    \58\ 17 CFR 240.17Ad-22(e)(4).
    \59\ Id.
---------------------------------------------------------------------------

    Rule 19d-1(c)(2) \60\ permits a self-regulatory organization to 
adopt a plan for minor rule violations that, among other things, result 
in fines not exceeding $2,500. The proposed rule change amends OCC's 
minor rule violation plan in proposed Rule 1203. Among other things, 
the amended plan includes fines not to exceed $2,500 for violations of 
specified rules that may be deemed minor rule violations under the 
Rules. OCC believes that these proposed changes are consistent with 
Rule 19d-1(c)(2),\61\ including the designation of Rule 1203 as a 
``plan.''
---------------------------------------------------------------------------

    \60\ 17 CFR 240.19d-1(c)(2).
    \61\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(1) \62\ requires, among other things, a clearing 
agency to provide for a well-founded, clear, transparent, and 
enforceable legal basis for each aspect of its activities. As described 
in greater detail herein, the proposed rule change makes certain 
organizational and other clarifying changes to the By-Laws and the 
Rules in order to prevent unnecessary regulatory burdens, to provide 
greater clarity and transparency, and to promote efficient 
administration of the By-Laws and the Rules. OCC believes that these 
proposed rule changes promote the purposes of Rule 17Ad-22(e)(1).\63\
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    \62\ 17 CFR 240.17Ad-22(e)(1).
    \63\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) \64\ of the Act requires that the rules of a 
clearing agency do not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would impact or impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed rule change is generally intended to 
improve upon OCC's existing financial and operational membership 
standards. The proposed rule change imposes these enhanced standards 
uniformly on all Clearing Members within a particular category of 
institution, and whenever possible, uniformly across all Clearing 
Members irrespective of category. Furthermore, any differences in the 
standards applicable to different categories of institutions are a 
result of OCC's risk-based, objective criteria in accordance with the 
requirements set forth in Rule 17Ad-22(e)(18) \65\ under the Act, and 
therefore are necessary and appropriate in furtherance of the purposes 
of the Act.
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    \64\ 15 U.S.C. 78q-1(b)(3)(I).
    \65\ 17 CFR 240.17Ad-22(e)(18).
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    The proposed increase in minimum capital requirements for broker-
dealers, FCMs, Canadian Investment Dealers, and other Non-U.S. 
Securities Firms may present a burden on competition among certain 
Clearing Members. OCC believes the proposed increase in minimum capital 
requirements would impact fewer than ten current Clearing Members; 
however, several of those impacted Clearing Members at times did 
maintain sufficient capital to meet the proposed requirements. OCC 
believes the higher regulatory capital requirements are necessary and 
appropriate in furtherance of the purposes of the Act. OCC believes 
that more thinly capitalized members present greater risks to OCC that 
may impact OCC's ability to comply with the requirements of the Act 
applicable to clearing agencies. For example, less capitalized Clearing 
Members may be unable to meet potential Clearing Fund replenishment/
assessment obligations or Operational Loss Fee assessments. This could 
present increased credit and liquidity risk to OCC in times of extreme 
stress and place additional burdens on other Clearing Members that may 
need to compensate for the absence of such resources. OCC believes the 
proposed rule change would continue to provide for objective and risk-
based standards that balance fair and open access with prudent 
qualification standards while ensuring its membership base is 
appropriately capitalized to support the prompt and accurate clearance 
and settlement of securities transactions and derivative agreements, 
contracts and transactions cleared by OCC, the safeguarding of 
securities and funds in the custody or control of OCC or for which it 
is responsible, and the protection of investors and the public interest 
in accordance with section 17A(b)(3)(F) of the Act.\66\
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    \66\ 15 U.S.C. 78q-1(b)(3)(F).
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impact or impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    On February 27, 2023 and March 3, 2023, OCC received an unsolicited 
draft comment letter and additional comments from Broadridge Business 
Process Outsourcing LLC (``Broadridge'') on an initial version of the 
proposal. The draft letter expressed full support for OCC's proposal 
and suggested certain clarifying word choice changes in connection with 
the initially proposed text for Rules 303(a), (b) and (c). OCC has 
addressed these written comments from Broadridge by incorporating them 
as part of the text of these proposed provisions.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(A) by order approve or disapprove such proposed rule change, or (B) 
institute proceedings to determine whether the proposed rule change 
should be disapproved. The proposal shall not take effect until all 
regulatory actions required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-OCC-2023-002 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2023-002. This file 
number should be included on the subject line if email is used. To help 
the

[[Page 17065]]

Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2023-002 and 
should be submitted on or before April 11, 2023.
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    \67\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\67\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05689 Filed 3-20-23; 8:45 am]
BILLING CODE 8011-01-P