Document ID: SEC-2019-0316-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corporation
Posted Date: 2019-03-20T04:00Z

[Federal Register Volume 84, Number 54 (Wednesday, March 20, 2019)]
[Notices]
[Pages 10377-10380]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05220]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85322; File No. SR-OCC-2019-001]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Revise The Options Clearing Corporation's Schedule of Fees

March 14, 2019.
    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 8, 2019, The Options Clearing Corporation 
(``OCC'' or ``Corporation'') 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. OCC filed the proposed rule change pursuant to Section 
19(b)(3)(A)(ii) \3\ of the Act and Rule 19b-4(f)(2) \4\ thereunder so 
that the proposal was effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change by OCC would revise OCC's Schedule of Fees 
effective April 1, 2019, to implement an increase in clearing fees. 
OCC's Schedule of Fees is included in Exhibit 5 of the filing. Material 
proposed to be added to OCC's Schedule of Fees as currently in effect 
is underlined and material proposed to be deleted is marked in 
strikethrough text. All capitalized terms not defined herein have the 
same meaning as set forth in the OCC By-Laws and Rules.\5\
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    \5\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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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 purpose of this proposed rule change is to revise OCC's 
Schedule of Fees effective April 1, 2019, to implement an increase in 
clearing fees. The proposed fee change is designed to enable OCC to 
accumulate capital to comply with Rule 17Ad-22(e)(15) under the 
Exchange Act, which requires OCC, in pertinent part, to 
``hold[[hairsp]] liquid net assets funded by equity to the greater of 
either (x) six months . . . current operating expenses, or (y) the 
amount determined by the Board of Directors to be sufficient to ensure 
a recovery or orderly wind-down of critical operations and service . . 
.'' and ``[maintain[[hairsp]] a viable plan, approved by the Board of 
Directors and updated at least annually, for raising additional equity 
should its equity fall close to or below the amount required [to be 
held].'' \6\
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    \6\ See 17 CFR 240.17Ad-22(e)(15).
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    On February 13, 2019, the Commission issued an order disapproving 
OCC's rules concerning its

[[Page 10378]]

plan to significantly increase OCC's capitalization (``Capital 
Plan'').\7\ The Capital Plan provided for a capital contribution of 
$150 million from OCC's five shareholder exchanges and an agreement for 
the shareholder exchanges to replenish OCC's capital up to another $200 
million if OCC's capital fell close to or below the amount OCC 
determined to be required by Rule 17Ad-22(e)(15).\8\ The Capital Plan 
also provided for fees to be set at a level sufficient to cover OCC's 
estimated operating expenses and any unexpected fluctuations in 
business capital needs or projected volume.
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    \7\ See Securities Exchange Act Release No. 85121 (February 13, 
2019), 84 FR 5157 (February 20, 2019) (SR-OCC-2015-02).
    \8\ See Securities Exchange Act Release No. 74452 (March 6, 
2015), 80 FR 13058 (March 12, 2015) (SR-OCC-2015-02) and Securities 
Exchange Act Release No. 77112 (February 11, 2016), 81 FR 8294 
(February 18, 2016) (SR-OCC-2015-02).
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    As a result of the Commission's disapproval order, OCC's By-Laws 
and Rules reverted back to their pre-Capital Plan state. Article IX, 
Section 9 of OCC's By-Laws, in its reverted and currently effective 
form, permits OCC to establish a fee structure to: (i) Cover operating 
expenses; (ii) maintain reserves as are deemed reasonably necessary by 
the Board of Directors (``Board'') to provide facilities for the 
conduct of OCC's business; and (iii) accumulate such additional surplus 
as the Board may deem advisable to permit OCC to meet its obligations 
to Clearing Members and the general public.
    Following the disapproval of the Capital Plan, OCC's shareholder 
exchanges unanimously agreed to allow OCC to retain $40 million of the 
initial capital contribution on a temporary basis to ensure that OCC 
continues to maintain sufficient liquid net assets until such time as 
OCC is able to accumulate retained earnings sufficient to meet its 
anticipated cashflow needs and the liquid net assets funded by equity 
requirement of Rule 17Ad-22(e)(15).\9\ OCC notes that the timing of the 
return of the remaining $40 million to shareholder exchanges is 
dependent on a number of variable factors, such as the implementation 
of the proposed fee change describe herein, cleared product volume for 
the year 2019, and the potential for unanticipated expenses or cash 
outflows not currently known to OCC.
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    \9\ 17 CFR 240.17Ad-22(e)(15).
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    In light of the disapproval of the Capital Plan, and pursuant to 
the Board's authority under Article IX, Section 9 of OCC's By-Laws, 
OCC's Board has determined that it is necessary and advisable to 
increase OCC's clearing fees to generate sufficient revenue and 
maintain sufficient reserves to cover OCC's anticipated operating 
expenses and other expected cash outlays, including any unanticipated 
fluctuations in operating expenses, and accumulate sufficient liquid 
net assets in reserve to facilitate compliance with Rule 17Ad-
22(e)(15)(ii) \10\ and ensure that OCC's liquid net assets do not fall 
close to or below the amount needed to comply therewith. Specifically, 
the Board believes that the proposed fee change is necessary and 
advisable to ensure that OCC maintains sufficient liquid net assets to 
maintain its target capital level above $247 million throughout 2019. 
This target capital requirement was determined based on a number of 
considerations including: (i) A baseline amount that is the greater of 
six months of projected operating expenses or the amount determined to 
ensure a recovery or orderly wind-down of critical operations and 
services; (ii) a value linked to OCC's risk of potential business or 
operational losses; and (iii) the level of annual expenses from OCC's 
budget (excluding one-time expenses). In determining the appropriate 
level of the proposed fee increase, OCC's Board considered quantitative 
analyses based on a number of assumptions and projections, including: 
(i) Projected average daily contract volumes consistent with the 
assumptions used in OCC's 2019 annual budget; (ii) projected expenses 
and known cash flows based on OCC's 2019 budget; (iii) an operating 
margin based on an analysis of five-year historical volumes; (iv) the 
retention of refund and dividend payments for 2018; (v) the retention 
of $40 million of the initial capital contribution from the shareholder 
exchanges; and (vi) known capital needs to replace and modernize OCC's 
technology infrastructure.\11\ OCC believes that these assumptions are 
both appropriate and reasonable for assessing its liquid net assets 
against its target capital requirement and determining the level of 
fees necessary to ensure that OCC continues to maintain liquid net 
assets in excess of that amount. Moreover, OCC and its Board believe 
that an increase in clearing fees is necessary and appropriate because 
there are no alternative means for OCC to increase its capital in a 
manner that is consistent with its existing By-Laws and Rules on a 
timely basis.\12\
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    \10\ 17 CFR 240.17Ad-22(e)(15)(ii).
    \11\ OCC has provided a summary of its analysis, including 
projected volumes, revenues, and capital reserves under the proposed 
fee change, in confidential Exhibit 3 of the filing.
    \12\ OCC notes that it is also in the process of developing a 
new plan for replenishing its capital as required under Rule 17Ad-
22(e)(15)(iii). See 17 CFR 240.17Ad-22(e)(15)(iii). This 
replenishment plan would likely be subject to proposed rule change 
and advance notice filings with the Commission prior to 
implementation. Any revenue generated from the proposed fee increase 
in excess of the amount required to meet OCC's operating expenses 
and target capital requirement may also be factored into OCC's 
proposed replenishment plan and help facilitate OCC's compliance 
with the requirements of Rule 17Ad-22(e)(15). See 17 CFR 240.17Ad-
22(e)(15).
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    OCC proposes to revise its Schedule of Fees as set forth below.\13\
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    \13\ These changes are also reflected in Exhibit 5.

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                   Current fee schedule                                    Proposed fee schedule
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                                                           Trades with contracts
     Trades with contracts of:           Current fee                of:                    Proposed fee
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1-1100............................  $0.050/contract......  1-999................  $0.055/contract.
>1100.............................  $55/trade............  >999.................  $55/trade.
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    OCC proposes to modify its fee schedule to: (i) Increase its per 
contract clearing fee from $0.050 to $0.055 per contract and (ii) 
adjust the quantity of contracts at which the fixed, per trade clearing 
fee begins from greater than 1100 contracts per trade to greater than 
999 contracts per trade. OCC proposes to make the fee change effective 
April 1, 2019, because OCC believes that this date is the first date 
that the industry could be prepared to process the new fee without 
disruption based on consultations with market participants.\14\
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    \14\ OCC notes that a mid-month change to clearing fees could 
introduce operational disruption to Clearing Members due to the 
impact on their billing processes.
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Clearing Member Outreach
    On February 25, 2019, OCC provided a written notification to its 
Clearing Members summarizing actions approved

[[Page 10379]]

by OCC's Board in response to the disapproval of the Capital Plan, 
which included, among other things, OCC's plan for returning the 
initial capital contribution of the shareholder exchanges, the 
temporary retention of $40 million of the initial contribution, and the 
proposed fee increase described herein. On February 27, 2019, OCC 
published an Information Memo to all of its Clearing Members and 
exchanges notifying them of the proposed changes to the Schedule of 
Fees that would become effective as of April 1, 2019, subject to OCC 
completing its regulatory filing requirements.\15\ OCC also held a 
conference call with industry participants on March 1, 2019, to discuss 
these issues, including the proposed fee change. The feedback from this 
call regarding the fee change primarily consisted of questions 
concerning the length of time that the fee increase would need to be in 
place before OCC could reduce fees, but there were no specific 
objections to the fee increase raised during the call. Finally, OCC 
notes that the increase in clearing fees was unanimously approved by 
its Board of Directors, which is comprised of Member Directors 
representing over 50% of OCC's cleared volume and Exchange Directors 
representing over 80% of OCC's cleared volume.
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    \15\ See OCC Information Memo #44631 published on February 27, 
2019, available on OCC's public website: https://www.theocc.com/webapps/infomemos.
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(2) Statutory Basis
    Section 17A(b)(3)(D) of the Act \16\ requires that the rules of a 
clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants. OCC believes that 
the proposed fee change is reasonable because it is designed to 
generate sufficient revenue and accumulate sufficient reserves in the 
form of liquid net assets to cover OCC's operating expenses and address 
potential business or operational losses so that OCC can continue to 
meet its obligations as a systemically important financial market 
utility to Clearing Members and the general public if such losses were 
to materialize (including through a recovery or orderly wind-down of 
critical operations and services) and thereby facilitate compliance 
with certain requirements of Rule 17Ad-22(e)(15)(ii).\17\ As described 
above, OCC believes that the proposed fee change is necessary and 
advisable to ensure that OCC maintains sufficient liquid net assets to 
cover its $247 million target capital requirement throughout 2019. In 
determining the appropriate level of the proposed fee increase, OCC's 
Board considered quantitative analyses based on a number of assumptions 
and projections, including: (i) Projected average daily contract 
volumes consistent with the assumptions used in OCC's 2019 annual 
budget; (ii) projected expenses and known cash flows based on OCC's 
2019 budget; (iii) an operating margin based on an analysis of five-
year historical volumes; (iv) the retention of refund and dividend 
payments for 2018; (v) the retention of $40 million of the initial 
capital contribution from the shareholder exchanges; and (vi) known 
capital needs to replace and modernize OCC's technology infrastructure. 
OCC believes that these assumptions are both appropriate and reasonable 
for assessing its liquid net assets against its target capital 
requirement and determining the level of fees necessary to ensure that 
OCC continues to maintain liquid net assets in excess of that amount. 
Moreover, OCC believes that the proposed increase in clearing fees is 
reasonable because it is the only way in which OCC can increase its 
capital as quickly as reasonably possible and in a manner that is 
consistent with its existing By-Laws and Rules. OCC also believes that 
the proposed fee change would result in an equitable allocation of fees 
among its participants because it would be equally applicable to all 
market participants transacting at a given level of contract volume. As 
a result, OCC believes that the proposed fee schedule provides for the 
equitable allocation of reasonable fees in accordance with Section 
17A(b)(3)(D) of the Act.\18\
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    \16\ 15 U.S.C. 78q-1(b)(3)(D).
    \17\ 17 CFR 240.17Ad-22(e)(15)(ii).
    \18\ 15 U.S.C. 78q-1(b)(3)(D).
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \19\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would have any impact or impose a 
burden on competition. Although this proposed rule change affects 
clearing members, their customers, and the markets that OCC serves, OCC 
believes that the proposed rule change would not disadvantage or favor 
any particular user of OCC's services in relationship to another user 
because the proposed clearing fees apply equally to all users of OCC. 
Accordingly, OCC does not believe that the proposed rule change would 
have any impact or impose a burden on competition.
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    \19\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

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

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

    Pursuant to Section 19(b)(3)(A)(ii) \20\ of the Act, and Rule 19b-
4(f)(2) thereunder,\21\ the proposed rule change is filed for immediate 
effectiveness as it constitutes a change in fees charged to OCC 
Clearing Members. At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.\22\
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    \20\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \21\ 17 CFR 240.19b-4(f)(2).
    \22\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Regulation 40.6.
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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 rule-comments@sec.gov. Please include 
File Number SR-OCC-2019-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2019-001. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use

[[Page 10380]]

only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/about/publications/bylaws.jsp. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-OCC-2019-001 and should be submitted on 
or before April 10, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05220 Filed 3-19-19; 8:45 am]
 BILLING CODE 8011-01-P