Document ID: SEC-2023-0519-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2023-05-11T04:00Z

[Federal Register Volume 88, Number 91 (Thursday, May 11, 2023)]
[Notices]
[Pages 30373-30377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10029]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97439; File No. SR-OCC-2023-002]

Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Granting Approval of Proposed Rule Change by the Options Clearing 
Corporation Concerning the Amendment of Its Clearing Membership 
Standards

May 5, 2023.

I. Introduction

    On March 3, 2023, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2023-002 pursuant to section 19(b) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
\2\ thereunder. The proposed rule change concerns proposed changes to 
OCC's standards for its members. The proposed rule change was published 
for public comment in the Federal Register on March 21, 2023.\3\ The 
Commission has received no comments regarding the proposed rule change. 
For the reasons discussed below, the Commission is approving the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 97150 (Mar. 15, 2023), 
88 FR 17046 (Mar. 21, 2023) (File No. SR-OCC-2023-002) (``Notice of 
Filing'').
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II. Background \4\
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    \4\ Capitalized terms used but not defined herein have the 
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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    OCC acts as the central counterparty (``CCP'') for all listed 
options in the U.S., as well as for certain futures. It provides 
clearing services to its members, which are financial organizations 
that, in turn, facilitate the clearing and settlement of their customer 
transactions or proprietary transactions through OCC. OCC is proposing 
to change its rules that address standards for its membership by (i) 
expanding its membership types and updating its membership requirements 
and associated processes, including on-boarding and off-boarding 
procedures; (ii) amending members' financial responsibility standards; 
(iii) amending members' operational requirements; and (iv) changing 
rules governing disciplinary actions.

(i) Member Eligibility, On-Boarding, and Termination

    OCC proposes rule changes to expand the types of entities that are 
eligible to become Clearing Members, while removing distinctions 
between certain membership categories to ensure consistent requirements 
across members. The proposed rule changes would also consolidate and 
streamline the procedures and requirements for admitting new members. 
Further, the proposed rule changes would allow a member to elect to 
voluntarily terminate its membership.
    Currently, OCC's Articles and By-Laws permit three different types 
of institutions eligible for clearing membership: (i) broker-dealers, 
(ii) futures commission merchants, and (iii) non-U.S. securities firms. 
The proposed rule change would expand the list of eligible institutions 
to include certain banks.\5\ OCC proposes limiting bank membership to 
clearing proprietary activity only. The proposed rules would also 
require a bank member to provide assurances regarding its activities 
and ability to contribute collateral.
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    \5\ OCC also proposes relocating the list of eligible 
institutions in its rules from Article V of the By-Laws to new Rule 
201(a)(1) through (a)(3).
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    In addition to expanding its list of eligible institutions to 
include banks, OCC proposes additional revisions to member eligibility. 
For example, proposed Rule 201(b)(5) would clearly state the types of 
members who may clear stock loan transactions (i.e., broker-dealers, 
non-U.S. securities firms, or banks). Similarly, proposed Rule 201(d) 
requires that each member meet standards related to risk management 
capability, in addition to the current requirements related to 
financial and operational capabilities.
    The proposed rule change is designed to accommodate the admission 
of non-U.S. Clearing Members other than Canadian Clearing Members.\6\ 
Broadly, the changes would require that such members not conduct 
transactions or activities that would result in the imposition of 
taxes, withholding, or reporting obligations with respect to amounts 
paid or received by OCC (other than U.S. federal and state income taxes 
imposed on OCC's income).\7\
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    \6\ OCC also proposes relocating existing Article V, Section 1, 
paragraph (e) of the By-Laws and Rule 310(d) to new Rule 202.
    \7\ Relatedly, OCC also proposes to move various defined terms 
from its Bylaws to Chapter 1 of its Rules, such as: 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, and 
Qualified Derivatives Dealer.
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    The proposed rule change would consolidate the admission procedures 
and requirements and modify such admission procedures and requirements 
to help streamline the application review process.\8\ For example, 
proposed Rule 203(b) would include information about expedited approval 
through OCC's Risk Committee, if the approval of the applicant is 
appropriate for the protection of investors and the public interest. 
Moreover, proposed Rule 203(c) would allow for Clearing Members to 
clear additional types of transactions by requesting authorization from 
OCC through a business expansion request.
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    \8\ OCC also proposes relocating existing Article V, Section 2 
and Article V, Section 1, Interpretation and Policy .03, clause (e) 
of the By-Laws to new Rule 203.
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    The proposed rule change would amend the conditions for admission 
as an OCC member.\9\ Such amendments would impose requirements on 
applicants (e.g., an applicant must notify OCC in writing if it is or 
becomes subject to Statutory Disqualification) \10\

[[Page 30374]]

as well as make less substantive updates (e.g., removal of a 
duplicative choice of law provision addressed elsewhere in OCC's 
rules). The changes also describe, with minor clarifying changes, the 
terms of a new member's initial contribution and agreements; 
disapproval where an applicant engages in acts or practices 
inconsistent with ``just and equitable principles of trade;'' and other 
admission conditions.
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    \9\ OCC also proposes consolidating such provisions currently 
set forth in existing Article V, Section 3 and various other 
portions of Article V of the By-Laws into new Rule 204.
    \10\ OCC proposes to move the definition of Statutory 
Disqualification from its By-Laws to Chapter 1 of its rules, move 
the majority of its current Rule 217 regarding Statutory 
Disqualification to proposed Rule 308, and remove certain provisions 
related to hearings that are duplicative of authority under OCC's 
rules.
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    The proposed rule change would adopt new Rule 212 to address 
circumstances in which a Clearing Member may elect to voluntarily 
terminate its membership. OCC's current Rules include information about 
voluntary membership termination, but only under certain specific 
circumstances, such as if the member's Clearing Fund contribution is 
increased as a result of an amendment of the Rules,\11\ or during a 
cooling-off period.\12\ Among other things, proposed Rule 212 would 
provide that a Clearing Member may elect to voluntarily terminate its 
membership by providing written notice to OCC that specifies a desired 
date for its withdrawal from membership. The terminating Clearing 
Member will be required to close out or transfer all open positions 
with OCC by the termination date.
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    \11\ See OCC Rule 1002(e).
    \12\ See OCC Rule 1006(h)(C). Proposed Rule 212(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).
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    Additionally, OCC proposes to relocate existing rules,\13\ remove 
distinctions between certain membership categories to ensure consistent 
requirements across members,\14\ and remove rules regarding 
implementation dates that have already passed.\15\
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    \13\ OCC proposes to relocate requirements applicable to 
Canadian Hedge Clearing Members on behalf of which CDS maintains an 
identifiable sub-account at DTC to existing Rule 2201, which 
addresses instructions provided to OCC. Specifically, OCC would 
propose relocating portions of existing Article V, Section 1, 
Interpretation and Policy .07 to Rule 2201(c) and (d).
    \14\ OCC proposes to replace the following distinct membership 
categories with general references to ``Clearing Member'' and make 
them subject to the standards for all Clearing Members: 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. OCC proposes to maintain the 
concept of Appointing Clearing Members and Appointed Clearing 
Members, but these members would no longer be subject to distinct or 
different membership standards.
    \15\ OCC proposes to remove defined terms ``Section 871(m) 
Effective Date'' and ``Section 871(m) Implementation Date'' as well 
as references to these terms because these dates have passed and the 
defined terms are no longer necessary.
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(ii) Financial Responsibility Standards

    OCC proposes to eliminate the current distinction between initial 
and ongoing capital requirements for its members.\16\ OCC also proposes 
to increase the minimum financial requirements for members and set out 
requirements for banks as a new member category.\17\ The current 
broker-dealer and FCM minimum requirement of $2.5 million in initial 
capital and adjusted net capital would be increased to $10 million in 
net capital and adjusted net capital.\18\ Similarly, OCC proposes to 
set capital requirements for Canadian Investment Dealers and Non-U.S. 
Securities Firms at $10 million generally.\19\ The proposed rule change 
also introduces capital requirements for banks as a new type of 
Clearing Member. Specifically, U.S. banks would be required to maintain 
Tier 1 Capital of at least $500 million, a Tier 1 Capital Ratio greater 
than 6%, and be either ``well-capitalized'' or ``adequately-
capitalized'' as measured by prompt corrective action (``PCA'') capital 
category ratios applicable to such U.S. Banks. OCC represents that, 
upon Commission approval of the proposed rule change, OCC would provide 
a six-month grace period for existing Clearing Members to meet the 
proposed increase in capital requirements.\20\
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    \16\ OCC proposes to replace current Rules 301 and 302, which 
set forth initial financial requirements and ongoing net capital 
requirements, respectively, with new Rule 301.
    \17\ OCC would continue not to permit opening purchase 
transactions, opening sale transactions, or entering into a Stock 
Loan by members not meeting such standards. OCC proposes to move the 
language related to this requirement from current Rule 302(a) to 
proposed Rule 301(b). The proposed rule change would also delete 
existing Rule 309A, which sets forth minimum capital and other 
requirements for Appointed Clearing Members because these concepts 
are no longer a distinct membership type.
    \18\ For broker-dealers, the minimum net capital would be equal 
to the greater of (i) $10 million; (ii) 6\2/3\% of its aggregate 
indebtedness (in the case of a broker-dealer that does not elect to 
operate pursuant to the alternative net capital requirements); or 
(iii) 2% of its aggregate debit items (in the case of a broker-
dealer that elects to operate pursuant to the alternative net 
capital requirements). For FCMs, the minimum net capital would be 
equal to the greater of (i) $10 million or (ii) any other minimum 
financial requirements established by regulation of the Commodity 
Futures Trading Commission.
    \19\ The change would increase the current warning reserve 
requirement from $2.5 million to $10 million for Canadian Investment 
Dealers.
    \20\ See Notice of Filing, 88 FR at 17052.
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(iii) Operational Requirements

    OCC proposes changes to rules governing certain operation 
requirements and processes for its members. As described below, such 
changes include, but are not limited to, the acceptance of e-
signatures, record retention requirements, and the consolidation of 
existing rules.\21\
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    \21\ OCC also proposes relocating its current Rule 203 
(requiring members to establish and maintain a bank account in a 
Clearing Bank for each account maintained by it with OCC) to 
proposed Rule 206. OCC proposes no changes to the text of current 
Rule 203.
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    OCC proposes changes to its rules designed to reflect changes in 
technology. OCC proposes to expand its rules to permit the reliance on 
electronic signatures, in addition to reliance on an original 
signature.\22\ Additionally, OCC proposes to remove references to 
authorization stamps as a security measure because OCC no longer uses 
such stamps.\23\ Additionally, OCC proposes removing its current Rule 
204 that requires members to designate physical locations as clearing 
offices of the Clearing Member, because the rule is no longer relevant 
to OCC's operations or to its Clearing Members given the migration of 
trading, clearance and settlement activities to electronic means.
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    \22\ OCC stated that the change is intended to better reflect 
evolving technology and the means by which signatures generally may 
be accepted. See Notice of Filing, 88 FR at 17051. OCC also proposes 
to renumber current Rule 202, which discusses such signature 
requirements, as new Rule 205.
    \23\ OCC proposes to renumber its current Rule 212 regarding 
security measures (including authorization stamps) as proposed Rule 
209.
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    OCC proposes changes to its rules regarding various submissions and 
reports between OCC and its members. OCC proposes to align its rules 
regarding the submission to and retrieval from OCC of documents by 
Clearing Members.\24\ The proposed rules also permit OCC to disregard 
untimely submissions from a Clearing Member, except in unusual or 
unforeseen circumstances. Additionally, OCC proposes to require that it 
post proposed rule changes on its website after (rather than before) 
filing such changes to provide notice to members.\25\
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    \24\ To facilitate this alignment, OCC proposes to combine its 
current Rules 205 (submissions by members) and 206 (retrievals from 
OCC) into proposed Rule 207.
    \25\ Rule 19b-4(l) under the Exchange Act requires OCC to post 
each proposed rule change to its website within two business days of 
filing such change. 17 CFR 240.19b-4(l). OCC further proposes to 
consolidate its current Rules 208, 211, and 213 (regarding reports 
and notices by OCC) in proposed Rule 211 subject to the 
modifications described here.
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    OCC also proposes to reorganize and update various rules pertaining 
to member processes and operational requirements. With regard to member 
processes, OCC proposes to streamline its rule regarding record 
retention requirements for Clearing Members to state that such 
requirements apply to all

[[Page 30375]]

confirmed trade data required pursuant to the By-Laws and Rules, 
including confirmed trade information reported to OCC under Rule 
401.\26\ With regard to operational requirements, OCC proposes to 
consolidate existing provisions regarding Clearing Members' operational 
capability in proposed Rule 302.\27\ In addition to consolidation, OCC 
proposes the following changes to such requirements:
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    \26\ OCC's current rule requires retention of such information 
by referencing specific types of information by product (e.g., the 
series, trade price, and trade date with respect to confirmed trades 
in BOUNDS). In addition to the modifications described here, OCC 
proposes to renumber its current Rule 207 regarding record retention 
requirements as proposed Rule 208.
    \27\ Proposed Rule 302 is a consolidation of requirements set 
forth in the existing By-Laws and the Rules, including Article V, 
Section 1, Interpretations and Policies .02, .07 and .07A of the By-
Laws and current Rule 201.
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     Adopt a new general statement requiring members to meet 
OCC's operational capability, experience and competence standards;
     Require that an authorized representative of each Clearing 
Member be available during regular and overnight business hours;
     Simplify and standardize the record keeping requirements 
applicable to each Clearing Member;
     Clarify that each Clearing Member must be able to 
participate in applicable operational and default management 
activities; and
     Make additional minor clarifying changes.
    Proposed Rule 302 would also set forth the requirement that 
Clearing Members must maintain operationally sufficient facilities, 
systems, and procedures to discharge their clearing functions in a 
timely and efficient manner. The proposed rule also provides additional 
operational requirements for Clearing Members that effect transactions 
in physically-settled equity options and stock futures, or participate 
in OCC's stock loan programs.
    Further, OCC proposes to apply its existing rules regarding an 
applicant's financial, operations, and risk management personnel to OCC 
Clearing Members.\28\ Under OCC's current rules, different personnel 
requirements exist for applicants and Clearing Members. OCC's proposal 
would make such requirements the same for both. In addition to applying 
the personnel requirements for applicants to Clearing Members, OCC 
proposes to change such standards as follows. Proposed Rule 303(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 (b) would require Clearing Members to employ 
personnel or retain third-party service providers responsible for 
Clearing Members' compliance with applicable net capital, recordkeeping 
and other financial, operational, and risk management rules. Proposed 
paragraph (c) would require Clearing Members to ensure that they employ 
an appropriate number of clearing operations personnel or retain third-
party service providers with requisite capability, experience, and 
competency, among other requirements. The proposed Rule also sets forth 
additional requirements for contractual arrangements with third-party 
personnel, as well as requirements for replacing relevant personnel or 
third-party providers who are being separated or terminated from OCC. 
The proposed modifications to the existing financial, operations, and 
risk management personnel requirements include eliminating the 
requirements for Managed Clearing Members and Managing Clearing 
Members, and removing references to facilities management agreements, 
Managing Clearing Members and Managed Clearing Members. These 
requirements, in current Rule 309, would be replaced by proposed Rule 
303's more general rules for outsourcing third-party service providers. 
According to OCC, the modifications are intended to reduce 
administrative burdens and provide OCC and its Clearing Members with 
greater flexibility.\29\
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    \28\ As an organizational matter, OCC proposes to consolidate 
the personnel requirements set forth in Article V, Section 1 of the 
By-Laws as well as current Rule 214 in proposed Rule 303.
    \29\ See Notice of Filing, 88 FR 17055.
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    OCC proposes to add two new rule provisions designed to expand its 
rules related to operational and default management testing.\30\ The 
first would state that OCC will periodically designate Clearing Members 
required to participate in business continuity and disaster recovery 
testing. The second would state that OCC may require Clearing Members 
to participate in other operational and connectivity testing and 
related reporting requirements 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.
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    \30\ As an organizational matter, OCC proposes to move existing 
Rule 218 regarding operational and default management testing to 
proposed Rule 304 subject to the changes described here. 
Additionally, OCC proposes a few non-material changes (e.g., 
replacing ``will'' with ``shall'').
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    OCC proposes three sets of changes to its rules regarding 
notification and reporting requirements for Clearing Members.\31\ 
First, OCC proposes to add a rule stating 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. In contrast, OCC's current rules prescribe a series 
of narrow notice requirements under specific circumstances such as 
currently requiring ``prompt'' written notice (rather than 30-day prior 
written notice).
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    \31\ These requirements would be consolidated from various 
provisions of the By-Laws and 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).
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    Second, OCC proposes to change the requirements for event-based 
reporting by Clearing Members.\32\ Specifically, proposed Rule 306A(a) 
would require Clearing Members to provide early-warning notices to OCC 
of any financial or operational difficulty, or any instances where a 
Clearing Member fails to meet certain financial or operational 
thresholds, depending on the nature of the Clearing Member's business. 
For example, if the Clearing Member is a fully-registered broker-dealer 
and fails to meet specific thresholds for net capital, it would need to 
provide an early-warning notice to OCC. The proposed rule also provides 
the specific circumstances where early-warning notices would be 
required from other Clearing Member types, such as fully-registered 
FCMs, non-U.S. securities firms, and banks. Proposed Rule 306A(b) sets 
forth the requirements for Clearing Members to report material changes 
to their organizational structure, finances, or operations; their 
intentions to enter into, terminate, or alter outsourcing activities; 
and provide other types of event-based reporting or responses to 
information requests from OCC. Proposed Rule 306A(c) provides the 
statutory disqualification notification requirements for Clearing 
Members.
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    \32\ OCC's current event-based reporting requirements for 
members, 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, would be consolidated in proposed 
Rule 306A.
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    Third, OCC proposes to change the requirements for periodic 
reporting by Clearing Members.\33\ The proposed rule

[[Page 30376]]

would cover periodic reporting of financial reports and annual audited 
financial statements, as well as the timing and frequency of such 
reporting, including providing OCC discretion to allow for extensions.
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    \33\ OCC's current periodic reporting requirements for members, 
set forth in existing Rules 216, 306, 308 and 310(a)-(c), would be 
consolidated in proposed Rule 306B.
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(iv) Protective Measures and Disciplinary Actions

    OCC proposes to change its rules related to (i) the imposition of 
protective measures on Clearing Members who may pose a risk to OCC and 
(ii) disciplinary actions OCC may take in response to violations of its 
rules. With regard to the imposition of protective measures, OCC 
proposes to adopt new Rule 307, which would grant OCC the authority to 
impose broader protective measures on a member or applicant that (i) is 
approaching or does not meet OCC's minimum membership standards or 
fails to provide information 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.\34\ Although proposed Rule 307 would not provide OCC with 
entirely new authority to impose protective measures, it would clarify 
that OCC has the authority to impose such measures under a broader set 
of circumstances, not just on Clearing Members, but on applicants for 
membership as well. Additionally, OCC proposes to modify two of its 
current rules regarding the imposition of protective measures on its 
members.\35\ OCC proposes to clarify that restrictions on distributions 
apply to all qualified regulatory capital (as opposed to funds from 
specific accounts), and to provide that OCC may prohibit a Clearing 
Member from withdrawing qualified regulatory capital if it is subject 
to enhanced monitoring and surveillance under OCC's watch level 
reporting process or the distribution could increase OCC's credit or 
liquidity risk.\36\ Further, the proposal would permit OCC to impose 
activity restrictions as additional protective measures.\37\ The 
proposed changes would link certain restrictions on activities to the 
potential risks posed by that Clearing Member (e.g., limiting 
transactions that increase credit or liquidity risk).\38\ OCC also 
proposes to adopt a new Rule 307C that would authorize it to impose 
protective measures in the form of additional operational, personnel, 
financial resource, or risk management requirements.
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    \34\ OCC proposes a conforming change to its Rule 609 regarding 
the imposition of intraday margin. Specifically, OCC proposes to 
expand the grounds for imposing additional margin requirements to 
contemplate not only a member's financial position, but also its 
operational and risk management conditions. Similarly, OCC proposes 
to add a statement to current Rule 311 (renumbered as proposed Rule 
305) authorizing the imposition of protective measures based on a 
review of a member's risk management policies, procedures, and 
practices.
    \35\ OCC's current Rules 304 (restrictions on distributions) and 
305 (restrictions on certain transactions, positions, and 
activities) would be renumbered as proposed Rules 307A and 307B, 
respectively.
    \36\ OCC would also remove certain distinctions from its current 
rules such that restrictions on distributions would apply 
consistently across member types.
    \37\ Currently, OCC may impose such restrictions based on 
certain broad determinations. The proposed change would align the 
threshold with the terms of proposed Rule 307.
    \38\ OCC also proposes to remove a non-exhaustive list of 
situations in which OCC may impose protective measures.
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    With regard to disciplinary actions, OCC proposes to increase the 
potential fines for minor rule violations (e.g., increasing the fine 
for a first occasion from $300 to $1500).\39\ Additionally, the 
proposed rules would reduce the number of minor rule violations within 
a twenty-four month period that would result in a disciplinary 
proceeding from four to three violations. OCC also proposes to modify 
its current Rule 209 to require that any fine levied by OCC for a minor 
rule violation that has not been timely contested will be due and 
payable immediately upon notice as opposed to within five business days 
following the end of each calendar month.\40\
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    \39\ In addition to the modification described here, OCC 
proposes to consolidate rules regarding minor rule violations. 
Specifically, OCC proposes to relocate rule 1201(b), 215(e) and 
215(f) and Interpretation and Policy .01 to proposed Rule 1203. 
Further, current Rule 1203 would be renumbered as proposed Rule 
1204.
    \40\ In addition to the modification described here, OCC 
proposes to renumber current Rule 209 as proposed Rule 210.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\41\ After carefully 
considering the proposed rule change, the Commission finds that the 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to OCC. More 
specifically, the Commission finds that the proposal is consistent with 
Exchange Act sections 17A(b)(3)(B), (F), and (G) \42\ as well as Rules 
17Ad-22(e)(2)(i) and 17Ad-22(e)(18),\43\ as described in detail below.
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    \41\ 15 U.S.C. 78s(b)(2)(C).
    \42\ 15 U.S.C. 78q-1(b)(3)(B), 15 U.S.C. 78q-1(b)(3)(F), and 15 
U.S.C. 78q-1(b)(3)(G).
    \43\ 17 CFR 240.17Ad-22(e)(2)(i) and 17 CFR 240.17Ad-22(e)(18).
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A. Consistency With Section 17A(b)(3)(B) of the Exchange Act

    Section 17A(b)(3)(B) of the Exchange Act requires that the rules of 
a clearing agency provide, among other things, that any registered 
broker or dealer, bank may become a participant in such clearing 
agency.\44\ OCC's rules currently allow for registered broker-dealers 
to become members if they meet the applicable membership requirements. 
As described above, OCC proposes to expand the list of entities 
eligible for membership to include banks. Such expansion includes the 
description of specific standards for banks to become Clearing Members. 
These standards, including bank-specific financial thresholds, 
operational requirements, and risk requirements, are consistent with 
the types of standards for other entities already eligible for clearing 
membership with OCC, such as broker-dealers and futures commission 
merchants. The Commission believes, therefore, that the proposal is 
consistent with the requirements of section 17A(b)(3)(B) of the 
Exchange Act.
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    \44\ 15 U.S.C. 78q-1(b)(3)(B).
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B. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that a clearing agency's rules are designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and are not designed to permit the unfair discrimination in the 
admission of participants or among participants in the use of the 
clearing agency.\45\
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    \45\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, OCC proposes to align and strengthen its 
financial responsibility standards for members. OCC also proposes to 
modify its operational requirements for members to (i) reflect changes 
in technology (e.g., allowing for reliance on electronic signatures); 
(ii) remove provisions no longer applicable to current practice (e.g., 
the use of authorization stamps or

[[Page 30377]]

designation of a physical location as a clearing office); and (iii) 
expand requirements with regard to members' operational capability, 
personnel, and reporting, as well as testing (e.g., participation in 
business continuity testing). The Commission believes that such 
enhancements to OCC's financial and operational standards for Clearing 
Members should help to ensure that OCC's Clearing Members are capable 
of meeting their obligations to OCC, which in turn will help ensure 
that OCC continues to promote the prompt and accurate clearance and 
settlement of securities transactions.
    Further, OCC proposes to consolidate its admission procedures and 
requirements and modify such admission procedures and requirements to 
help streamline the application review process. The Commission believes 
that such streamlining should promote consistent application across 
membership types, which, in turn may reduce the likelihood of unfair 
discrimination in the admission of OCC's Clearing Members. OCC also 
proposes to amend its conditions for member admission (e.g., an 
applicant must notify OCC in writing if it is or becomes subject to 
Statutory Disqualification), and directly address voluntary membership 
termination.
    The Commission believes, therefore, that the proposal is consistent 
with the requirements of section 17A(b)(3)(F) of the Exchange Act.

C. Consistency With Section 17A(b)(3)(G) of the Exchange Act

    Section 17A(b)(3)(G) of the Exchange Act requires, among other 
things, that the rules of a clearing agency provide that its 
participants shall be appropriately disciplined for violation of any 
provision of the rules of that clearing agency by expulsion, 
suspension, limitation of activities, functions, and operations, fine, 
censure, or any other fitting sanction.\46\
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    \46\ 15 U.S.C. 78q-1(b)(3)(G).
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    As described above, OCC proposes to broaden its authority to impose 
protective measures on Clearing Members who may pose a risk to OCC. 
Such measures include the imposition of financial obligations, such as 
additional margin requirements, as well as activity restrictions. OCC 
also proposes to raise fines, reduce the threshold for instituting a 
disciplinary proceeding, define when fines for uncontested violations 
become due, and make other strengthening changes to the way it enforces 
and addresses minor rule violations. The Commission believes that 
strengthening OCC's ability to respond to risks and violations in this 
way is consistent with the requirements of section 17A(b)(3)(G) of the 
Exchange Act.

D. Consistency With Rule 17Ad-22(e)(2)(i) of the Exchange Act

    Rule 17Ad-22(e)(2)(i) requires that a covered clearing agency 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that are clear and transparent.\47\
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    \47\ 17 CFR 240.17Ad-22(e)(2)(i).
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    OCC's existing membership eligibility requirements, admissions 
criteria, and ongoing standards are scattered across OCC's By-Laws and 
Rules. As described above, OCC proposes to reorganize, relocate, or 
consolidate such rule text into chapters 2 and 3 of OCC's Rules (along 
with supporting definitional changes to chapter 1 of OCC's rules). 
Further, OCC proposes other non-substantive wording changes throughout 
its rules (e.g., changing ``will'' to ``shall''). Because such changes 
would improve the readability of OCC's publically available rules, 
which, in turn, would make such rules clearer and more transparent to 
members and the public, the Commission believes that such changes are 
consistent with Rule 17Ad-22(e)(2)(i).\48\
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    \48\ 17 CFR 240.17Ad-22(e)(2)(i).
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E. Consistency With Rule 17Ad-22(e)(18) of the Exchange Act

    Rule 17Ad-22(e)(18) requires a covered clearing agency to 
establish, implement, maintain, and enforce policies and procedures 
reasonably designed to, among other things, establish objective, risk-
based, and publically disclosed criteria for participation, which 
permit fair and open access by direct participants, require 
participants to have sufficient financial resources and robust 
operational capacity to meet obligations arising from participation in 
the clearing agency, and to monitor compliance with such participation 
requirements on an ongoing basis.\49\
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    \49\ 17 CFR 240.17Ad-22(e)(18).
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    As stated above, OCC proposes to align and strengthen its financial 
responsibility standards for members. OCC also proposes to modify its 
operational requirements for members to (i) reflect changes in 
technology (e.g., allowing for reliance on electronic signatures); (ii) 
remove provisions no longer applicable to current practice (e.g., the 
use of authorization stamps or designation of a physical location as a 
clearing office); and (iii) expand requirements with regard to members' 
operational capability, personnel, and reporting, as well as testing 
(e.g., participation in business continuity testing). The Commission 
believes that such enhancements to OCC's financial and operational 
standards should help to ensure that OCC's membership has sufficient 
financial resources and robust operational capacity to meet obligations 
for participation in OCC. Further, OCC proposes to modify and 
consolidate its admission procedures and requirements to help 
streamline the application review process. The Commission believes that 
such streamlining should promote consistent application across 
membership types, which, in turn, would permit fair and open access by 
direct participants.
    Therefore, the Commission believes, therefore, that the proposal is 
consistent with the requirements of Rule 17Ad-22(e)(18) of the Exchange 
Act.\50\
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    \50\ 17 CFR 240.17Ad-22(e)(18).
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act, and in particular the requirements of section 17A of the 
Exchange Act \51\ and the rules and regulations thereunder.
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    \51\ In approving this proposed rule change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\52\ that the proposed rule change (SR-OCC-2023-002) be, 
and hereby is, approved.
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    \52\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-10029 Filed 5-10-23; 8:45 am]
BILLING CODE 8011-01-P