Document ID: SEC-2018-1361-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2018-08-29T04:00Z

[Federal Register Volume 83, Number 168 (Wednesday, August 29, 2018)]
[Notices]
[Pages 44091-44096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18673]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83918; File No. SR-OCC-2017-021]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change, as Modified by Partial Amendment 
No. 2, Concerning Updates to and Formalization of OCC's Recovery and 
Orderly Wind-Down Plan

August 23, 2018.

I. Introduction

    On December 8, 2017, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2017-021 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 \2\ thereunder to propose to 
formalize and update its Recovery and Orderly Wind-Down Plan (``RWD 
Plan'').\3\ The Proposed Rule Change was published for comment in the 
Federal Register on December 26, 2017.\4\ On January 25, 2018, the 
Commission designated a longer period of time for Commission action on 
the Proposed Rule Change.\5\ On March 22, 2018, the Commission 
published an order to institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice infra note 4, 82 FR 61072.
    \4\ Securities Exchange Act Release No. 82352 (Dec. 19, 2017), 
82 FR 61072 (Dec. 26, 2017) (File No. SR-OCC-2017-021) (``Notice''). 
On December 8, 2017, OCC also filed a related advance notice (SR-
OCC-2017-810) (``Advance Notice'') with the Commission pursuant to 
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) under the 
Exchange Act. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), 
respectively. The Advance Notice was published in the Federal 
Register on January 23, 2018. Securities Exchange Act Release No. 
82514 (Jan. 17, 2017), 83 FR 3224 (Jan. 23, 2018) (SR-OCC-2017-810).
     The Financial Stability Oversight Council designated OCC a 
systemically important financial market utility on July 18, 2012. 
See Financial Stability Oversight Council 2012 Annual Report, 
Appendix A, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to 
comply with the Payment, Clearing and Settlement Supervision Act and 
file advance notices with the Commission. See 12 U.S.C. 5465(e).
    \5\ Securities Exchange Act Release No. 82586 (Jan. 25, 2018), 
83 FR 4527 (Jan. 31, 2018) (File No. SR-OCC-2017-021).
    \6\ Securities Exchange Act Release No. 82927 (Mar. 22, 2018), 
83 FR 13176 (Mar. 27, 2018) (File No. SR-OCC-2017-021).
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    On July 11, 2018, OCC filed Partial Amendment No. 1 to the Proposed 
Rule Change.\7\ On July 13, 2018, OCC filed Partial Amendment No. 2 to 
the Proposed Rule Change.\8\ Notice of Partial Amendments No. 1 and 2 
to the Proposed Rule Change was published for public comment in the 
Federal Register on August 2, 2018,\9\ and the Commission has received 
no comments

[[Page 44092]]

in response. This order approves the Proposed Rule Change as modified 
by Partial Amendment No. 2 (``Amended Proposed Rule Change'').
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    \7\ In Partial Amendment No. 1, OCC made three modifications to 
the Notice: (1) Removal of sections of the RWD Plan concerning OCC's 
proposed authority to require cash settlement of certain physically 
delivered options and single stock futures; (2) updating the list of 
OCC's Critical Support Functions; and (3) making three changes to 
the RWD Plan to conform to a change contemporaneously proposed in 
Partial Amendment No. 2 to OCC filing SR-OCC-2017-020 concerning 
enhanced and new tools for recovery scenarios.
    \8\ Partial Amendment No. 2 superseded and replaced Partial 
Amendment No. 1 in its entirety, due to technical defects in Partial 
Amendment No. 1.
    \9\ See Securities Exchange Act Release No. 83732 (Jul. 27, 
2018), 83 FR 37864 (Aug. 2, 2018) (``Notice of Amendment'').
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II. Description of the Amended Proposed Rule Change [bds1][bds0]
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    \10\ 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's proposal would formalize and update its RWD Plan. The purpose 
of the RWD Plan is to: (i) Demonstrate that OCC has considered the 
scenarios which may potentially prevent it from being able to provide 
the services OCC determined to be critical as a going-concern; (ii) 
provide appropriate plans for OCC's recovery or orderly wind-down based 
on the results of such consideration; and (iii) impart to relevant 
authorities the information reasonably anticipated to be necessary for 
purposes of recovery and orderly wind-down planning.
    The RWD Plan would identify the services provided by OCC that OCC 
has determined to be critical, and it would set forth five qualitative 
events that could trigger a recovery scenario and six qualitative 
events that could trigger an orderly wind-down. It would also address 
six scenarios that describe OCC's possible responses to series of 
stresses. The RWD Plan would also include an overview designed to 
provide information that OCC believes would be essential to relevant 
authorities for purposes of recovery and orderly wind-down planning, as 
well as to provide readers of the Plan with necessary context for 
subsequent discussion and analysis. The overview would also include a 
detailed description of OCC's business, summarizing the role OCC has in 
the options market as well as the services and products it provides to 
its clearing members and market participants. The RWD Plan would 
identify fourteen internal support functions at OCC and provide a brief 
description of the activities performed by each support function. 
Similar to the information regarding OCC's business, this information 
is designed to inform the relevant authorities for orderly wind-down 
planning and as necessary context for understanding other elements of 
the RWD Plan.

A. Designating Critical Services and Critical Support Functions

    The RWD Plan would define the terms ``Critical Services'' and 
``Critical Support Functions.'' Specifically, a Critical Service would 
be a service provided by OCC that, if interrupted, would likely have a 
material negative impact on participants or significant third parties, 
give rise to contagion, or undermine the general confidence of markets 
that OCC serves. A Critical Support Function would be a function within 
OCC that must continue in some capacity for OCC to be able to continue 
providing its Critical Services.
    The RWD Plan would describe the framework that OCC uses to 
determine whether a service is critical. This framework includes four 
criteria to determine if failure or discontinuation of a particular 
service would impact financial and operational capabilities of OCC's 
clearing members, other FMUs, or the broader financial system: (1) 
Market dominance, (2) substitutability, (3) interconnectedness, and (4) 
barriers to entry. The current set of services designated as Critical 
Services under the RWD Plan is based on the analysis of these 
measureable indicators and subsequent internal discussion at OCC. The 
Critical Services currently include, but are not limited to, clearance 
services for listed options and clearance services for futures.

B. Recovery Plan

    The RWD Plan would include plans for recovery from scenarios that 
could prevent OCC from providing Critical Services.\11\ After 
discussing particular scenarios, the RWD Plan identifies the tools that 
OCC could use as warranted in such scenarios. These tools fall into two 
categories: (1) Enhanced Risk Management Tools, and (2) Recovery Tools. 
An Enhanced Risk Management Tool is a tool that is designed to 
supplement OCC's existing processes and other existing tools in 
scenarios where OCC faces heightened stresses, while a Recovery Tool is 
a tool that is generally limited to a scenario in which a specific 
trigger has occurred. In its RWD Plan, OCC would define a set of five 
such qualitative trigger events (``Recovery Trigger Events'').
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    \11\ For the purposes of the RWD Plan, OCC defines ``recovery'' 
as ``the actions of [a financial market utility], consistent with 
its rules, procedures, and other ex-ante contractual arrangements, 
to address any uncovered credit loss, liquidity shortfall, capital 
inadequacy, or business, operational or other structural weakness, 
including the replenishment of any depleted pre-funded financial 
resources and liquidity arrangements, as necessary to maintain the 
[financial market utility's] viability as a going concern.''
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    The sequence and timing of the deployment of each Recovery Tool is 
more structured and lacks the flexibility inherent in the sequence and 
timing for use of the Enhanced Risk Management Tools. For each tool, 
the RWD Plan provides an overview of the tool, and, as appropriate, a 
discussion of its implementation with an estimated time frame for use 
of the tool, key risks associated with use of the tool, and the 
expected impact and incentives of using the tool.
1. Enhanced Risk Management Tools
    OCC stated that the Enhanced Risk Management Tools would be used 
prophylactically in an effort to prevent the occurrence of a Recovery 
Trigger Event and would not be limited to recovery. OCC would not 
anticipate applying a rigid order or timing for the deployment of the 
Enhanced Risk Management Tools. The RWD Plan would include five 
Enhanced Risk Management Tools: (1) Use of Current/Retained Earnings; 
(2) Minimum Clearing Fund Cash Contribution; (3) Borrowing Against 
Clearing Fund; (4) Credit Facility; and (5) Non-Bank Facility.
    Use of Current/Retained Earnings. Under its By-Laws, OCC may use 
current and/or retained earnings to discharge a loss that would be 
chargeable against the Clearing Fund, but would require unanimous 
consent from the holders of OCC's Class A and Class B common stock. The 
RWD Plan acknowledges that the utility of this tool is limited by the 
requirement for shareholder consent and that OCC's retained earnings 
presently amount to a small fraction of OCC's existing prefunded 
Clearing Fund resources. OCC stated that, given this amount, the 
maximum utility of this tool may be realized in specific circumstances 
at either the beginning of OCC's loss waterfall or toward the end of 
OCC's loss waterfall, where it would be sufficient to fully extinguish 
liabilities without triggering the use of another tool.
    Minimum Clearing Fund Cash Contribution. Under its current rules, 
OCC Clearing Members collectively contribute $3 billion in cash to 
OCC's Clearing Fund.\12\ In addition, OCC may, in certain limited 
circumstances, increase the minimum cash requirement up to the then-
minimum size of the Clearing Fund.\13\ The RWD Plan would acknowledge 
that increasing the minimum cash requirement would require preparation 
of OCC documentation that considers the

[[Page 44093]]

projected liquidity demands for successful management of a defaulted 
Clearing Member.
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    \12\ See OCC By-Laws, Art. VIII, Section 3(a)(i). The Commission 
recently approved a proposal by OCC that, after implementation, 
would move this section of the OCC By-Laws to OCC Rule 1002(a)(i). 
See Securities Exchange Act Release No. 83735 (Jul. 27, 2018), 83 FR 
37855, 37859 (Aug. 2, 2018) (SR-OCC-2018-008) (``Order Approving 
Proposed Rule Change, as Modified by Amendments No. 1 and 2, Related 
to OCC's Stress Testing and Clearing Fund Methodology'').
    \13\ See OCC By-Laws, Art. VIII, Section 3(a)(i).
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    Borrowing Against Clearing Fund. OCC has the authority to borrow 
against the Clearing Fund in three circumstances: (1) To meet 
obligations arising out of the default or suspension of a Clearing 
Member or any action taken by OCC under Chapter XI of its rules 
pertaining to the suspension of a clearing member; (2) to borrow or 
otherwise obtain funds from third parties in lieu of immediately 
charging the Clearing Fund for a loss that is reimbursable out of the 
Clearing Fund; and (3) to meet liquidity needs for same-day settlement 
as a result of the failure of any bank or securities or commodities 
clearing organization to achieve daily settlement.\14\ The RWD Plan 
would acknowledge that any borrowing would require preparation of OCC 
documentation in accordance with OCC procedures. Further, the RWD Plan 
would recognize that the availability of this tool in advance of a 
heightened stress scenario would be unknown because OCC's primary 
liquidity facilities could already be fully or partially utilized.
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    \14\ See OCC By-Laws, Art. VIII, Section 5(e). The Commission 
recently approved a proposal by OCC that, after implementation, 
would move this section of the OCC By-Laws to OCC Rule 1006(f). See 
Order Approving Proposed Rule Change Related to OCC Stress Testing 
and Clearing Fund Methodology, supra note 12, 83 FR at 37859.
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    Credit Facility and Non-Bank Liquidity Facility. OCC maintains a $2 
billion dollar senior secured 364-day revolving credit facility with a 
syndicate of lenders for the purpose of providing OCC with liquidity to 
meet settlement obligations as a central counterparty. The RWD Plan 
would recognize that an inherent risk of the credit facility is that a 
portion of the syndicate may not provide funds in timely response to 
OCC's request. OCC also maintains a $1 billion dollar secured non-bank 
liquidity facility for the purpose of providing OCC with a non-bank 
liquidity resource to meet settlement obligations as a central 
counterparty. Similar to the risk associated with the credit facility, 
the RWD Plan would recognize the risk that OCC's counterparty may not 
timely execute the transaction under the non-bank liquidity facility.
2. Recovery Tools
    Under the RWD Plan, Recovery Tools would be different from Enhanced 
Risk Management Tools because OCC's use of a Recovery Tool is generally 
limited to a scenario in which a Recovery Trigger has occurred. The RWD 
Plan would identify five Recovery Tools, the last four of which would 
generally be deployed in the order they are described here: (1) 
Replenishment Capital; (2) Assessment Powers; (3) Voluntary Payments; 
(4) Voluntary Tear-Up; and (5) Partial Tear-Up.\15\ As noted above, the 
sequence and timing of deployment of the Recovery Tools would be more 
structured than the sequence and timing of the use of Enhanced Risk 
Management Tools.
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    \15\ For a more detailed description of the Recovery Tools 
numbered (2) through (5) here, please see Securities Exchange Act 
Release No. 83916 (Aug. 23, 2018) (SR-OCC-2017-020).
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    Replenishment Capital. OCC holds capital contributed by its 
stockholder exchanges who have committed to replenish OCC's capital if 
it falls below a certain threshold.\16\ The RWD Plan would include the 
replenishment of capital by OCC's stockholder exchanges as a recovery 
tool.
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    \16\ The requirement to replenish OCC's capital was adopted as 
part of OCC's plan to raise and maintain capital at a specified 
level (``Capital Plan''). See Securities Exchange Act Release No. 
77112 (Feb. 11, 2016), 81 FR 8294 (Feb. 18, 2016) (SR-OCC-2015-02). 
The Capital Plan was later subject to judicial review by the U.S. 
Court of Appeals for the District of Columbia Circuit, which 
remanded for the Commission to further analyze whether the Capital 
Plan is consistent with the Exchange Act. Susquehanna Int'l Grp., 
LLP v . SEC, 866 F.3d 442 (D.C. Cir. 2017). The Commission's review 
of the Capital Plan on remand is ongoing, and the Capital Plan 
remains in effect during this ongoing review.
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    Assessment Powers. Under OCC's rules, OCC has authority to assess a 
non-defaulting Clearing Member during any cooling-off period for an 
amount equal to 200 percent of the Clearing Member's then-required 
contribution to the Clearing Fund.\17\ Following the end of the 
cooling-off period, each remaining Clearing Member must replenish the 
Clearing Fund in the amount necessary to meet its then-required 
contribution.\18\ The RWD Plan would recognize the risk that the use of 
assessment powers may incentivize Clearing Members to withdraw from 
membership in OCC to avoid replenishment, and that such withdrawals 
would limit the resources available to OCC for future assessments.
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    \17\ The cooling-off period is the period following a 
proportionate charge assessed by OCC against the Clearing Members' 
Clearing Fund contributions. It is a minimum of fifteen days, but 
could extend to as much as twenty days from the date of the 
proportionate charge based on intervening events.
    \18\ A Clearing Member may avoid liability for replenishment by 
terminating its membership in OCC prior to the end of the cooling-
off period.
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    Voluntary Payments. OCC's rules provide a framework by which OCC 
can receive voluntary payments in response to a Clearing Member 
default. Use of this tool is permissible only where OCC has determined 
that it may not have sufficient resources to satisfy its obligations 
and liabilities arising out of the default. The RWD Plan would describe 
the processes involved in calling for and receiving voluntary payments, 
including the issuance of a notice to Clearing Members. The RWD Plan 
would recognize the risk that Clearing Members would be unwilling or 
unable to make voluntary payments. As an incentive for Clearing Members 
to provide voluntary payments, a non-defaulting Clearing Member who 
made a voluntary payment would receive priority in reimbursement from 
amounts recovered by OCC from the estate of a defaulting Clearing 
Member.
    Voluntary Tear-up. OCC's rules provide a framework by which non-
defaulting Clearing Members and customers could be permitted to 
voluntarily extinguish (i.e., voluntarily tear-up) open positions in 
response to a Clearing Member default. Voluntary Tear-up is permissible 
only where OCC has determined that it may not have sufficient resources 
to satisfy its obligations and liabilities arising out of the default. 
The RWD Plan would contemplate that OCC would initiate any tear-up 
process after the market close on the day that OCC determines it may 
have insufficient resources. The RWD Plan would further anticipate that 
OCC would publish notice of tear-up no later than the following morning 
(prior to the market open), and that positions would be extinguished 
following the market close. The RWD Plan would also recognize the risk 
that Clearing Members would be unwilling or unable to participate in 
the voluntary tear-up process. A non-defaulting Clearing Member that 
faced losses, costs, or expenses in reestablishing voluntarily torn-up 
positions could receive compensation from amounts recovered by OCC from 
the estate of a defaulting Clearing Member ahead of other Clearing 
Members that faced such losses, costs, or expenses after reestablishing 
torn up positions.
    Partial Tear-up. OCC's rules provide a framework by which OCC could 
extinguish the remaining open positions of a defaulted Clearing Member 
or its customers (i.e., Partial Tear-up) in response to a Clearing 
Member default. The RWD Plan would anticipate that the Partial Tear-up 
process would be intertwined with the Voluntary Tear-up process 
described above. The RWD Plan also would contemplate the compensation 
of Clearing Members facing losses, costs, or expenses after 
reestablishing torn up positions from Clearing Fund contributions.
    The RWD Plan also would provide a mapping of Enhanced Risk 
Management Tools and Recovery Tools to different types of risk 
exposures. Such risk

[[Page 44094]]

exposures include: (1) Uncovered credit losses; (2) liquidity 
shortfalls; (3) replenishment of financial resource; (4) losses related 
to business, operational, or other structural weaknesses; and (5) re-
establishment of a matched book. The RWD Plan discusses how each tool 
would apply to these risk categories and would reference the stress 
scenarios contemplated by the RWD Plan.
    The RWD Plan would outline an escalation process for the occurrence 
of each Recovery Trigger.\19\ Under the RWD Plan, OCC's Enterprise Risk 
Management and Financial Risk Management groups would be responsible 
for recommending which, if any, of the tools described above should be 
used in a given situation. Further, OCC's Chief Executive Officer and 
Executive Chairman would be responsible for approval of such 
recommendations, and OCC's Chief Risk Officer and Management Committee 
would be responsible for overseeing deployment of such tools. Finally, 
OCC's Board and the Risk Committee of the Board would be responsible 
for generally overseeing OCC's recovery efforts.
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    \19\ The RWD Plan also would discuss notification of regulators, 
including the Commission, the U.S. Commodity Futures Trading 
Commission, and the Federal Deposit Insurance Corporation, in 
response to the occurrence of a Recovery Trigger.
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C. Orderly Wind-Down Plan

    The RWD Plan would also include OCC's wind-down plan and include 
scenarios that could prevent OCC from being able to provide Critical 
Services as a going-concern. OCC would identify its wind-down objective 
as the pursuit of financial stability and ensuring the continuity of 
critical functions. The RWD Plan would provide OCC's assumptions 
concerning the wind-down process regarding: (1) Duration of wind-down; 
(2) cost of wind-down; (3) OCC's capitalization; and (4) the 
maintenance of Critical Services and Critical Support Functions. It 
also would identify six wind-down triggers (``WDP Trigger Events''), 
the occurrence of which could jeopardize the viability of OCC's 
recovery. Under the RWD Plan, the occurrence of a WDP Trigger Event 
would necessitate notification of regulators, including the Commission, 
the U.S. Commodity Futures Trading Commission, and the Federal Deposit 
Insurance Corporation, as well as internal notifications to OCC senior 
management.
    The RWD Plan would reference critical interconnections and key 
agreements for consideration in the context of wind-down. The RWD Plan 
also would discuss OCC's key actions in wind-down including the: (1) 
Decision by OCC's Board to initiate wind-down; (2) institution of 
heightened clearing member requirements; (3) imposition of heightened 
capital requirements for clearing members; (4) imposition of increased 
margin requirements; (5) cessation of investment by OCC; (6) 
institution of new operational practices; and (7) targeted reductions 
in force.
    The RWD Plan also would identify transactions that could be entered 
into to accomplish OCC's wind-down objectives: (1) Stock transactions; 
(2) merger transactions; and (3) asset transactions. The RWD Plan 
focuses discussion of wind-down transactions on issues including, but 
not limited to, governance and regulatory issues. The goal of any such 
transaction would be to transfer ownership of OCC in a manner that 
ensures the continuation of OCC's critical services; however, the RWD 
Plan also would contemplate the cessation of Critical Services through 
OCC's existing close-out netting rules.\20\
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    \20\ See also OCC By-Laws, Art. VI, Section 27.
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D. Governance

    The RWD Plan would also memorialize the governance processes for 
maintenance, review, and approval of the RWD Plan. Under the RWD Plan, 
all changes would originate in a recommendation from OCC's RWD Working 
Group. Changes would go through a series of consecutive rounds of 
review and approval by OCC's Management Committee, the Risk Committee 
of OCC's Board of Directors, and the full Board of Directors, which 
would have final approval authority.

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.\21\ After carefully 
considering the Amended Proposed Rule Change, the Commission believes 
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 Amended Proposed Rule 
Change is consistent with Section 17A(b)(3)(F) of the Exchange Act \22\ 
and Rules 17Ad-22(e)(2)(i), (iii), and (v), 17Ad-22(e)(3)(ii), and 
17Ad-22(e)(15)(i) thereunder.\23\
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    \21\ 15 U.S.C. 78s(b)(2)(C).
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v); (e)(3)(ii); 
(e)(15)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires that the rules of 
a clearing agency be designed to, among other things, promote the 
prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency or for which it is 
responsible, and, in general, to protect investors and the public 
interest.\24\
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the RWD Plan would specify the Enhanced Risk 
Management Tools and Recovery Tools available to OCC in recovery and in 
an orderly wind-down, as well as the governance framework applicable to 
the use of such tools. The RWD Plan would analyze the use of the 
Enhanced Risk Management Tools and Recovery Tools, the incentives 
created by such tools, and the risks associated with using such tools. 
The Commission believes that by specifying the tools that OCC would 
take in either a recovery or a wind-down, the RWD Plan would enhance 
OCC's ability to address circumstances specific to an extreme stress 
event, thereby increasing the likelihood that OCC could execute a 
successful recovery or orderly wind-down in such an event. In 
increasing the likelihood that OCC could execute a successful recovery 
or orderly wind-down, the RWD Plan would enhance OCC's ability to 
maintain continuity of its critical services (including clearance and 
settlement services) during, through, and following periods of extreme 
stress giving rise to the need for recovery, thereby promoting the 
prompt and accurate clearance and settlement of securities 
transactions. The Commission also believes that the rules proposed in 
the RWD Plan are designed to assure the safeguarding of securities or 
funds in the custody or control of OCC by reducing the likelihood of a 
disorderly or unsuccessful recovery or wind-down, which could otherwise 
disrupt access to such securities or funds.
    Further, the Commission believes that the RWD Plan is designed, in 
general, to protect investors and the public interest by establishing a 
plan to effectuate an orderly wind-down. The RWD Plan's governance 
processes and regulatory notice provisions could facilitate either the 
orderly transfer of OCC's Critical Services to another entity or the 
orderly

[[Page 44095]]

close-out of positions. Providing additional information regarding the 
potential orderly transfer of services or close-out of positions would 
benefit Clearing Members and their customers by providing greater 
transparency and certainty regarding the potential disposition or 
treatment of their positions and assets at OCC, thereby benefiting 
market participants more broadly.
    Therefore, the Commission believes that the Amended Proposed Rule 
Change would promote the prompt and accurate clearance and settlement 
of securities transactions, assure the safeguarding of securities and 
funds in OCC's custody and control, and, in general, protect investors 
and the public interest, consistent with the Section 17A(b)(3)(F) of 
the Act.\25\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the 
Exchange Act

    Rules 17Ad-22(e)(2)(i), (iii), and (v) require that OCC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent, that support the public interest requirements in 
Section 17A of the Exchange Act applicable to clearing agencies, and 
the objectives of owners and participants, and that specify clear and 
direct lines of responsibility.\26\
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    \26\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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    The RWD Plan would outline an escalation process for the occurrence 
of a Recovery Trigger Event, which would provide a governance framework 
for the use and functioning of the Enhanced Risk Management Tools and 
Recovery Tools in addition to those specified elsewhere in OCC's rules. 
It would also identify the internal notification requirements that 
would apply to WDP Trigger Events and establish the role of the Board 
in determining whether to enter into a wind-down or take other key 
actions, consistent with the governance specified elsewhere in OCC's 
rules.
    Moreover, the RWD Plan would identify the internal governance 
process for the approval of subsequent changes to OCC's RWD Plan. The 
RWD Plan would also specify the process OCC would take to receive input 
from various parties at OCC, including management and the Board.
    Taken together, the Commission believes that these lines of control 
could contribute to establishing, implementing, maintain and enforcing 
clear and transparent governance arrangements that support the public 
interest requirements in Section 17A of the Exchange Act applicable to 
clearing agencies, and the objectives of owners and participants.
    Therefore, the Commission believes that the proposed changes are 
consistent with Rules 17Ad-22(e)(2)(i), (iii), and (v).\27\
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    \27\ Id.
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C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Exchange Act

    Rule 17Ad-22(e)(3)(ii) requires that OCC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, general 
business, investment, custody, and other risks that arise in or are 
borne by OCC, which includes plans for the recovery and orderly wind-
down of OCC necessitated by credit losses, liquidity shortfalls, losses 
from general business risk, or any other losses.\28\
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    \28\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The Commission believes that the information the RWD Plan would 
provide about the OCC's recovery tools would enhance OCC's ability to 
recover from credit losses, liquidity shortfalls, general business risk 
losses, or other losses, consistent with Rule 17Ad-22(e)(3)(ii).\29\ 
Specifically, the information from the RWD Plan would enable OCC to 
prepare in advance for the use of such tools, which would in turn 
enhance OCC's ability to use such tools effectively to carry out a 
successful recovery. In addition, by establishing a single source of 
information about, and steps needed to effectuate, a recovery of OCC, 
the RWD Plan would allow OCC personnel to effectuate a recovery in a 
consistent and coordinated fashion, and would thereby increase the 
likelihood of a successful recovery. Moreover, by identifying and 
assessing available Enhanced Risk Management Tools and Recovery Tools, 
the Commission believes that the RWD Plan would enhance OCC's ability 
to use such tools effectively to bring about a recovery by identifying 
in advance which tools may be most effective for different situations 
or needs, consistent with Rule 17Ad-22(e)(3)(ii).\30\
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    \29\ Id.
    \30\ Id.
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    Similarly, in providing detailed information about the assumptions, 
actions, and objectives related to triggering and implementing the 
wind-down portion of the RWD Plan, discussed in more detail above, the 
Commission believes that the RWD Plan would enhance OCC's ability to 
effectuate an orderly wind-down, consistent with Rule 17Ad-
22(e)(3)(ii).\31\ Specifically, by setting out in advance the potential 
events that could cause OCC to trigger, and transactions by which OCC 
would effectuate, a wind-down, the RWD Plan would enable OCC to prepare 
in advance for a wind-down, which the Commission believes would enhance 
OCC's ability to use the RWD Plan effectively to carry-out an orderly 
wind-down. In addition, by establishing a single source of information 
about, and steps needed to effectuate, a wind-down of OCC, the 
Commission believes the RWD Plan would allow OCC personnel to 
effectuate a wind-down in a consistent and coordinated fashion, and 
would thereby increase the likelihood of an orderly wind-down. Finally, 
the RWD Plan would identify the legal basis for OCC's actions with 
respect to a potential wind-down, including relevant citations to 
provisions of the rule books of its various clearing services and 
contractual agreements, which the Commission believes would further 
facilitate an orderly wind-down process by providing OCC with a single 
source of information and steps needed for a wind-down, consistent with 
Rule 17Ad-22(e)(3)(ii).\32\
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    \31\ Id.
    \32\ Id.
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    Therefore, the Commission believes that the proposed changes to 
adopt plans for the recovery and orderly wind-down of OCC are 
consistent with Rule 17Ad-22(e)(3)(ii).\33\
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    \33\ Id.
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D. Consistency With Rules 17Ad-22(e)(15)(i) Under the Exchange Act

    Rule 17Ad-22(e)(15)(i) requires OCC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to identify, monitor, and manage its general business risk and 
hold sufficient liquid net assets funded by equity to cover potential 
general business losses so that OCC can continue operations and 
services as a going concern if those losses materialize, including by 
determining the amount of liquid net assets funded by equity based upon 
its general business risk profile and the length of time required to 
achieve a recovery or orderly wind-down, as appropriate, of its 
critical operations and services if such action is taken.\34\
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    \34\ 17 CFR 240.17Ad-22(e)(15)(i).
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    OCC's RWD Plan would estimate costs related to a wind-down based on 
a series of assumptions laid out in the RWD Plan. These assumptions 
include

[[Page 44096]]

duration of the wind-down process, OCC's capitalization through the 
wind-down process, the maintenance of Critical Services and Critical 
Support Functions, and the retention of personnel and contractual 
relationships. OCC also provided information regarding its assumption 
about the cost of the wind-down process. Further, the RWD Plan 
identifies potential transactions that could be effected to accomplish 
the objectives of wind-down with the ultimate goal of transferring 
ownership of OCC itself by the consummation or a consensual sale or 
similar transaction, in a manner that ensures the continuation of OCC's 
Critical Services. The Commission considered the assumptions that the 
RWD Plan makes regarding wind-down as well as the potential 
transactions in which OCC might engage in the event of a wind-down. The 
Commission also considered the estimated cost of wind-down noted in the 
RWD Plan in light of OCC's rules regarding the maintenance of certain 
capital levels and qualifying liquid resources. The Commission believes 
that the RWD Plan, which indicates the cost at which OCC could 
effectuate an orderly wind-down, i.e., at a lower cost than the amount 
of its liquid resources is consistent with Rule 17Ad-22(e)(15)(i).\35\
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    \35\ Id.
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    Therefore, the Commission believes that the proposed changes that 
would determine costs associated with an orderly wind-down and that 
would further ensure that OCC holds liquid net assets greater than 
these costs, are consistent with Rule 17Ad-22(e)(15)(i).\36\
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    \36\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Amended Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, with the requirements of Section 17A 
of the Exchange Act \37\ and the rules and regulations thereunder.
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    \37\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\38\ that the Proposed Rule Change (SR-OCC-2017-021), as 
modified by Partial Amendment No. 2, be, and it hereby is, approved.
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    \38\ 15 U.S.C. 78s(b)(2).
    \39\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18673 Filed 8-28-18; 8:45 am]
 BILLING CODE 8011-01-P