Document ID: SEC-2015-0504-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2015-03-25T04:00Z

[Federal Register Volume 80, Number 57 (Wednesday, March 25, 2015)]
[Notices]
[Pages 15846-15847]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06714]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74536; File No. SR-OCC-2015-007]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Enhance the Measurement 
Used To Establish Minimum Capital Requirements for Banks Approved To 
Issue Letters of Credit

March 19, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on March 6, 2015, The Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by OCC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC proposes to amend its By-Laws and Rules in order to enhance the 
measurement used to establish minimum capital requirements for banks 
approved to issue letters of credit that may be deposited by clearing 
members as a form of margin asset.

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 enhance the 
measurement used by OCC to establish minimum capital requirements for 
banks approved to issue letters of credit that may be deposited by 
clearing members as a form of margin asset. Currently, OCC Rule 604 
Interpretation and Policy .01 requires U.S. banks to have $100,000,000 
or more in shareholders' equity, and non-U.S. banks to have 
$200,000,000 or more in shareholders' equity, in order to be approved 
as an issuer of letters of credit that may deposited by clearing 
members to meet their margin obligation(s) at OCC. The purpose of these 
minimum capital requirements is to ensure that issuers of letters of 
credit whose letters of credit are deposited at OCC as a margin asset 
by clearing members have the ability to honor a demand for payment by 
OCC under such letters of credit should a need to do so arise, such as 
in the case of a clearing member default.
    The financial requirements set forth in OCC Rule 604 Interpretation 
and Policy .01 concerning issuers of letters of credit have been in 
place for some time.\3\ In the years since OCC adopted OCC Rule 604 
Interpretation and Policy .01, bank financial reporting standards have 
evolved and now place a greater emphasis on Tier 1 Capital as opposed 
shareholders' equity.\4\ In fact, Tier 1 Capital is the primary 
component of a bank's total regulatory capital.\5\ Tier 1 Capital is a 
more conservative measure of a bank's financial health as it ignores 
subordinated debt, intermediate-term preferred stock, cumulative and 
long-term preferred stock and a portion of a bank's allowance for loan 
and lease losses. In light of the more universal acceptance of Tier 1 
Capital for bank financial reporting standards, OCC is now proposing to 
amend OCC Rule 604 Interpretation and Policy .01 to substitute Tier 1 
Capital for shareholders' equity.
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    \3\ See Securities and Exchange Act Release No. 19422 (January 
12, 1983), SR-OCC-1982-08 [sic].
    \4\ Tier 1 Capital is the measure used by the Basel Committee on 
Banking Supervision to measure the financial health of a bank. The 
goal of the Basel Committee on Banking Supervision is to strengthen 
the regulation, supervision and risk management of the banking 
sector. The Basel Committee on Banking Supervision's most recent set 
of reform measures, Basel III, is located at: http://www.bis.org/publ/bcbs189.pdf.
    \5\ See https://www.kansascityfed.org/Publicat/BasicsforBankDirectors/BasicsforBankDirectors.pdf.>
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    OCC believes that by measuring a bank's financial health based on 
Tier 1 Capital, instead of shareholders' equity, OCC will reduce its 
credit risk to banks issuing letters of credit deposited by clearing 
members as a form of margin asset. As stated above, Tier 1 Capital is a 
more conservative measure of a bank's financial health. Therefore, 
after implementation of the proposed rule change, should OCC need to 
demand payment on a letter of credit deposited by a clearing member as 
a margin asset, such as in the case of a clearing member default, it is 
less likely that the bank issuing such letter of credit would not 
perform upon its payment commitment because the bank would be required 
to hold a greater amount of capital in order to be an OCC letter of 
credit bank. In turn, credit risk presented to OCC as a result of 
accepting letters of credit as a form of margin asset is reduced.\6\
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    \6\ OCC does not anticipate that the proposed rule change would 
impact any of the banks already approved to issue letters of credit 
that may be deposited by clearing members as a form of margin since 
all such banks maintain amounts of Tier 1 Capital that exceed, as 
applicable, $100 million for U.S. banks or $200 million for Non-U.S. 
banks.
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    In order to effect the proposed rule change, and in addition to 
amending OCC Rule 604 Interpretation and Policy .01 as described above, 
OCC is proposing to add a paragraph ``c'' to Interpretation and Policy 
.01 of OCC Rule 604 in order to adopt a definition for Tier 1 Capital 
that leverages the definition of Tier 1 Capital employed by a bank's 
regulatory agency. OCC believes that such a definition is appropriate 
given that OCC accepts letters of credit from banks regulated by 
different regulatory authorities.\7\ In addition, and for the reasons 
stated

[[Page 15847]]

above, OCC is proposing to make a conforming change to OCC Rule 604 
Interpretation and Policy .04 so that any one bank may not issue 
letters of credit for an individual clearing member exceeding 15% of 
the bank's Tier 1 Capital (instead of shareholders' equity).
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    \7\ See OCC Rule 604(c). For example, OCC accepts letters of 
credit issued by banks regulated by The Federal Reserve Board, The 
Office of the Comptroller of the Currency, The Australian Prudential 
Regulation Authority and The German Federal Financial Supervisory 
Authority.
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2. Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \8\ because it will help ensure the 
safeguarding of securities and funds which are in the custody and 
control of OCC, or for which it is responsible. OCC believes that the 
proposed rule change would help ensure the safeguarding of securities 
and funds which are in the custody and control of OCC, or for which OCC 
is responsible, because banks approved to issue letters of credit that 
may be deposited by clearing members as a form of margin asset at OCC 
will be subject to a more conservative capital requirement thereby 
increasing the likelihood that the bank will have the ability to honor 
a demand for payment made by OCC. For the same reason, OCC believes 
that the adoption of a more conservative capital requirement for banks 
approved to issue letters of credit that may be deposited by clearing 
members as a form of margin asset is consistent with the requirement of 
SEC Rule 17Ad-22(d)(3), which requires OCC hold assets in a manner that 
minimizes risk of loss or delay in access to them.\9\ The proposed rule 
change is not inconsistent with any rules of OCC, including any other 
rules proposed to be amended.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(d)(3).
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(B) Clearing Agency's Statement on Burden on Competition

    OCC does not believe that the proposed rule change would impose any 
burden on competition.\10\ Changes to the rules of a clearing agency 
may have an impact on the participants in a clearing agency and the 
markets that the clearing agency serves. This proposed rule change 
enhances the measurement used to establish capital requirements for 
banks that want to be, or are, approved to issue letters of credit that 
clearing members may deposit as a margin asset at OCC. The proposed 
modifications would not unfairly inhibit access to OCC's services or 
disadvantage or favor any particular user in relationship to another 
user because each user will continue to be able to use the same set of 
approved letter of credit banks if it wishes to deposit a letter of 
credit as a form of margin asset. In addition, OCC permits a wide 
variety of other assets to be deposit by clearing members to meet their 
margin requirements at OCC.\11\ The proposed modifications would not 
disadvantage or favor any particular bank wishing to become an approved 
letter of credit bank, or already an approved letter of credit bank, as 
those wishing to become letter of credit banks will have the same 
capital requirement applied to them, and those currently approved as 
letter of credit banks already meet the enhanced capital measurement.
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    \10\ 15 U.S.C. 78q-1(b)(3)(I).
    \11\ See OCC Rule 604.
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies and would not 
impose a burden on competition.

(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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2015-007 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-2015-007. 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 only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 Web site 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 the filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_15_007.pdf. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-OCC-2015-007 and should be submitted on 
or before April 15, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06714 Filed 3-24-15; 8:45 am]
 BILLING CODE 8011-01-P