Document ID: SEC-2020-2037-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2020-12-22T05:00Z

[Federal Register Volume 85, Number 246 (Tuesday, December 22, 2020)]
[Notices]
[Pages 83662-83664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28258]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90701; File No. SR-OCC-2020-806]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Partial Amendment No. 1 and Notice of No Objection 
To Advance Notice, as Modified by Partial Amendment No. 1, Related to 
Proposed Changes To Update the Options Clearing Corporation's Recovery 
and Orderly Wind-Down Plan

December 17, 2020.

I. Introduction

    On October 20, 2020, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2020-806 (``Advance Notice'')pursuant to Section 
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, entitled Payment, Clearing and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') \3\ to make changes to OCC's Recovery and Orderly 
Wind-Down Plan (``RWD Plan'').\4\ The Advance Notice was published for 
public comment in the Federal Register on November 18, 2020,\5\ and the 
Commission has received no comments regarding the changes proposed in 
the Advance Notice.\6\ On November 18, 2020, OCC filed a partial 
amendment (``Partial Amendment No. 1'') to modify the Advance 
Notice.\7\ The Commission is publishing this notice to solicit comments 
on Partial Amendment No. 1 from interested persons and, for the reasons 
discussed below, is hereby providing notice of no objection to the 
Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ See Notice of Filing infra note 5, at 85 FR 73553.
    \5\ Securities Exchange Act Release No. 90416 (Nov. 13, 2020), 
85 FR 73553 (Nov. 18, 2020) (File No. SR-OCC-2020-806) (``Notice of 
Filing''). On October 20, 2020, OCC also filed a related proposed 
rule change (SR-OCC-2020-013) with the Commission pursuant to 
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder 
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. In the Proposed Rule Change, which was published in 
the Federal Register on November 9, 2020, OCC seeks approval of 
proposed changes to its rules necessary to implement the Advance 
Notice. Securities Exchange Act Release No. 90315 (Nov. 3, 2020), 85 
FR 71384 (Nov. 9, 2020) (File No. SR-OCC-2020-013). The comment 
period for the related Proposed Rule Change filing closed on 
November 30, 2020.
    \6\ Since the proposal contained in the Advance Notice was also 
filed as a proposed rule change, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or the Advance Notice.
    \7\ In Partial Amendment No. 1, OCC corrects and updates a 
confidential Exhibit 5 to the materials filed on October 20, 2020 
regarding File No. SR-OCC-2020-806. Partial Amendment No. 1 corrects 
an error in the proposed rule text and updates the list of vendor 
agreements attached to the RWD Plan, but did not change the purpose 
of or basis for the Advance Notice. References to the Advance Notice 
from this point forward refer to the Advance Notice, as amended by 
Partial Amendment No. 1.
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II. Background 8
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    \8\ 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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    The Advance Notice concerns changes to OCC's RWD Plan. As described 
in greater detail below, OCC proposes to (1) update the RWD Plan to 
reflect changes to OCC's capital structure resulting from the 
disapproval of OCC's previously approved ``Capital Plan'' \9\ and the 
subsequent approval of OCC's ``Capital Management Policy,'' \10\ and 
(2) implement changes identified during OCC's annual review of the RWD 
Plan. The changes arise out of OCC's annual review of the RWD Plan and 
include factual updates (e.g., market share and contract volume data) 
and streamlined discussions in the RWD Plan (e.g., replacement of 
detailed overview of OCC's risk management program with a more concise 
summary).
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    \9\ See Securities Exchange Act Release No. 85121 (Feb. 13, 
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \10\ See Securities Exchange Act Release No. 86725 (Aug. 21, 
2019), 84 FR 44952 (Aug. 27, 2019) (File No. SR-OCC-2019-007).
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    Capital Management Policy Updates. As a result of the 
implementation of the Capital Management Policy, OCC is proposing 
changes to Chapters 2, 5, and 6 of its RWD Plan. In Chapter 2, OCC is 
proposing to revise its discussion of fee management for consistency 
with the Capital Management Policy. In Chapter 5, OCC is proposing to 
(i) replace its discussion of the Replenishment Plan established under 
the disapproved Capital Plan with a discussion of the replenishment 
structure adopted under the Capital Management Policy; (ii) replace 
references to the discretionary use of OCC's current and/or retained 
earnings with references to the mandatory contribution--immediately 
following the use of margin, deposits in lieu of margin and the 
Clearing Fund deposits of the suspended Clearing Member--of OCC's 
current and retained earnings greater than 110% of OCC's annually-
established ``Target Capital Requirement;'' (iii) update the 
description of how OCC could increase the minimum required cash

[[Page 83663]]

contribution to the Clearing Fund to reflect enhancements to OCC's 
liquidity risk management framework that the Commission approved in 
2020; \11\ and (iv) include a discussion of the mandatory contribution 
of any unvested portions of OCC's Executive Deferred Compensation Plan 
(``EDCP'') in proportion to any charges against the mutualized portion 
of OCC's Clearing Fund. OCC also proposes to revise the list of 
``Recovery Trigger Events'' in Chapter 5 to: (a) Delete one of the 
Recovery Trigger Events that was derived from a defined term in the 
Capital Plan; (b) consolidate two other Recovery Trigger Events into a 
single, operational loss-related recovery trigger; and (c) add a 
qualification onto an existing liquidity loss-related recovery trigger. 
In Chapter 6, OCC is proposing to update discussion of the tools by 
which OCC could recapitalize in certain recovery and wind-down 
scenarios. Further, OCC is proposing to revise the list of Wind-Down 
Plan Trigger Events (``WDP Triggers''). Specifically, OCC proposes to 
consolidate two current WDP Triggers into a single WDP Trigger related 
to OCC's financial resource requirements and to consolidate two other 
WDP Triggers into a single WDP Trigger related to operational 
disruption. Similar to the changes OCC proposes in Chapter 5, the 
changes proposed in Chapter 6 would be designed to reflect OCC's 
current replenishment plan under the Capital Management Policy.
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    \11\ See Securities Exchange Act Release No. 89014 (Jun. 4, 
2020), 85 FR 35446 (Jun. 10, 2020) (File No. SR-OCC-2020-003).
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    Annual Review Updates. As a result of its annual review and update 
process, OCC is proposing changes to Chapters 2, 3, 5, 6, 7, and 8 of 
its RWD Plan. In Chapter 2, OCC is proposing to update (i) market share 
and contract volume data; (ii) lists of the securities options 
exchanges and other markets for which OCC provides clearing services; 
(iii) organizational charts, headcount numbers, discussions of OCC's 
management structure and descriptions of management roles and 
responsibilities; (iv) updated descriptions of OCC's Board's 
responsibilities and procedures, lists of Board members and 
descriptions of OCC's Board committees' roles and responsibilities; and 
(v) graphs of total monthly deposits to OCC's Clearing Fund. OCC is 
also proposing revisions to reflect certain program changes that have 
occurred at OCC since the initial approval of the RWD Plan in 2018 
(e.g., changes to cross-margining arrangements, credit facilities, 
investment counterparties, and vendors) as well as changes to OCC's 
retirement plan obligations. In Chapter 3, the RWD Plan lists OCC's 
internal support functions. OCC is proposing the addition of two new 
internal support functions to that list and the removal of the Office 
of the Corporate Executive from the list. The net result of the 
proposed changes would bring the total number of internal support 
functions listed from fourteen to sixteen. OCC also proposes to update 
the descriptions of all OCC's internal support functions so they align 
with OCC's internal descriptions of such functions.
    In Chapter 6, OCC is proposing to (i) update references to OCC's 
internal support functions; and (ii) certain references to headcount. 
In Chapter 7, OCC is proposing to update staff titles to reflect 
changes in related office titles. In Chapter 8, OCC is proposing to 
update lists of (i) Clearing Members; (ii) Board participation; (iii) 
settlement bank and letter of credit bank; (iv) OCC's vendors and 
service providers; (v) updates to the extreme hypothetical scenarios 
designed by OCC that, if such scenarios occurred, could cause OCC to 
activate the RWD Plan; and (vi) key agreements.
    Administrative and Streamlining Changes. In addition to the updates 
described above, OCC is also proposing several administrative and 
streamlining changes throughout the RWD Plan. OCC proposes to align the 
executive summary and overview section of the RWD Plan with the changes 
described above. OCC also proposes moving annual report excerpts from 
Chapter 2 to an appendix to the RWD Plan, replace the current overview 
of OCC's risk management program with a more concise summary, and 
update a summary description of OCC's interconnections with external 
vendors and a list of vendors that provide OCC critical technology and 
information reporting services. In Chapter 4, OCC proposes to update 
certain factual references and make other minor changes to reflect the 
use of a single term for Critical Services that are currently 
identified separately. OCC also proposes to revise the mapping of 
Critical Services to Support Functions in Chapter 4 to reflect the 
categorization of Support Functions as either ``primary,'' 
``secondary,'' or ``non-critical.'' In Chapter 5, OCC proposes to (i) 
clean up references to its by-laws that are now rules; (ii) consolidate 
two recovery triggers into a single, operational loss-related recovery 
trigger; and (iii) add qualifying language to an existing liquidity 
loss-related recovery trigger.

III. Commission Findings and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: To mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for SIFMUs and 
strengthening the liquidity of SIFMUs.\12\
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    \12\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe regulations containing risk management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency.\13\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \14\
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    \13\ 12 U.S.C. 5464(a)(2).
    \14\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk 
management standards may address such areas as risk management and 
default policies and procedures, among other areas.\15\
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    \15\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\16\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk management practices on an 
ongoing basis.\17\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described

[[Page 83664]]

in Section 805(b) of the Clearing Supervision Act. As discussed below, 
the Commission believes the changes proposed in the Advance Notice are 
consistent with the objectives and principles described in Section 
805(b) of the Clearing Supervision Act,\18\ and in the Clearing Agency 
Rules, in particular Rule 17Ad-22(e)(3)(ii).\19\
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    \16\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See 
also Covered Clearing Agency Standards, 81 FR 70786. The Commission 
established an effective date of December 12, 2016 and a compliance 
date of April 11, 2017 for the Covered Clearing Agency Standards. 
OCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
    \17\ 17 CFR 240.17Ad-22.
    \18\ 12 U.S.C. 5464(b).
    \19\ 17 CFR 240.17Ad-22(e)(3)(ii).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposal contained in OCC's 
Advance Notice is consistent with the stated objectives and principles 
of Section 805(b) of the Clearing Supervision Act. Specifically, as 
discussed below, the Commission believes that the changes proposed in 
the Advance Notice are consistent with promoting robust risk 
management, promoting safety and soundness, reducing systemic risks, 
and supporting the stability of the broader financial system.\20\
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    \20\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposed changes to OCC's RWD Plan 
are consistent with promoting robust risk management, in particular 
risks arising out of severe financial or operational stress that could 
be presented to OCC as well as promoting safety and soundness, reducing 
systemic risk, and supporting the broader financial system. As a 
central counterparty and SIFMU,\21\ it is imperative for OCC to have a 
plan in place to address extreme stresses or crises with the aim of 
maintaining OCC's viability and ability to provide critical services. 
In the event that OCC's recovery efforts are not successful, the RWD 
Plan would seek to increase the possibility that a resolution of OCC's 
operations could be conducted in an orderly manner. The Commission 
continues to believe that OCC specifying the steps that it would take 
in either a recovery or orderly wind-down would enhance OCC's ability 
to address circumstances specific to an extreme stress event.\22\ The 
Commission also continues to believe that, by increasing the likelihood 
that recovery would be orderly, efficient, and successful, the RWD Plan 
enhances OCC's ability to maintain the 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.\23\
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    \21\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \22\ See Securities Exchange Act Release No. 83918 (Aug. 23, 
2018), 83 FR 44091, 44094 (Aug. 29, 2018) (File No. SR-OCC-2017-
021); Securities Exchange Release No. 83928 (Aug. 23, 2018), 83 FR 
44109, 44112 (Aug. 29, 2018) (File No. SR-OCC-2017-810).
    \23\ See id.
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    As described above, OCC proposes to (1) update the RWD Plan to 
reflect changes to OCC's capital structure resulting from the 
disapproval of OCC's previously approved ``Capital Plan'' \24\ and the 
subsequent approval of OCC's ``Capital Management Policy,'' \25\ and 
(2) implement changes identified during OCC's annual review of the RWD 
Plan. Consistent with the Commission's prior statements regarding 
disclosure of documents describing a covered clearing agency's recovery 
and wind-down plans, the Commission believes that such recovery and 
wind-down plans should be updated regularly or more frequently as 
necessary.\26\ OCC also proposes to update and streamline the data and 
descriptions provided in the RWD Plan.\27\ The Commission believes that 
keeping the RWD Plan updated with current information, and refining the 
descriptions to make it more concise, makes it a more accurate and 
useful document. As such, the Commission believes that the proposal 
would promote both robust risk management and safety and soundness, 
reduce systemic risk, and support the broader financial system 
consistent with Section 805(b) of the Clearing Supervision Act.\28\
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    \24\ See Securities Exchange Act Release No. 85121 (Feb. 13, 
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \25\ See Securities Exchange Act Release No. 86725 (Aug. 21, 
2019), 84 FR 44952 (Aug. 27, 2019) (File No. SR-OCC-2019-007).
    \26\ See Securities Exchange Act Release No. 34-78961 (Oct. 13, 
2016), 81 FR 70786, 70808 (Oct. 13, 2016) (File No. S7-03-14).
    \27\ For example, OCC is proposing to update its market share 
and contract volume data, lists of the securities options exchanges 
and other markets for which OCC provides clearing services, 
organizational charts, and headcount numbers. OCC also proposes to 
replace the detailed overview of OCC's risk management program with 
a more concise summary.
    \28\ 12 U.S.C. 5464(b).
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    Accordingly, and for the reasons stated above, the Commission 
believes the changes proposed in the Advance Notice are consistent with 
Section 805(b) of the Clearing Supervision Act.\29\
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    \29\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Exchange Act

    Rule 17Ad-22(e)(3)(ii) under the Exchange Act requires that a 
covered clearing agency 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 the covered clearing agency, 
which includes plans for the recovery and orderly wind-down of the 
covered clearing agency necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses.\30\
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    \30\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    The Commission continues to believe that the RWD Plan (i) clearly 
describes OCC's recovery tools, which 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); and (ii) 
supports OCC's ability to use risk management and recovery 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).\31\ As described above, the RWD 
Plan sets forth OCC's plans to recover or wind-down its operations as a 
result of severe financial or operational stress in an orderly fashion. 
The proposed updates will make the information provided in the RWD Plan 
more accurate and useful. The revised RWD Plan would, in turn, provide 
a more accurate and usable playbook for OCC or source of information 
for a resolution authority. Accordingly, the Commission believes that 
the proposed changes to the RWD Plan are consistent with Rule 17Ad-
22(e)(3)(ii) under the Exchange Act.\32\
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    \31\ See Securities Exchange Act Release No. 83918 (Aug. 23, 
2018), 83 FR 44091, 44095 (Aug. 29, 2018) (File No. SR-OCC-2017-
021); Securities Exchange Release No. 83928 (Aug. 23, 2018), 83 FR 
44109, 44113 (Aug. 29, 2018) (File No. SR-OCC-2017-810).
    \32\ 17 CFR 240.17Ad-22(e)(3)(ii).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-OCC-2020-806) and that OCC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-OCC-
2020-013, as modified by Partial Amendment No. 1, whichever is later.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-28258 Filed 12-21-20; 8:45 am]
BILLING CODE 8011-01-P