Document ID: SEC-2022-1180-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2022-09-08T04:00Z

[Federal Register Volume 87, Number 173 (Thursday, September 8, 2022)]
[Notices]
[Pages 55064-55068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-19413]

[[Page 55064]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95669; File No. SR-OCC-2022-802]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Related to a Master Repurchase 
Agreement as Part of The Options Clearing Corporation's Overall 
Liquidity Plan

September 2, 2022.

I. Introduction

    On July 7, 2022, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2022-802 (``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\ in connection with a proposed master repurchase 
agreement with a bank counterparty.\4\ The Advance Notice was published 
for public comment in the Federal Register on July 26, 2022.\5\ The 
Commission has received comments regarding the changes proposed in the 
Advance Notice.\6\ The Commission is hereby providing notice of no 
objection to the Advance Notice.
---------------------------------------------------------------------------

    \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 87 FR 44457.
    \5\ Exchange Act Release No. 95326 (Jul. 20, 2022), 87 FR 44457 
(Jul. 26, 2022) (File No. SR-OCC-2022-802) (``Notice of Filing'').
    \6\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm.
---------------------------------------------------------------------------

II. Background 7
---------------------------------------------------------------------------

    \7\ 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.
---------------------------------------------------------------------------

    As the sole clearing agency for standardized U.S. securities 
options listed on national securities exchanges registered with the 
Commission (``listed options''), OCC is obligated to make certain 
payments. In the event of a Clearing Member default, OCC would be 
obligated to make payments, on time, related to that member's clearing 
transactions. To meet such payment obligations, OCC maintains access to 
cash from a variety of sources, including a requirement for members to 
pledge cash collateral to OCC and various agreements with banks and 
other counterparties (``liquidity facilities'') to provide OCC with 
cash in exchange for collateral, such as U.S. Government securities. 
OCC routinely considers potential market stress scenarios that could 
affect such payment obligations. Based on such considerations, OCC now 
believes that it should seek to expand its liquidity facilities to 
increase OCC's access to cash to manage a member default.\8\
---------------------------------------------------------------------------

    \8\ See Notice of Filing, 87 FR at 44458.
---------------------------------------------------------------------------

    OCC is proposing to expand its liquidity facilities to include a 
new arrangement with a bank to provide access to cash for OCC. As 
described in more detail below, OCC is proposing to execute a master 
repurchase agreement (``MRA'') with a bank counterparty as part of 
OCC's overall liquidity plan. OCC is not requiring its members or other 
market participants to provide additional or different collateral to 
OCC. Rather, the proposed MRA would provide OCC with another vehicle 
for accessing cash to meet its payment obligations, including in the 
event that one of its members fails to meet its payment obligations to 
OCC.\9\
---------------------------------------------------------------------------

    \9\ See OCC Rule 1006(f)(1)(A). OCC may also use the Clearing 
Fund to address liquidity shortfalls arising from the failure of any 
bank, securities or commodities clearing organization, or investment 
counterparty to perform any obligation to OCC when due. See OCC Rule 
1006(f)(1)(C); Exchange Act Release No. 94304 (Feb. 24, 2022), 87 FR 
11776 (Mar. 2, 2022) (File No. SR-OCC-2021-014).
---------------------------------------------------------------------------

    OCC's liquidity plan already provides access to a diverse set of 
funding sources, including banks (i.e., OCC's syndicated credit 
facility),\10\ the Non-Bank Liquidity Facility program,\11\ and 
Clearing Members' Clearing Fund Cash Requirement.\12\ OCC currently 
maintains $8 billion in qualifying liquid resources,\13\ consisting of 
$5 billion of required Clearing Fund cash contributions, $2 billion in 
the syndicated bank credit facility, and $1 billion in the Non-Bank 
Liquidity Facility. OCC intends to increase such resources by $2.5 
billion to a new total of $10.5 billion. OCC's proposed expansion of 
its liquidity plan includes several components: (1) creating a new 
committed repurchase facility with a commercial bank counterparty 
(``Bank Repo Facility''); \14\ (2) expanding OCC's existing Non-Bank 
Liquidity Facility program; \15\ (3) expanding OCC's existing 
syndicated credit facility; \16\ and (4) establishing a target for the 
aggregate amount of all external liquidity resources (i.e., the 
syndicated credit facility, Bank Repo Facility and Non-Bank Liquidity 
Facility).\17\ The Advance Notice concerns the first component 
described above, namely, a change to OCC's operations to execute an MRA 
with a commercial bank counterparty.\18\
---------------------------------------------------------------------------

    \10\ See Exchange Act Release No. 88971 (May 28, 2020), 85 FR 
34257 (June 3, 2020) (File No. SR-OCC-2020-804).
    \11\ See Exchange Act Release No. 89039 (Jun. 10, 2020), 85 FR 
36444 (Jun. 16, 2020) (File No. SR-OCC-2020-803); Exchange Act 
Release No. 76821 (Jan. 4, 2016), 81 FR 3208 (Jan. 20, 2016) (File 
No. SR-OCC-2015-805); Exchange Act Release No. 73979 (Jan. 2, 2015), 
80 FR 1062 (Jan. 8, 2015) (File No. SR-OCC-2014-809).
    \12\ See OCC Rule 1002.
    \13\ See 17 CFR 240.17Ad-22(a)(14) (defining qualifying liquid 
resources).
    \14\ The Bank Repo Facility would retain a funding limit and a 
limit on adding new counterparties because OCC is proposing this 
facility as a discrete MRA with a single counterparty. To the extent 
OCC determines to add additional commitments or counterparties to 
the Bank Repo Facility in the future, OCC would first file an 
advance notice.
    \15\ In a separate advance notice, OCC is proposing changes to 
the Non-Bank Liquidity Facility program, including the elimination 
of the current funding limit to that program in favor of an 
established target for external liquidity across all sources. See 
Exchange Act Release No. 95327 (Jul. 20, 2022), 87 FR 44477 (Jul. 
26, 2022) (File No. SR-OCC-2022-803).
    \16\ Id. at 44479.
    \17\ Id.
    \18\ The proposed Bank Repo Facility would have terms that 
largely resemble those of an earlier Bank Repo Facility that OCC 
executed with a bank counterparty in 2020 after obtaining a notice 
of no objection from the Commission (``2020 Bank Repo Facility''). 
See Exchange Act Release No. 88317 (Mar. 4, 2020), 85 FR 13681 (Mar. 
9, 2020) (File No. SR-OCC-2020-801). However, in this case, the 
committed amount would be up to $1 billion (as opposed to $500 
million), and the bank counterparty would be one to which OCC has 
minimal other credit exposure.
---------------------------------------------------------------------------

    Although the MRA would be based on the Securities Industry and 
Financial Markets Association (``SIFMA'') standard form of master 
repurchase agreement,\19\ OCC would require the MRA to contain certain 
additional provisions tailored to help ensure certainty of funding and 
operational effectiveness, as described in more detail below.
---------------------------------------------------------------------------

    \19\ The standard form master repurchase agreement is published 
by SIFMA and is commonly used in the repurchase market by 
institutional investors.
---------------------------------------------------------------------------

A. MRA Standard Repurchase Agreement Terms

    The MRA repurchase agreement terms would state that the buyer 
(i.e., the bank counterparty) would purchase U.S. Government securities 
(``Eligible Securities'') from OCC from time to time.\20\ OCC, the 
seller, would transfer Eligible Securities to the buyer in

[[Page 55065]]

exchange for a buyer payment to OCC in immediately available funds 
(``Purchase Price''). The buyer would simultaneously agree to transfer 
the purchased securities back to OCC at a specified later date 
(``Repurchase Date''), or on OCC's demand against the transfer of funds 
from OCC to the buyer, where the funds would be equal to the 
outstanding Purchase Price plus the accrued and unpaid price 
differential (together, ``Repurchase Price'').
---------------------------------------------------------------------------

    \20\ For the repurchase arrangements, OCC would use Eligible 
Securities that are included in Clearing Fund contributions by 
Clearing Members and margin deposits of any suspended Clearing 
Member. OCC Rule 1006(f) and OCC Rule 1104(b) authorize OCC to use 
these sources to obtain funds from third parties through securities 
repurchases. The officers who may exercise this authority include 
the Chairman, Chief Executive Officer, and Chief Operating Officer.
---------------------------------------------------------------------------

    At all times while a transaction is outstanding, OCC would be 
required to maintain a specified amount of securities or cash margin 
with the buyer.\21\ The market value of the securities supporting each 
transaction would be determined daily, based on a price obtained from a 
generally recognized pricing source. If the market value of the 
purchased securities falls below OCC's required margin, OCC would be 
required to satisfy its margin requirement by transferring sufficient 
cash or additional securities reasonably acceptable to the buyer.\22\ 
If the market value of the purchased securities rises above OCC's 
required margin, OCC would be permitted to require the buyer to return 
excess purchased securities.
---------------------------------------------------------------------------

    \21\ OCC expects that it would be required to maintain margin 
equal to 102% of the Repurchase Price, which is a standard rate for 
arrangements involving Government securities.
    \22\ OCC expects that it would use Clearing Fund securities and 
securities posted as margin by defaulting Clearing Members.
---------------------------------------------------------------------------

    A buyer would default if it fails to purchase securities on a 
Purchase Date, fails to transfer purchased securities on any applicable 
Repurchase Date, or fails to transfer any interest, dividends, or 
distributions on purchased securities to OCC within a specified period 
after receiving notice of such failure. OCC would default if it fails 
to transfer purchased securities on a Purchase Date, or fails to 
repurchase purchased securities on an applicable Repurchase Date. The 
MRA would also provide for standard events of default for either party, 
including a party's failure to maintain required margin or an 
insolvency event with respect to either party. If one party defaults, 
the non-defaulting party has the option to accelerate the Repurchase 
Date of all outstanding transactions between the defaulting party and 
the non-defaulting party, among other rights. If OCC or the buyer did 
not timely perform, the non-defaulting party would be permitted to buy 
or sell, or deem itself to have bought or sold, securities as needed to 
be made whole, and the defaulting party would be required to pay the 
costs related to any covering transactions. Additionally, if OCC were 
required to obtain replacement securities to be made whole because of a 
buyer default, the buyer would be required to pay the excess of the 
price paid by OCC to obtain replacement securities over the Repurchase 
Price.

B. Additional Provisions To Promote Funding Certainty

Commitment To Fund
    The buyer would provide a funding commitment of up to $1 billion, 
with the commitment extending for one year (plus or minus one day). The 
buyer would be obligated to enter into transactions under the MRA up to 
its committed amount, so long as no default had occurred and OCC 
transferred sufficient Eligible Securities. The buyer would be 
obligated to enter into transactions even if OCC had experienced a 
material adverse change, such as the failure of a Clearing Member.
Funding Mechanics
    OCC would receive the Purchase Price in immediately available funds 
within 60 minutes of its request for funds and delivery of Eligible 
Securities and, if needed, prior to OCC's regular daily settlement 
time.\23\ These targeted funding mechanics would allow OCC to receive 
needed liquidity in time to satisfy settlement obligations, even in the 
event of a default by a Clearing Member or a market disruption. For 
example, the funding mechanism may be delivery versus payment/receive 
versus payment \24\ or another method acceptable to OCC that both 
satisfies the objectives of the Bank Repo Facility and presents limited 
operational risks.
---------------------------------------------------------------------------

    \23\ This would include OCC's regular daily settlement time and 
any extended settlement time implemented by OCC in an emergency 
situation under Rule 505.
    \24\ Delivery versus payment/receive versus payment is a method 
of settlement under which payment for securities must be made prior 
to or simultaneously with delivery of the securities.
---------------------------------------------------------------------------

Rehypothecation Not Permitted
    The buyer would not be permitted to grant any third party an 
interest in purchased securities, in order to reduce the risk that the 
third party could interfere with the buyer's transfer of the purchased 
securities on the Repurchase Date. The buyer would agree to provide OCC 
with daily information about the account the buyer uses to hold the 
purchased securities, which would allow OCC to act quickly in the event 
the buyer violates any requirements.
Early Termination Rights
    OCC would be able to terminate any transaction early upon providing 
written notice to the buyer, but the buyer would only be able to 
terminate a transaction upon an OCC default, as further described 
below. A notice of termination by OCC would specify a new Repurchase 
Date prior to the originally agreed-upon Repurchase Date. Upon the 
early termination of a transaction, the buyer would be required to 
return all purchased securities to OCC and OCC would be required to pay 
the Repurchase Price.
Substitution
    OCC would have the discretion to substitute any Eligible Securities 
for purchased securities by a specified time, so long as the Eligible 
Securities satisfy any applicable criteria contained in the MRA and the 
transfer of the Eligible Securities would not create a margin deficit, 
as described above.\25\
---------------------------------------------------------------------------

    \25\ In addition to its substitution rights, OCC could cause the 
return of purchased securities by exercising its optional early 
termination rights under the MRA. If OCC were to terminate the 
transaction, the buyer would be required to return purchased 
securities to OCC against payment of the corresponding Repurchase 
Price.
---------------------------------------------------------------------------

Default Events
    Beyond standard default events (e.g., failure to purchase or 
transfer securities on the applicable Purchase Date or Repurchase 
Date), OCC would require the MRA to not contain any additional default 
events that would restrict OCC's access to funding. Most importantly, 
OCC would require that if OCC suffers a ``material adverse change,'' it 
would not be a default event.\26\ This provision provides OCC with 
funding certainty, even in difficult market conditions.
---------------------------------------------------------------------------

    \26\ A ``material adverse change'' is typically defined 
contractually as a change that would have a materially adverse 
effect on the business or financial condition of a company.
---------------------------------------------------------------------------

    If a default event were to occur, the non-defaulting party may 
elect to take the actions specified in a ``mini close-out'' provision 
of the MRA instead of declaring an event of default. For example, if 
the buyer were to fail to transfer purchased securities on the 
applicable Repurchase Date, OCC may choose to take one of the following 
actions, instead of declaring an event of default: (1) If OCC has 
already paid the Repurchase Price, OCC could require the buyer to repay 
it; (2) If there is a margin excess, OCC could require the buyer to pay 
cash or deliver purchased securities in an amount equal to the margin 
excess; or (3) OCC could declare that the applicable transaction, and 
only that transaction, will be immediately terminated, and apply 
default remedies under the MRA to only that transaction. OCC would 
therefore have remedies to mitigate risk with respect to a particular

[[Page 55066]]

transaction, without having to declare an event of default with respect 
to all transactions under the MRA.

C. The Proposed Program: Annual Renewal

    As discussed above, the MRA would be for an annual term. OCC 
anticipates that it would renew the MRA with the same bank 
counterparty, based on the same or substantially similar terms.
    At each renewal, OCC would evaluate the commitment amount so that 
OCC's available liquidity resources remain properly calibrated to its 
activities and settlement obligations. OCC would submit another advance 
notice with respect to such renewal for the same term only under one of 
the following conditions: (1) OCC determines its liquidity needs merit 
funding levels above the $1 billion; (2) OCC should seek to change the 
terms and conditions of the MRA in a manner that materially affects the 
nature or level of risk presented by OCC; \27\ (3) OCC should seek to 
add counterparties or substitute the bank counterparty to the Bank Repo 
Facility program; or (4) the bank counterparty has experienced a 
negative change to its credit profile or a material adverse change 
since the latest renewal of the MRA. Annual renewals for the Bank Repo 
Facility would proceed in a similar manner to renewals of term 
commitments under the existing Non-Bank Liquidity Facility.\28\
---------------------------------------------------------------------------

    \27\ For the purposes of clarity, OCC would not consider changes 
to pricing or changes in representations, covenants, and terms of 
events of default to be changes to a term or condition that would 
require the filing of a subsequent advance notice. This would be 
OCC's position so long as pricing is at the then-prevailing market 
rate, and changes to such other provisions are immaterial to OCC as 
the seller and do not materially impair OCC's ability to draw 
against the facility.
    \28\ See Exchange Act Release No. 76821, 81 FR at 3209 
(describing OCC's proposal to submit an advance notice in connection 
with a renewal of commitments under the Non-Bank Liquidity Facility 
if: (i) OCC determined that its liquidity needs merited commitments 
above or below certain levels; (ii) OCC should seek to change the 
terms and conditions of the Non-Bank Liquidity Facility; and (iii) 
the commitment counterparty experienced a negative change to its 
credit profile or a material adverse change since entering the 
commitment or the latest renewal of the commitment). OCC 
subsequently submitted an advance notice pursuant to that commitment 
to support its ability to onboard multiple liquidity providers below 
the identified thresholds and with different term lengths to replace 
expiring commitments, see Exchange Act Release No. 89039, 85 FR at 
36445-46, and has, concurrent with the filing of File No. SR-OCC-
2022-802, submitted another advance notice to eliminate the current 
funding limit to that program in favor of an established target for 
external liquidity across all sources. See supra note 15.
---------------------------------------------------------------------------

    Absent one or more of the changes described above, OCC states that 
it does not believe that renewal of the MRA would constitute a change 
to OCC's operations that could materially affect the nature or level of 
risks presented by OCC so as to require an advance notice under Section 
806(e)(1) of the Clearing Supervision Act.\29\ OCC would consider such 
a renewal to be on substantially the same terms and conditions. 
Conversely, a new commitment or renewal under different conditions 
would necessitate OCC providing advance notice to the Commission for 
consideration.
---------------------------------------------------------------------------

    \29\ 12 U.S.C. 5465(e)(1).
---------------------------------------------------------------------------

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 systemically 
important financial market utilities (``SIFMUs'') and strengthening the 
liquidity of SIFMUs.\30\
---------------------------------------------------------------------------

    \30\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    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.\31\ 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): \32\
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 5464(a)(2).
    \32\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     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.\33\
---------------------------------------------------------------------------

    \33\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

    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'').\34\ 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.\35\ 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 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,\36\ and in 
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(7).\37\
---------------------------------------------------------------------------

    \34\ 17 CFR 240.17Ad-22. See 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).
    \35\ 17 CFR 240.17Ad-22.
    \36\ 12 U.S.C. 5464(b).
    \37\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

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.\38\
---------------------------------------------------------------------------

    \38\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The Commission believes that the addition of a Bank Repo Facility 
to OCC's overall liquidity plan is consistent with the promotion of 
robust risk management, in particular management of liquidity risk 
presented to OCC. As a central counterparty and SIFMU,\39\ it is 
imperative that OCC have adequate resources to be able to satisfy its 
counterparty settlement obligations, including in the event of a 
Clearing Member default.\40\ As described above, the Bank Repo Facility 
program would provide an additional source of liquidity to OCC's 
overall liquidity plan and increase the amount of OCC's qualifying 
liquid resources. This would promote the reduction of risks to OCC, its 
Clearing Members, and the options market in general, because it would

[[Page 55067]]

allow OCC to increase the amount and availability of short-term funds 
to address liquidity demands arising out of the default or suspension 
of a Clearing Member, or in anticipation of a potential default or 
suspension of a Clearing Member. Moreover, adding another committed 
source of liquidity resources would help OCC to manage the allocation 
between its sources of liquidity by giving OCC more flexibility to 
adjust the mix of liquidity resources based on market conditions, 
availability, and shifting liquidity needs.
---------------------------------------------------------------------------

    \39\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
    \40\ See Exchange Act Release No. 73979 (Jan. 2, 2015), 80 FR 
1062, 1065 (Jan. 8, 2015) (File No. SR-OCC-2014-809).
---------------------------------------------------------------------------

    The Commission also believes that the proposed changes to add the 
Bank Repo Facility are consistent with the promotion of safety and 
soundness. By adding a liquidity resource of up to $1 billion, OCC is 
reducing the likelihood that it would have insufficient financial 
resources to address liquidity demands arising out of a Clearing Member 
default. Further, the Commission believes that, to the extent the 
proposed changes are consistent with promoting OCC's safety and 
soundness, they are also consistent with supporting the stability of 
the broader financial system. OCC has been designated as a SIFMU, in 
part, because its failure or disruption could increase the risk of 
significant liquidity or credit problems spreading among financial 
institutions or markets.\41\ The Commission believes that the proposed 
changes would support OCC's ability to continue providing services to 
the options markets by addressing losses and shortfalls arising out of 
the default of a Clearing Member or a market disruption. OCC's 
continued operations would, in turn, help support the stability of the 
financial system by reducing the risk of significant liquidity or 
credit problems spreading among market participants that rely on OCC's 
central role in the options market.
---------------------------------------------------------------------------

    \41\ See FSOC 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited Mar. 17, 
2021).
---------------------------------------------------------------------------

    The Commission received comments asserting that the proposal would 
be harmful to U.S. markets, investors, and pension holders, and that 
``changing the rules regarding advance notice'' (likely referring to 
OCC not having to file an advance notice at renewal) has ``no value to 
the public.'' \42\ As described above, an additional liquidity source 
of $1 billion would reduce the likelihood that OCC would have 
insufficient financial resources resulting from a Clearing Member 
default, and would in fact promote the safety and soundness of the U.S. 
markets. Moreover, the Commission has carefully considered the risk of 
allowing renewals of the Bank Repo Facility without additional advance 
notice filings. Given that such a renewal would only be permitted 
without an advance notice if executed on substantially similar terms as 
those of the Bank Repo Facility,\43\ to which the Commission does not 
object, the Commission does not believe that future renewals would pose 
any more risk than the proposal considered here. Any change to the 
terms of the proposed Bank Repo Facility or a renewal thereof that 
could materially affect the nature or level of risk posed by OCC would 
necessitate an advance notice filing.
---------------------------------------------------------------------------

    \42\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm.
    \43\ OCC would submit another advance notice if: (1) OCC seeks 
funding above $1 billion; (2) OCC seeks to change the terms and 
conditions of the MRA in a manner that materially affects the nature 
or level of risk presented by OCC; (3) OCC seeks to add or 
substitute counterparties; or (4) the bank counterparty has 
experienced a negative change to its credit profile or a material 
adverse change since the latest renewal of the MRA.
---------------------------------------------------------------------------

    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.\44\
---------------------------------------------------------------------------

    \44\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(7) Under the Exchange Act

    Rule 17Ad-22(e)(7)(ii) under the Exchange Act requires that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor, and manage the liquidity risk that arises in or is 
borne by the covered clearing agency, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity by, at a minimum, holding 
qualifying liquid resources sufficient to meet the minimum liquidity 
resource requirement under Rule 17Ad-22(e)(7)(i) \45\ in each relevant 
currency for which the covered clearing agency has payment obligations 
owed to clearing members.\46\ For any covered clearing agency, 
``qualifying liquid resources'' means assets that are readily available 
and convertible into cash through prearranged funding arrangements, 
such as, committed arrangements without material adverse change 
provisions, including, among others, repurchase agreements.\47\
---------------------------------------------------------------------------

    \45\ Rule 17Ad-22(e)(7)(i) requires OCC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively measure, monitor, and manage liquidity risk 
that arises in or is borne by OCC, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and 
timely basis, and its use of intraday liquidity by, at a minimum, 
maintaining sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day settlement of payment 
obligations with a high degree of confidence under a wide range of 
foreseeable stress scenarios that includes, but is not limited to, 
the default of the participant family that would generate the 
largest aggregate payment of obligation for the covered clearing 
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
    \46\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \47\ 17 CFR 240.17Ad-22(a)(14)(ii)(3).
---------------------------------------------------------------------------

    As described above, implementation of the Bank Repo Facility would 
provide OCC with a committed funding arrangement that would give OCC 
access to $1 billion of committed liquid resources through an MRA with 
a bank counterparty. Under the terms of the MRA, OCC's bank 
counterparty would be required to provide OCC with funding subject to a 
number of conditions, including an obligation to fund regardless of any 
material adverse change at OCC, such as the failure of a Clearing 
Member. Taken together, the Commission believes that the Bank Repo 
Facility provides OCC with $1 billion of ``qualifying liquid 
resources'' as that term is defined in Rule 17Ad-22(e)(14) of the 
Exchange Act,\48\ and therefore is consistent with the requirements of 
Rule 17Ad-22(e)(7)(ii) under the Exchange Act.
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    The Commission received comments asserting that the proposal would 
leave the investing public, rather than Clearing Members, accountable 
for a Clearing Member default or a market disruption.\49\ As permitted 
by the Clearing Agency Rules, OCC maintains a number of different 
liquidity resources to manage liquidity risk, including a requirement 
that Clearing Members provide a specified amount of their Clearing Fund 
contributions in cash.\50\ As noted above, Rule 17Ad-22(a)(14) under 
the Exchange Act defines qualifying liquid resources to include assets 
that are readily available and convertible into cash through 
prearranged funding arrangements, such as committed repurchase 
agreements.\51\ OCC is proposing to arrange a facility for converting 
assets pledged by its members into cash to ensure that OCC is able to 
meet its payment obligations. Any cash provided to OCC under the

[[Page 55068]]

Bank Repo Facility would be in exchange for U.S. Government 
Securities.\52\ Retail investors would not be directly exposed to any 
potential risks arising out of the facility because the arrangement 
would be between OCC and a bank counterparty.\53\ The Commission 
believes, therefore, that the facility would not relieve Clearing 
Members from collateralizing the risks they pose to OCC or 
inappropriately shift such risks to the investing public.\54\
---------------------------------------------------------------------------

    \49\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm.
    \50\ See OCC Rule OCC 1002(a)(i). OCC increased the amount of 
cash that Clearing Members are required to provide to address 
liquidity exposures twice in 2021. See OCC Info Memo 48995 (Jul. 16, 
2021), available at https://infomemo.theocc.com/infomemos?number=48995 and OCC Info Memo 49316 (Sep. 28, 2021) 
available at https://infomemo.theocc.com/infomemos?number=49316.
    \51\ 17 CFR 240.17Ad-22(a)(14)(ii).
    \52\ See Bank Repo Facility Notice of Filing, 87 FR at 44458.
    \53\ Id. at 44457.
    \54\ The Commission also received comments asserting that the 
proposal would leave the investing public accountable for a Clearing 
Member default, specifically because the OCC proposes to obtain 
liquidity from pension funds. See comments on the Advance Notice at 
https://www.sec.gov/comments/sr-occ-2022-802/srocc2022802.htm. These 
comments were likely intended for OCC's concurrent proposal to 
expand its Non-Bank Liquidity Facility program, but were erroneously 
submitted as comments for the Bank Repo Facility proposal. These 
comments have been considered and addressed as part of the Non-Bank 
Liquidity Facility proposal. See Exchange Act Release No. 95327 
(Jul. 20, 2022), 87 FR 44477 (Jul. 26, 2022) (File No. SR-OCC-2022-
803).
---------------------------------------------------------------------------

    Accordingly, the Commission believes that the changes proposed in 
the Advance Notice are consistent with Rule 17Ad-22(e)(7) under the 
Exchange Act.\55\
---------------------------------------------------------------------------

    \55\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------

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-2022-802) and that OCC is authorized to 
implement the proposed change as of the date of this notice.

    By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-19413 Filed 9-7-22; 8:45 am]
BILLING CODE P