Document ID: SEC-2016-1722-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2016-09-27T04:00Z

[Federal Register Volume 81, Number 187 (Tuesday, September 27, 2016)]
[Notices]
[Pages 66318-66320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23223]

[[Page 66318]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78893; File No. SR-OCC-2016-803]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice of and No Objection to the Options 
Clearing Corporation's Proposal To Enter Into a New Credit Facility 
Agreement

September 21, 2016.
    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 (``Payment, Clearing 
and Settlement Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under 
the Securities Exchange Act of 1934 (``Act''), notice is hereby given 
that, on August 29, 2016, The Options Clearing Corporation (``OCC'') 
filed an advance notice (SR-OCC-2016-803) with the Securities and 
Exchange Commission (``Commission''). The advance notice is described 
in Items I and II below, which Items have been prepared by OCC. The 
Commission is publishing this notice to solicit comments on the advance 
notice from interested persons, and to provide notice that the 
Commission does not object to the changes set forth in the advance 
notice and authorizes OCC to implement those changes earlier than 60 
days after the filing of the advance notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice is being filed in connection with a proposed 
change in the form of the replacement of a revolving credit facility 
that OCC maintains for a 364-day term for the purpose of meeting 
obligations arising out of the default or suspension of a clearing 
member, in anticipation of a potential default by a clearing member, or 
the failure of a bank or securities or commodities clearing 
organization to perform its obligations due to its bankruptcy, 
insolvency, receivership or suspension of operations.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the advance notice and 
discussed any comments it received on the advance notice. 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 and B below, 
of the most significant aspects of these statements.

A. Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with 
respect to the advance notice and none have been received.

B. Advance Notice Filed Pursuant to Section 806(e) of the Payment, 
Clearing, and Settlement Supervision Act

    This advance notice is being filed in connection with a proposed 
change in the form of the replacement of a revolving credit facility 
that OCC maintains for a 364-day term for the purpose of meeting 
obligations arising out of the default or suspension of a clearing 
member, in anticipation of a potential default by a clearing member, or 
the failure of a bank or securities or commodities clearing 
organization to perform its obligations due to its bankruptcy, 
insolvency, receivership or suspension of operations. OCC's existing 
credit facility (``Existing Facility'') was implemented on October 5, 
2015 through the execution of a Credit Agreement among OCC, Bank of 
America, N.A. (``BofA''), as administrative agent, and the lenders that 
are parties to the agreement from time to time. The Existing Facility 
provides short-term secured borrowings in an aggregate principal amount 
of $2 billion but may be increased to $3 billion if OCC so requests and 
sufficient commitments from lenders are received and accepted. To 
obtain a loan under the Existing Facility, OCC must pledge as 
collateral U.S. dollars or certain securities issued or guaranteed by 
the U.S. Government or the Government of Canada. Certain mandatory 
prepayments or deposits of additional collateral are required depending 
on changes in the collateral's market value. In connection with OCC's 
past implementation of the Existing Facility, OCC filed an advance 
notice with the Commission on September 9, 2015 [sic], and the 
Commission published a Notice of No-Objection on October 1, 2015.\3\
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    \3\ See Securities Exchange Act Release No. 76062 (October 1, 
2015), 80 FR 64028 (October 22, 2015) (SR-OCC-2015-803).
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    The Existing Facility is set to expire on October 3, 2016, and OCC 
is therefore currently negotiating the terms of a new credit facility 
(``New Facility'') on substantially similar terms as the Existing 
Facility.
    The terms and conditions applicable to the New Facility are set 
forth in the Summary of Terms and Conditions, which is not a public 
document.\4\ OCC has separately submitted a request for confidential 
treatment to the Commission regarding the Summary of Terms and 
Conditions, which is included in this filing as Exhibit 3. The 
conditions regarding the availability of the New Facility, which OCC 
anticipates will be satisfied on or before October 3, 2016, include the 
execution and delivery of (i) a credit agreement between OCC and the 
administrative agent, collateral agent and various lenders under the 
New Facility, (ii) a pledge agreement between OCC and the 
administrative agent or collateral agent, and (iii) such other 
documents as may be required by the parties. The definitive 
documentation concerning the New Facility is expected to be consistent 
with the Summary of Terms and Conditions and substantially similar to 
that concerning the Existing Facility, although it may include certain 
changes as may be necessary regarding administrative and operational 
terms being finalized between the parties. Language will be added to 
the credit agreement in order to permit European Economic Area 
(``EEA'')-based lenders under the New Facility to comply with new 
``bail-in'' requirements under European law. Specifically, OCC would 
agree in the credit agreement that, liabilities of lenders that are 
classified as ``EEA Financial Institutions'' under the relevant law are 
subject to potential write-down or conversion into equity by EEA 
regulators.\5\
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    \4\ The Summary of Terms and Conditions for the New Facility 
clarifies certain terms regarding mandatory prepayments or deposits 
of additional collateral, which, as described above, are also 
features of the Existing Facility.
    \5\ EU Directive 2014/59, often referred to as the Bank 
Resolution and Recovery Directive, contains wide-ranging recovery 
and resolution powers for EEA regulators to facilitate the rescue of 
a failing EEA financial institution. These powers include the 
ability for an EEA regulator to write-down and/or convert into 
equity a failing institution's liabilities. Article 55 of the 
Directive requires EEA financial institutions to include in certain 
documents, such as credit agreements, governed by the law of a non-
EEA country an acknowledgment that obligations of the EEA financial 
institutions are subject to the exercise of write-down and 
conversion powers.
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    The New Facility involves a variety of customary fees payable by 
OCC, including: (1) An arrangement fee payable to the joint lead 
arrangers; (2) administrative and collateral agent fees payable to the 
administrative agent and collateral agent if the New Facility closes; 
(3) upfront commitment fees payable to the lenders based on the

[[Page 66319]]

amount of their commitments; and (4) an ongoing quarterly commitment 
fee based on the unused amount of the New Facility.
Anticipated Effect on and Management of Risk
    Completing timely settlement is a key aspect of OCC's role as a 
clearing agency performing central counterparty services. Overall, the 
New Facility would continue to promote the reduction of risks to OCC, 
its clearing members and the options market in general because it would 
allow OCC to obtain short-term funds to address liquidity demands 
arising out of the default or suspension of a clearing member, in 
anticipation of a potential default or suspension of clearing members 
or the insolvency of a bank or another securities or commodities 
clearing organization. The existence of the New Facility would 
therefore help OCC minimize losses in the event of such a default, 
suspension or insolvency, by allowing it to obtain funds on extremely 
short notice to ensure clearance and settlement of transactions in 
options and other contracts without interruption. OCC believes that the 
reduced settlement risk presented by OCC resulting from the New 
Facility would correspondingly reduce systemic risk and promote the 
safety and soundness of the clearing system. By drawing on the New 
Facility, OCC would also be able to avoid liquidating margin or 
clearing fund assets in what would likely be volatile market 
conditions, which would preserve funds available to cover any losses 
resulting from the failure of a clearing member, bank or other clearing 
organization. Because the New Facility generally preserves the same 
terms and conditions as the Existing Facility, OCC believes that the 
change would not otherwise affect or alter the management of risk at 
OCC. Moreover, and [sic] while the credit agreement for the New 
Facility would contain the ``bail-in'' acknowledgment discussed above, 
OCC has existing processes in place to monitor the financial health of 
lenders under the Existing and New Facilities, including European-based 
lenders under the New Facility. In the event that a lender were 
experiencing [sic] financial difficulties that triggered a bail-in 
risk, OCC could exercise its right to seek a replacement lender.
Consistency With the Payment, Clearing and Settlement Supervision Act
    OCC believes that the New Facility is consistent with Section 
805(b)(1) of the Payment Clearing and Settlement Supervision Act \6\ 
because it promotes robust risk management by OCC of settlement and 
liquidity risk. The New Facility would promote robust risk management 
of these risks by providing OCC with timely access to a stable and 
reliable liquidity funding source to help it complete timely clearing 
and settlement.
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    \6\ 12 U.S.C. 5464(b)(1).
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Accelerated Commission Action Requested
    Pursuant to Section 806(e)(1)(I) of the Payment, Clearing and 
Settlement Supervision Act,\7\ OCC requests that the Commission notify 
OCC that it has no objection to the New Facility not later than 
Wednesday, September 28, 2016, which is three business days prior to 
the October 3, 2016 expiration date of the Existing Facility. OCC 
requests Commission action three business days in advance of the 
effective date in order to ensure that there is no period of time that 
OCC operates without this essential liquidity resource, given its 
importance to OCC's borrowing capacity in connection with its 
management of liquidity and settlement risk and timely completion of 
clearance and settlement.
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    \7\ 12 U.S.C. 5465(e)(1)(I).
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III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. OCC shall not implement the proposed change if the Commission 
has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the OCC with prompt written notice of the 
extension. A proposed change may be implemented in less than 60 days 
from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies OCC in writing that it does not object to the proposed change 
and authorizes OCC to implement the proposed change on an earlier date, 
subject to any conditions imposed by the Commission.
    OCC shall post notice on its Web site of proposed changes that are 
implemented.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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-2016-803 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-2016-803. 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 advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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 
(http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_16_803.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-2016-803 and should be submitted on or before October 18, 2016.

V. Commission's Findings and Notice of No Objection

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, its stated 
purpose is

[[Page 66320]]

instructive.\8\ The stated purpose is 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 (``FMUs'') and strengthening the 
liquidity of systemically important FMUs.\9\ Section 805(a)(2) of the 
Payment, Clearing and Settlement Supervision Act \10\ authorizes the 
Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities and 
financial institutions engaged in designated activities for which it is 
the Supervisory Agency or the appropriate financial regulator. Section 
805(b) of the Payment, Clearing and Settlement Supervision Act \11\ 
states that the objectives and principles for the risk management 
standards prescribed under Section 805(a) shall be to:
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    \8\ See 12 U.S.C. 5461(b).
    \9\ Id.
    \10\ 12 U.S.C. 5464(a)(2).
    \11\ 12 U.S.C. 5464(b).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Payment, Clearing and Settlement Supervision Act \12\ 
and the Act (``Clearing Agency Standards'').\13\ The Clearing Agency 
Standards require registered clearing agencies to establish, implement, 
maintain, and enforce written policies and procedures that are 
reasonably designed to meet certain minimum requirements for their 
operations and risk management practices on an ongoing basis.\14\ 
Therefore, it is appropriate for the Commission to review advance 
notices against these Clearing Agency Standards and the objectives and 
principles of these risk management standards as described in Section 
805(b) of the Payment, Clearing and Settlement Supervision Act.\15\
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    \12\ 12 U.S.C. 5464(a)(2).
    \13\ See Exchange Act Rule 17Ad-22. 17 CFR 240.17Ad-22. 
Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 
66220 (November 2, 2012) (S7-08-11).
    \14\ Id.
    \15\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposal in the advance notice is 
consistent with the Clearing Agency Standards, in particular, Rule 
17Ad-22(d)(11) under the Act and Rule 17Ad-22(b)(3) under the Act.\16\ 
Rule 17Ad-22(d)(11) under the Act \17\ requires that registered 
clearing agencies ``establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable . . . 
establish default procedures that ensure that the clearing agency can 
take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant 
default.'' The Commission believes that the proposal is consistent with 
Rule 17Ad-22(d)(11) under the Act \18\ because the New Facility will 
allow OCC to obtain short-term funds to address liquidity demands 
arising out of the default or suspension of a clearing member, in 
anticipation of a potential default or suspension of clearing members 
or the insolvency of a bank or another securities or commodities 
clearing organization. Therefore, the New Facility should help OCC 
minimize losses in the event of such a default, suspension or 
insolvency, by allowing it to obtain funds on extremely short notice to 
ensure clearance and settlement of transactions in options and other 
contracts without interruption.
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    \16\ 17 CFR 240.17Ad-22(d)(11) and 17 CFR 240.17Ad-22(b)(3), 
respectively.
    \17\ 17 CFR 240.17Ad-22(d)(11).
    \18\ Id.
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    Rule 17Ad-22(b)(3) under the Act \19\ requires a central 
counterparty to ``establish, implement, maintain and enforce written 
policies and procedures reasonably designed to . . . [m]aintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant family to which it has the largest exposure in extreme 
but plausible market conditions . . . .'' The Commission believes that 
the proposal is consistent with Rule 17Ad-22(b)(3) under the Act \20\ 
because OCC's proposal to enter into the New Facility, thereby ensuring 
continued access to a committed bank syndicated credit facility, will 
help OCC maintain sufficient financial resources to withstand, at a 
minimum, a default by an clearing member family to which it has the 
largest exposure.
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    \19\ 17 CFR 240.17Ad-22(b)(3).
    \20\ Id.
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    For these reasons, the Commission believes the proposal contained 
in the advance notice is consistent with the objectives and principles 
described in Section 805(b) of the Payment, Clearing and Settlement 
Supervision Act,\21\ including that it reduces systemic risks and 
promote the safety and soundness of the broader financial system. As 
discussed above, the New Facility will continue to promote the 
reduction of risks to OCC, its clearing members, and the options market 
in general because it will allow OCC to obtain short-term funds to 
address liquidity demands, which should ensure clearance and settlement 
of transactions in options and other contracts without interruption. 
Given that OCC has been designated as a systemically important FMU, its 
ability to access financial resources to address short-term liquidity 
demands contributes to reducing systemic risks and supporting the 
stability of the broader financial system.
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    \21\ 12 U.S.C. 5464(b).
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    For these reasons, stated above, the Commission does not object to 
the advance notice.

VI. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\22\ that the 
Commission does not object to the proposed change, and authorizes OCC 
to implement the change in the advance notice (SR-OCC-2016-803) as of 
the date of this notice.
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    \22\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23223 Filed 9-26-16; 8:45 am]
 BILLING CODE 8011-01-P