Document ID: SEC-2016-1119-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2016-06-30T04:00Z

[Federal Register Volume 81, Number 126 (Thursday, June 30, 2016)]
[Notices]
[Pages 42777-42779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15455]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78151; File No. SR-OCC-2016-003]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Related to the Acceptance of Pass-Through Letters of Credit as a Form 
of Margin Asset

June 24, 2016.
    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 June 17, 2016, 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. OCC filed the proposed rule change pursuant to 
Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(4)(ii) 
thereunder \4\ so that the proposal was effective upon filing with the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change by OCC would amend OCC Rule 604 to permit 
pass-through letters of credit (``Pass-Through Letters of Credit'') as 
a form of margin asset to satisfy margin obligations for futures, 
futures options, and commodity options positions (collectively referred 
to as ``futures positions'') held in segregated futures accounts and 
segregated futures professional accounts (collectively referred to as 
``segregated futures accounts'') that are not eligible to hold 
positions in security futures.\5\ Capitalized terms not defined herein 
have the same meaning as set forth in the OCC By-Laws and Rules.
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    \5\ See OCC By-Laws Article I, Section 1.S.(5) and (6) defining 
segregated futures accounts and segregated futures professional 
accounts.
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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 the proposed rule change is to amend OCC Rule 604 to 
permit Pass-Through Letters of Credit as a form of margin asset to 
satisfy margin

[[Page 42778]]

obligations for positions held in segregated futures accounts that are 
not eligible to hold positions in security futures in order to provide 
futures market participants with the ability to deposit similar forms 
of collateral for segregated futures accounts at OCC as they could 
deposit at other futures clearinghouses. OCC Rule 604(c) allows 
Clearing Members to deposit letters of credit as a form of margin asset 
provided that such letters of credit meet the form prescribed by OCC 
and satisfy the robust eligibility requirements and risk controls 
enumerated under the Rule.\6\ OCC currently accepts two party letters 
of credit as a form of margin asset under Rule 604(c), which are 
letters of credit issued by an OCC approved bank or trust on behalf of 
a Clearing Member, with OCC as beneficiary. Such letters of credit may 
be used by Clearing Members to meet margin obligations arising from 
positions held in any OCC account type.
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    \6\ Rule 604(c) requires, among other things, that: (i) Letters 
of credit must contain the unqualified commitment of the issuer to 
pay a specified sum of money to OCC within certain specified time 
periods; (ii) all letters of credit must be irrevocable; and (iii) 
OCC may draw upon a letter of credit at any time, whether or not the 
Clearing Member that deposited such letter of credit has been 
suspended by OCC or is in default with respect to any obligation to 
OCC, if OCC determines that such draw is advisable to protect OCC, 
other Clearing Members, or the general public. Moreover, if a 
Clearing Member deposits a letter of credit that indicates on its 
face that it is being deposited to serve as margin for the Clearing 
Member's customers' account or for a segregated futures account, 
such letter of credit shall not constitute margin for any other 
account maintained by the Clearing Member until such time as the 
issuing bank shall instruct OCC by amendment to the letter of credit 
stating that such letter of credit is not so restricted. See OCC 
Rule 604(c)(1) and (3). Letters of credit are also subject to 
specific eligibility standards for issuing banks and both Clearing 
Member and issuer concentration limits. Specifically, no more than 
50% of a Clearing Member's margin on deposit at any given time may 
include letters of credit in the aggregate, and no more than 20% may 
include letters of credit issued by any one institution. Moreover, 
the total amount of letters of credit issued for the account of any 
one Clearing Member by a U.S. or Non-U.S. institution shall not 
exceed 15% of such institution's Tier 1 Capital. See OCC Rule 604, 
Interpretations and Policies .01, .02, and .04.
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    Recently, certain futures market participants have inquired about 
using Pass-Through Letters of Credit as a form of margin asset at OCC. 
Pass-Through Letters of Credit are letters of credit issued on behalf 
of a third party (in this case, a customer of a Clearing Member) with a 
joint beneficiary structure that would allow the Clearing Member, as a 
joint beneficiary, to ``pass through'' the letter of credit directly to 
the clearinghouse, as joint beneficiary, and avoid the need for the 
Clearing Member to write its own letter of credit to the clearinghouse 
or to deposit cash margin on behalf of the customer. Pass-Through 
Letters of Credit are standard collateral vehicles accepted by other 
futures clearinghouses, particularly clearinghouses that provide 
clearance and settlement services for energy futures products. In order 
to provide OCC's futures commission merchant (``FCM'') Clearing Members 
with the ability to deposit similar forms of collateral for segregated 
futures accounts as they could deposit at other futures clearinghouses, 
OCC proposes to add new Interpretation and Policy .10 to Rule 604 to 
permit its FCM Clearing Members to deposit Pass-Through Letters of 
Credit as margin assets to satisfy margin requirements for their 
futures customers. Pass-Through Letters of Credit would be permitted 
only to satisfy margin obligations for positions held in segregated 
futures accounts and would not be available as a form of margin asset 
to satisfy margin obligations for securities products.\7\
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    \7\ In connection with the proposed rule change, OCC would 
implement procedural checks and verifications in its Collateral 
Services and Member Services Departments to ensure that (1) Pass-
Through Letters of Credit would not be permitted to be allocated to 
a segregated futures account unless that account is not eligible to 
hold positions in security futures and (2) accounts holding Pass-
Through Letters of Credit as a form of margin asset would not be 
enabled to hold positions in security futures.
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    Pass-Through Letters of Credit would be subject to the same 
requirements and risk controls of Rule 604 as the currently accepted 
two party letters of credit. Pass-Through Letters of Credit deposited 
as margin assets would be based on the industry standard Unified 
Clearing Group Uniform Letter of Credit Terms--(Pass-Through), would be 
consistent with terms accepted by other futures clearinghouses, and 
would work similarly to the two party letters of credit currently used 
by OCC Clearing Members. Specifically, the issuing bank would be 
required to notify OCC of any changes to the terms of the letter of 
credit (and in certain cases, OCC would be required to affirmatively 
accept such changes) prior to such changes becoming effective. The 
issuing bank would be required to inform OCC in the event that a 
Clearing Member beneficiary wished to draw on the letter of credit, and 
all potential draws on the letter of credit, regardless of who 
initiates them, would be deposited directly into the FCM Clearing 
Member's OCC segregated futures account and would be subject to all of 
the rules and limitations surrounding the use and withdraw [sic] of 
margin funds under OCC's Rules. For these reasons, OCC believes that 
Pass-Through Letters of Credit, under the terms and restrictions 
described above, are similar to the existing two party letters of 
credit currently on deposit as margin assets at OCC and do not raise 
any unique risks to OCC.
    In addition, existing Interpretations and Policies .10-.16 to Rule 
604 would be renumbered but otherwise remain unchanged.
(2) Statutory Basis
    OCC believes that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act,\8\ and the rules thereunder applicable 
to OCC. As noted above, the form of Pass-Through Letters of Credit that 
would be accepted by OCC would have terms that work similarly to the 
two party letters of credit currently used by OCC Clearing Members and 
would be subject to the same restrictions and safeguards contained in 
Rule 604 and the Interpretations and Policies thereunder.\9\ These 
safeguards include, among other things, that letters of credit 
deposited as margin assets have an unqualified commitment of the issuer 
to pay OCC within certain specified time periods, that all letters of 
credit must be irrevocable, and that OCC may draw upon a letter of 
credit at any time, whether or not the Clearing Member that deposited 
such letter of credit has been suspended by OCC or is in default with 
respect to any obligation to OCC. Moreover, the issuer and 
concentration limits for letters of credit deposited as margin assets 
are designed to ensure that OCC does not have excessive exposure to a 
particular issuing bank or to letters of credit generally as a form of 
margin asset. These requirements are designed to minimize the risk of 
loss or delay in OCC's access to funds payable under the letter of 
credit and reduce the likelihood that OCC would need to use the 
mutualized resources in its Clearing Fund to fulfill obligations 
arising from Clearing Members depositing letters of credit as a form of 
margin asset.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ See supra note 6 and related text.
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    In addition to the restrictions and safeguards under Rule 604, the 
terms of the Pass-Through Letters of Credit would require that they 
effectively operate similarly to the two party letters of credit 
currently on deposit as margin assets at OCC. For example, OCC must be 
notified of (and in certain cases must affirmatively accept) any 
changes to the terms of the letter of credit, the issuing bank would be 
required to inform OCC in the case that the Clearing Member beneficiary 
wished to draw on the letter of credit, and all potential draws on the 
letter of credit, regardless of who initiates them, would be deposited

[[Page 42779]]

directly into the FCM Clearing Member's segregated futures account.
    For the reasons stated above, OCC believes that the proposed rule 
change is designed to assure the safeguarding of securities and funds 
which are in the custody or control of OCC or for which it is 
responsible in accordance with Section 17A(b)(3)(F) of the Act \10\ and 
is reasonably designed to ensure that OCC holds margin assets in a 
manner that minimizes risk of loss or delay in its access to them, 
consistent with Rule 17Ad-22(d)(3).\11\ The proposed rule change is not 
inconsistent with the existing rules of OCC, including any other rules 
proposed to be amended.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 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 have any 
impact or impose any burden on competition\12\ not necessary or 
appropriate in furtherance of the Act because it pertains solely to 
OCC's activities relating to the clearing of commodity futures products 
subject to the exclusive jurisdiction of the CFTC and therefore would 
not have any impact or impose any burden on competition in securities 
markets or any other market governed by the Act.
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    \12\ 15 U.S.C. 78q-1(b)(3)(I).
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(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

    The foregoing rule change has become effective upon filing \13\ 
pursuant to Section 19(b)(3)(A)(iii) of the Act \14\ and Rule 19b-
4(f)(4)(ii) thereunder \15\ because it effects a change in an existing 
service of OCC that (i) primarily affects the clearing operations of 
OCC with respect to products that are not securities, including futures 
that are not security futures and (ii) does not significantly affect 
any securities clearing operations of OCC or any rights or obligations 
of OCC with respect to securities clearing or persons using such 
securities-clearing service. At any time within 60 days of the filing 
of the proposed rule change, the Commission summarily may temporarily 
suspend such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \13\ Notwithstanding the immediate effectiveness of the proposed 
rule change, implementation of this rule change is also contingent 
on it being deemed certified under CFTC Regulation Sec.  40.6.
    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(4)(ii).
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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-2016-003 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-2016-003. 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 such filings 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_16_003.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-2016-003 and 
should be submitted on or before July 21, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-15455 Filed 6-29-16; 8:45 am]
 BILLING CODE 8011-01-P