Document ID: SEC-2014-1680-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2014-10-06T04:00Z

[Federal Register Volume 79, Number 193 (Monday, October 6, 2014)]
[Notices]
[Pages 60214-60217]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23698]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73257; File No. SR-OCC-2014-806]

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 a New Credit Facility 
Agreement

September 30, 2014.
    Notice is hereby given that, on September 11, 2014, The Options 
Clearing Corporation (``OCC'') filed an advance notice with the 
Securities and Exchange Commission (``Commission'') pursuant to Section 
806(e) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act,\1\ entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Payment, Clearing, and Settlement 
Supervision Act''), and Rule 19b-4(n)(1)(i) of the Securities Exchange 
Act of 1934 (``Exchange Act'').\2\ 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 from 
interested persons, and to provide notice that the Commission has no 
objection 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\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (2010). OCC was designated as a 
systemically important financial market utility by the Financial 
Stability Oversight Council on July 18, 2012. See Financial 
Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply 
with Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
    \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 filed by OCC in connection with a proposed 
change to its operations to replace an existing credit facility OCC 
maintains for the purposes 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 Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing, and Settlement Supervision Act

(i) Description of Change
    This advance notice is being filed in connection with a proposed 
change in the form of the replacement of a credit facility that OCC 
maintains for the purposes 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 (the 
``Existing Facility'') was implemented on October 10, 2013 through the 
execution of a Credit Agreement among OCC, JPMorgan Chase Bank, N.A. 
(``JPMorgan''), as administrative agent, and the lenders that are 
parties to the agreement from time to time, which provides short-term 
secured borrowings in an aggregate principal amount of $2 billion and 
may be increased to $3 billion.\3\
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    \3\ On May 12, 2014, OCC executed an amendment to the Existing 
Facility regarding its ability to pledge Canadian Government 
securities to support borrowings. To hold Canadian Government 
securities and Canadian dollars pledged by OCC, JPMorgan established 
at its London branch a securities and a deposit account in the name 
of JPMorgan, as administrative agent for the Existing Facility. OCC 
and JPMorgan executed an English law governed charge agreement 
pursuant to which OCC pledged the securities and cash at any time 
deposited in such accounts. A new English law governed charge 
agreement is expected to be entered into in connection with the New 
Facility.
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    The Existing Facility is set to expire on October 9, 2014 and OCC 
is therefore currently negotiating the terms of a new credit facility 
(the ``New Facility'') on substantially similar terms as the Existing 
Facility, except that enhancements are being added for a back-up 
administrative agent in case the primary administrative agent is unable 
to perform its obligations and to allow OCC to request borrowings 
directly from individual lenders. A back-up administrative agent would 
provide OCC with additional safety and stability in the event the 
primary administrative agent is not able to perform its duties under 
the new Facility. On September 5, 2014, OCC received a Commitment 
Letter with regard to the New Facility from: JPMorgan, the 
administrative agent, collateral agent, and a lender for the New 
Facility; J.P. Morgan Securities LLC (``JPMorgan Securities''), the 
joint lead arranger for the New Facility; Merrill Lynch, Pierce, Fenner 
& Smith Incorporated (``MLPF&S''), the joint lead arranger for the New 
Facility; and Bank of America, N.A. (``BANA''), the syndication agent 
and a lender for the New Facility.
    The terms and conditions applicable to the New Facility are set 
forth in the Summary of Terms and Conditions attached to this filing as 
Exhibit 3. The conditions to the availability of the new facility 
include the execution and delivery of (i) a credit agreement between 
OCC, JPMorgan, BANA and the various lenders under the New Facility, 
(ii) a pledge agreement between OCC and JPMorgan, and (iii) a custodian 
agreement between OCC and JPMorgan which OCC anticipates will occur on 
or before October 7, 2014.
    Upon the successful syndication of the New Facility, a syndicate of 
banks, financial institutions and other entities will make loans to OCC 
on request. The aggregate amount of loans available under the facility, 
subject to the value of eligible collateral, is up to $2 billion. 
During the term of the New Facility, the amount of the New Facility may 
be increased to up to $3 billion if OCC so requests and if sufficient 
commitments from lenders are received and accepted.\4\
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    \4\ OCC is in the process of finalizing an additional $1 billion 
of liquidity with a non-bank provider to promote observance of its 
minimum liquidity requirements.
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    The Existing Facility included a tranche that could be drawn on in

[[Page 60215]]

dollars or euros and a dollar-only tranche. The dollar equivalent of 
the total loans denominated in euros under the euro/dollar tranche of 
the Existing Facility could not exceed $100 million. The New Facility 
does not contain a euro/dollar tranche, the ability to borrow in euros 
or a euro administrative agent because OCC no longer has any euro-
denominated product lines. Additionally, the Existing Facility provided 
OCC with the ability to make test borrowings, which become due and 
payable on the day after such borrowings are made, in an amount not 
greater than $10,000,000 for the purpose of testing communication and 
draw procedures. Under the New Facility, the $10,000,000 cap on test 
borrowings will be removed so that test draws can more closely simulate 
the dollar amount of an actual draw and to be consistent with other 
credit facilities in the marketplace that do not have caps on test 
draws.
    The New Facility is available on a revolving basis for a 364-day 
term. OCC may request a loan under the New Facility on any business day 
by providing a notice to JPMorgan, as administrative agent, which will 
then notify the lenders, who will be required to fund their pro rata 
share of any requested loan within a specified period of time after 
receiving notice from JPMorgan. The funding deadline is designed to 
permit OCC to obtain funds on the date of the request, subject to a 
cutoff time after which funding will occur on the next business day. 
Each loan issued pursuant to the New Facility matures and is payable 30 
days after the borrowing date, except for test borrowings under the 
facility, which mature and are payable one business day after the 
borrowing date. Proceeds of loans under the New Facility must be used 
to meet the obligations of OCC 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 to OCC. In order to 
obtain a loan under the facility, OCC must pledge as collateral U.S. 
dollars or securities issued or guaranteed by the U.S. Government or 
the Government of Canada that are margin deposits of suspended members 
or that are held in OCC's clearing fund, and in either case the 
administrative agent must have a valid and enforceable first priority 
perfected lien and security interest in such collateral under the 
applicable laws of the United States or other applicable jurisdiction. 
Securities issued by the Government of Canada will only be eligible to 
be pledged as collateral if they have a minimum rating of AAA/Aaa as 
determined by S&P or Moody's. OCC has the authority to pledge these 
assets in connection with borrowings under Section 5(e) of Article VIII 
of its By-Laws and Rule 1104(b).
    The amount available under the New Facility at any given point in 
time is equal to the lesser of (i) $2 billion, or the increased size of 
the facility, if applicable, and (ii) the sum of (A) 90% of the value 
of OCC's clearing fund that is not subject to liens or encumbrances 
granted by OCC other than in connection with the New Facility and (B) 
90% of the value of unencumbered margin deposits of suspended clearing 
members that are not subject to liens or encumbrances granted by OCC 
other than in connection with the New Facility. If the aggregate 
principal amount of loans under the New Facility exceeds the amount 
available under this formula, OCC must prepay loans, obtain the release 
of liens and/or require additional margin and/or clearing fund deposits 
to cure the deficiency. A condition to the making of any loan under the 
New Facility is that, after giving effect to the loan, the dollar value 
of the aggregate loans under the New Facility may not exceed the 
``borrowing base.'' The borrowing base is determined by adding the 
value of all collateral pledged in connection with all loans under the 
New Facility, after applying ``haircuts'' to U.S. and Canadian 
Government securities based on their remaining maturity. If the 
borrowing base is less than the sum of 100% of the outstanding loans 
under the New Facility, OCC must repay loans or pledge additional 
collateral to cure the deficiency. There are additional customary 
conditions to the making of any loan under the New Facility, including 
that OCC is not in default. Importantly, however, the absence of a 
material adverse change affecting OCC is not a condition to the making 
of a loan. Loans may be prepaid at any time without penalty.
    Events of default by OCC under the New Facility include, but are 
not limited to, non-payment of principal, interest, fees or other 
amounts when due; non-compliance with a daily borrowing base when loans 
are outstanding; material inaccuracy of representations and warranties; 
bankruptcy events; fundamental changes; and failure to maintain a first 
priority perfected security interest in collateral. In the event of a 
default, the interest rate applicable to outstanding loans would 
increase by 2.00%. The New Facility also includes customary defaulting 
lender provisions, including provisions that restrict the defaulting 
lender's voting rights, permit set-offs of payments against the 
defaulting lender and suspend the defaulting lender's right to receive 
commitment fees.
    The New Facility involves a variety of customary fees payable by 
OCC, including: (1) A one-time arrangement fee payable to JPMorgan 
Securities and MLPF&S (2) a one-time administrative and collateral 
agent fee payable to JPMorgan if the New Facility closes; (3) upfront 
commitment fees payable to the lenders based on the amount of their 
commitments; and (4) an ongoing quarterly commitment fee based on the 
unused amount of the New Facility.
(ii) Anticipated Effect on and Management of Risk
    Overall, the New Facility reduces the 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 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 could enable OCC to minimize losses 
in the event of such a default, suspension or insolvency, by allowing 
it to obtain funds on extremely short notice to ensure that the 
clearance and settlement of transactions in options and other contracts 
occurs without interruption. By drawing on the facility OCC would 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 another clearing organization. OCC's entering into the 
New Facility will not increase the risks associated with its clearing 
function because it is entered into on substantially the same terms as 
the Existing Facility.
    Two additional features carried through from the Existing Facility 
to the New Facility will enhance OCC liquidity and reduce risk. The 
inclusion of Canadian Government securities as eligible collateral will 
increase the amount of OCC collateral that can be pledged to support 
borrowings under the New Facility, resulting in increased availability 
of loans. The clarification that OCC may borrow under the New Facility 
in anticipation of a potential default by or suspension of a clearing 
member may be subject to a requirement that OCC provide JPMorgan with 
documentation supporting its authorization to do so.

[[Page 60216]]

    While the New Facility will, in general, reduce the risks 
associated with OCC's clearing function, like any lending arrangement 
the New Facility involves risks. One of the primary risks to OCC and 
its clearing function associated with the New Facility is the risk that 
a lender fails to fund when OCC requests a loan, because of the 
lender's insolvency or otherwise. This risk is mitigated through the 
use of a syndicated facility, which does not depend on the 
creditworthiness of a small number of lenders. In addition, the New 
Facility has lender default provisions designed to discourage lenders 
from failing to fund loans. Moreover, OCC has the ability under the New 
Facility to replace a defaulting lender. Finally, in the event a 
particular lender fails to fund its portion of the requested loan, the 
New Facility includes provisions pursuant to which OCC may request 
``covering'' loans from non-defaulting lenders to make up the 
shortfall. Alternatively, OCC may simply make a second borrowing 
request for the shortfall amount that lenders are committed to make, 
subject to OCC's satisfying the borrowing conditions for the second 
loan, although in either case the total amount available for borrowing 
under the New Facility would be reduced by the unfunded commitment of 
the defaulting lender. The failure by one or more lenders to fund the 
first loan does not relieve the lenders of their commitment to fund the 
second loan.
    A second risk associated with the New Facility is the risk that OCC 
is unable to repay a loan within 30 days, which would allow the lenders 
to seize the pledged collateral and liquidate it, potentially at 
depressed prices that would result in losses to OCC. OCC believes that 
this risk is at a manageable level, because 30 days should be an 
adequate period of time to allow OCC to generate funds to repay the 
loans under the New Facility, such as by liquidating clearing fund 
assets other than those pledged to secure the loans. As provided in 
Section 5(e) of Article VIII of its By-Laws, if the loans have not been 
repaid within 30 days, the amount of clearing fund assets used to 
secure the loans will be considered to be an actual loss to the 
clearing fund, which will be allocated in accordance with Section 5 of 
Article VIII, and the proceeds of such allocation can be used to repay 
the loans.
(iii) Consistency With the Payment, Clearing, and Settlement 
Supervision Act
    OCC believes that the proposed change is consistent with Section 
805(b) of the Payment, Clearing and Settlement Supervision Act \5\ 
because it will promote robust risk management.\6\ The New Facility 
would provide OCC with an additional source of liquidity to meet its 
settlement obligations while at the same time being structured to 
address certain risks, as described above, that arise in connection 
with the New Facility. The New Facility could also enable OCC to 
minimize losses in the event of a default, suspension or insolvency, by 
allowing it to obtain funds on extremely short notice to ensure that 
the clearance and settlement of transactions in options and other 
contracts occurs without interruption. Moreover, the New Facility would 
permit OCC to avoid liquidating margin or clearing fund assets in what 
would likely be volatile market conditions and preserve sufficient 
financial resources to cover any losses resulting from the failure of a 
clearing member, bank or other clearing organization.
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    \5\ 12 U.S.C. 5464(b).
    \6\ 12 U.S.C. 5464(b)(1).
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(iv) 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 change no later than September 30, 
2014, which is one week prior to the October 7, 2014 effective date of 
the New Facility. OCC requests Commission action one week in advance of 
the effective date to ensure that there is no period of time that OCC 
operates without a credit facility, given the importance of the 
borrowing capacity in connection with OCC's risk management.
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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. The clearing agency 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 clearing agency 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 the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its Web site of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

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-2014-806 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-2014-806. 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 of submission. 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 change that are 
filed with the Commission, and all written communications relating to 
the proposed 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 Section, 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 filing also will be 
available for inspection and copying at the principal office of OCC and 
on OCC's Web site at http://www.theocc.com/components/

[[Page 60217]]

docs/legal/rules_and_bylaws/sr_occ_14_806.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-2014-806 
and should be submitted on or before October 27, 2014.

V. Commission's Findings and Notice of No Objection

    Section 806(e)(1)(G) of the Payment, Clearing, and Settlement 
Supervision Act \8\ provides that a designated financial market utility 
may implement a change if it has not received an objection from the 
Commission within 60 days of the later of (i) the date that the 
Commission receives notice of the proposed change or (ii) the date the 
Commission receives any further information it requests for 
consideration of the notice. A designated financial market utility may 
implement a proposed change in less than 60 days from the date of 
receipt of the notice of the change by the Commission, or the date the 
Commission receives any further information it requested, if the 
Commission notifies the designated financial market utility in writing 
that it does not object to the proposed change and authorizes the 
designated financial market utility to implement the proposed change on 
an earlier date, subject to any conditions imposed by the Commission.
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    \8\ 12 U.S.C. 5465(e)(1)(G).
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    In its filing with the Commission, OCC requested that the 
Commission notify OCC that it has no objection to the change no later 
than September 30, 2014, which is one week before the October 7, 2014 
effective date of the New Facility. OCC requested Commission action by 
this date to ensure that there is no period of time that OCC operates 
without a credit facility, given the importance of the borrowing 
capacity in connection with OCC's risk-management framework.
    The Commission does not object to the proposed change. Ensuring 
that OCC has uninterrupted access to a credit facility will promote the 
safety and soundness of the broader financial system by providing OCC 
with an additional source of liquidity to meet its clearance and 
settlement obligations in the event of the failure of a clearing 
member, bank, or clearing organization doing business with OCC. Having 
access to a credit facility will help OCC minimize losses in the event 
of such a failure by allowing it to access funds on extremely short 
notice, and without having to liquidate assets at a time when market 
prices could be falling precipitously.

VI. Conclusion

    Pursuant to Section 806(e)(1)(I) of the Payment, Clearing, and 
Settlement Supervision Act,\9\ the Commission does not object to the 
proposed change, and authorizes OCC to implement the change (SR-OCC-
2014-806) as of the date of this Order.
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    \9\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23698 Filed 10-3-14; 8:45 am]
BILLING CODE 8011-01-P