Document ID: SEC-2017-1890-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2017-11-17T05:00Z

[Federal Register Volume 82, Number 221 (Friday, November 17, 2017)]
[Notices]
[Pages 54430-54434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24920]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82056; File No. SR-OCC-2017-806]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice Concerning Liquidity for Same-Day 
Settlement

November 13, 2017.
    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) of the Securities Exchange Act of 1934 
(``Act''),\2\ notice is hereby given that on October 13, 2017, The 
Options Clearing Corporation (``OCC'') filed with the Securities and 
Exchange Commission (``Commission'') an advance notice as described in 
Items I, II and III below, which Items have been prepared by OCC. The 
Commission is publishing this notice to solicit comments on the advance 
notice from interested persons.
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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 filed in connection with a proposed change 
to modify the tools available to OCC in order to provide a mechanism 
for addressing the risks of liquidity shortfalls, specifically, in the 
extraordinary situation where OCC faces a liquidity need to meet its 
same-day settlement obligations as a result of a bank or securities or 
commodities clearing organization failing to achieve daily settlement.
    The proposed changes to OCC's By-Laws were submitted as Exhibit 5 
of the

[[Page 54431]]

filing.\3\ The proposed change is described in detail in Item 10 below. 
All terms with initial capitalization not defined herein have the same 
meaning as set forth in OCC's By-Laws and Rules.\4\
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    \3\ OCC has filed a proposed rule change with the Commission in 
connection with the proposed change. See SR-OCC-2017-017.
    \4\ OCC's By-Laws and Rules can be found on OCC's public Web 
site: http://optionsclearing.com/about/publications/bylaws.jsp. 
Other terms not defined herein or in the OCC By-Laws and Rules can 
be found in the Rules & Procedures of NSCC (``NSCC Rules''), 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf, as the context implies.
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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 proposed change and none have been received. OCC will 
notify the Commission of any written comments received by OCC.

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

Description of the Proposed Change
    The purpose of the proposed change is to modify the tools available 
to OCC in order to provide a mechanism for addressing the risks of 
liquidity shortfalls, specifically, in the extraordinary situation 
where OCC faces a liquidity need to meet its same-day settlement 
obligations as a result of a bank or securities or commodities clearing 
organization failing to achieve daily settlement.
Current Practice
    Presently, Article VIII, Section 5(e) of OCC's By-Laws provides OCC 
with the authority to borrow against the Clearing Fund in two 
circumstances. First, Article VIII, Section 5(e) of OCC's By-Laws 
provides OCC the authority to borrow where OCC ``deems it necessary or 
advisable to borrow or otherwise obtain funds from third parties in 
order to meet obligations arising out of the default or suspension of a 
Clearing Member or any action taken by the Corporation in connection 
therewith pursuant to Chapter XI of the Rules or otherwise.'' Second, 
Article VIII, Section 5(e) of OCC's By-Laws provides OCC the authority 
to borrow against the Clearing Fund where OCC ``sustains a loss 
reimbursable out of the Clearing Fund pursuant to [Article VIII, 
Section 5(b) of OCC's By-Laws] but [OCC] elects to borrow or otherwise 
obtain funds from third parties in lieu of immediately charging such 
loss to the Clearing Fund.'' In order for a loss to be reimbursable out 
of the Clearing Fund under Article VIII, Section 5(b) of OCC's By-Laws, 
it must arise from a situation in which any bank or securities or 
commodities clearing organization has failed ``to perform any 
obligation to [OCC] when due because of its bankruptcy, insolvency, 
receivership, suspension of operations, or because of any similar 
event.'' \5\
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    \5\ To the extent that a loss resulting from any of the events 
referred to in Article VIII, Section 5(b) is recoverable out of the 
Clearing Fund pursuant to Article VIII, Section 5(a), the provisions 
of Article VIII, Section 5(a) control and render the provisions of 
Article VIII, Section 5(b) inapplicable.
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    Under either of the two aforementioned circumstances, OCC is 
authorized to borrow against the Clearing Fund for a period not to 
exceed 30 days, and during such period, the borrowing shall not affect 
the amount or timing of any charges otherwise required to be made 
against the Clearing Fund pursuant to Article VIII, Section 5. However, 
if any part of the borrowing remains outstanding after 30 days, then at 
the close of business on the 30th day (or the first Business Day 
thereafter) such amount must be considered an actual loss to the 
Clearing Fund, and OCC must immediately allocate such loss in 
accordance with Article VIII, Section 5.
Proposed Change
    While Article VIII, Section 5(e) of OCC's By-Laws currently 
provides for borrowing authority in the more extreme scenarios 
involving a bank's or securities or commodities clearing organization's 
bankruptcy, insolvency, receivership, suspension of operations or 
similar event, such authority does not extend to the similar, but less 
extreme scenarios in which a bank or securities or commodities clearing 
organization might be temporarily unable to timely make daily 
settlement with OCC for reasons other than its bankruptcy, insolvency, 
receivership or suspension of operations or similar events. An example 
of such a related scenario would be a disruption of the ordinary 
operations of a settlement bank that temporarily prohibits the bank 
from timely effecting settlement payments in accordance with OCC's 
daily settlement cycle.
    The proposed change would expand upon the existing borrowing 
authority in Article VIII, Section 5(e) of OCC's By-Laws. As expanded, 
OCC would be authorized to borrow (or otherwise obtain funds through 
any means determined to be reasonable by the Executive Chairman, COO or 
CAO) against the Clearing Fund in the extraordinary event that OCC 
faces a liquidity need in order to complete same-day settlement. As 
specified in the proposed rule text, the funds obtained from any such 
transaction can be used only for their stated purpose, namely, to 
satisfy a need for liquidity for same-day settlement. Consistent with 
the existing borrowing authority in Article VIII, Section 5(e) of OCC's 
By-Laws, OCC would be authorized to borrow against the Clearing Fund 
for a period not to exceed 30 days, and during such period, the funds 
obtained would not be deemed to be charges against the Clearing Fund, 
irrespective of how such funds are applied, and the borrowing shall not 
affect the amount or timing of any charges otherwise required to be 
made against the Clearing Fund pursuant to Article VIII, Section 5. 
However, in the unlikely event that any part of the borrowing were to 
remain outstanding after 30 days, then at the close of business on the 
30th day (or the first Business Day thereafter), such amount would be 
considered an actual loss to the Clearing Fund, and OCC must 
immediately allocate such loss in accordance with Article VIII, Section 
5.
    Like the existing borrowing authority in Article VIII, Section 5(e) 
of OCC's By-Laws, OCC envisions that the proposed expanded authority 
only would be relevant in extraordinary circumstances and, even then, 
only would be used where OCC, exercising its discretion, believes the 
employment of this particular authority would be appropriate to address 
OCC's immediate liquidity need.
    OCC proposes to amend Sections 1(a), 5(b) and 5(e) of Article VIII 
of its By-Laws in order to give effect to the expanded borrowing 
authority discussed herein. Section 5(e) of Article VIII of OCC's By-
Laws would be amended to permit OCC to borrow against the Clearing Fund 
if it reasonably believes such borrowing is necessary to meet its 
liquidity needs for same-day settlement as a result of the failure of 
any bank or securities or commodities clearing organization to achieve 
daily settlement.

[[Page 54432]]

    Section 1(a) of Article VIII of OCC's By-Laws would be amended to 
include conforming changes that would reflect that the purpose of the 
Clearing Fund includes borrowing against the Clearing Fund as permitted 
under Section 5(e) of Article VIII of the By-Laws.
    Section 5(b) of Article VIII of the By-Laws would be amended to 
include conforming changes that would declare that any borrowing 
remaining outstanding for less than 30 days may be considered, in OCC's 
discretion, an actual loss and the amount of any such loss then shall 
be charged proportionately against all Clearing Members' computed 
contributions to the Clearing Fund as fixed at the time, and any 
borrowing remaining outstanding on the 30th day shall be considered an 
actual loss to the Clearing Fund and the amount of any such loss shall 
be charged proportionately against all Clearing Members' computed 
contributions to the Clearing Fund as fixed at the time. OCC proposes 
to include discretionary authority to declare any borrowing outstanding 
for less than 30 days as an actual loss chargeable against the Clearing 
Fund because the proposed borrowing authority is intended only to 
address same-day liquidity needs, and intended to be promptly repaid 
upon the bank's or securities or commodities clearing organization's 
resolution of the temporary disruption. In the unlikely circumstance 
that a disruption of a bank or securities or commodities clearing 
organization is not timely resolved, OCC may need to exercise its 
discretion to declare an actual loss, depending on the size of the 
borrowing, to ensure that OCC replenishes its ``Cover 1'' financial 
resources.\6\ The requirement to recognize any borrowing outstanding 
after 30 days as an actual loss chargeable against the Clearing Fund 
would be consistent with the requirements of the borrowing authority 
currently permitted by Section 5(e) of Article VIII of the By-Laws.
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    \6\ ``Cover 1'' financial resources refers to the requirement 
that a CCA maintains financial resources sufficient to enable it to 
cover the ``default of the participant family that would potentially 
cause the largest aggregate credit exposure for the [CCA] in extreme 
but plausible market conditions.'' 17 CFR 240.17Ad-22(e)(7)(viii).
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Expected Effect on and Management of Risk
    OCC believes the proposed change would enable it to better manage 
the risks associated with the failure of a settlement bank or 
securities or commodities clearing organization's to achieve timely 
settlement. As noted above, OCC's By-Laws currently provide for 
borrowing authority in the more extreme scenarios involving a bank's or 
securities or commodities clearing organization's bankruptcy, 
insolvency, receivership, suspension of operations or similar event, 
such authority does not extend to the similar, but less extreme 
scenarios in which a bank or securities or commodities clearing 
organization might be temporarily unable to timely make daily 
settlement with OCC for reasons other than its bankruptcy, insolvency, 
receivership or suspension of operations or similar events. The 
proposed change would expand upon this existing borrowing authority to 
allow OCC to borrow (or otherwise obtain funds through any means 
determined to be reasonable by the Executive Chairman, COO or CAO) 
against the Clearing Fund in the extraordinary event that OCC faces a 
liquidity need in order to complete same-day settlement. As a result, 
the proposed change would enhance OCC's ability to manage its liquidity 
risks and ensure that it is able to continue making timely settlements 
in the event of such a disruption.
    As stated above, it is conceivable, though extremely unlikely, that 
a bank or securities or commodities clearing organization may fail to 
make timely settlement with OCC as a result of a temporary disruption 
to its ordinary operations. The proposed change would not alter this 
risk, but would provide OCC with a mechanism for addressing it, should 
such risk ever be realized. The proposed mechanism for addressing this 
risk--discretionary authority to borrow from the Clearing Fund--would 
require OCC's senior and executive management to exercise discretion 
and judiciousness and could, if ever deployed, present an arguably new, 
though very limited, risk to Clearing Members.
    Modifying OCC's existing authority to borrow against the Clearing 
Fund introduces a new, and potentially competing, demand on OCC's 
Clearing Fund resources in that any amount of Clearing Fund resources 
borrowed to address the failure of a bank or securities or commodities 
clearing organization to make timely settlement would subtract from the 
available resources to address other losses that could be charged 
against the Clearing Fund (most common among those, losses related to 
Clearing Member defaults). To manage the potential for competing 
demands on Clearing Fund resources, OCC would exercise discretion and 
judiciousness in selecting when this new borrowing authority could be 
prudently deployed, in light of then-existing facts and circumstances. 
In the alternative, OCC's could elect to deploy an alternative tool, 
such as OCC's ability to extend the settlement window under Rule 505, 
if such tool would be more appropriate given anticipated demands on 
Clearing Fund resources in light of then-existing facts and 
circumstances. Because of the low probability that a bank or securities 
or commodities clearing organization would suffer a temporary 
disruption to its ordinary operations that could threaten its ability 
to make timely settlement, and the extremely low probability that such 
a disruption would result in the bank or securities or commodities 
clearing organization actually failing to make timely settlement, OCC 
believes that the potential for competing demands on Clearing Fund 
resources can be managed sufficiently through the tools available in 
its default management rules, policies and procedures.\7\
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    \7\ In addition, the bank or securities or commodities clearing 
organization would need to be in deficit for the settlement cycle in 
question in order for OCC to face an immediate liquidity need. 
Further, OCC must reasonably anticipate an imminent or near imminent 
failure by one or more Clearing Members for there to be a potential 
competing demand on Clearing Fund resources. OCC believes that the 
alignment of all of these occurrences represents an extraordinarily 
low probability occurrence.
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    The proposed change could arguably present a new, though very 
limited, risk to Clearing Members in that OCC's authority to borrow 
against the Clearing Fund would be expanded, albeit slightly, to permit 
borrowing in a new scenario where a bank or securities or commodities 
clearing organization fails to make timely settlement (but otherwise is 
not in bankruptcy, insolvency, receivership, suspension of operations 
or a similar state). In order for Clearing Members to be impacted by 
this risk, a borrowing under the proposed authority would need to be 
declared an actual loss by OCC prior to 30 days lapsing or remain 
outstanding for 30 days, at which point, such amount would be 
considered an actual loss to the Clearing Fund, and OCC would be 
required to immediately allocate such loss in accordance with Article 
VIII, Section 5. However, given that the proposed borrowing authority 
is intended to be deployed to address immediate liquidity needs arising 
from temporary disruptions of the ordinary operation of a bank or 
securities or commodities clearing organization, OCC believes that it 
is extremely unlikely that any amount of any such borrowing ultimately 
would need to be declared as an actual loss in advance of 30 days or 
remain outstanding for a period of 30

[[Page 54433]]

days. If, however, any amount of any such borrowing in fact did remain 
outstanding for longer than expected, OCC believes there would be a 
high probability that the bank or securities or commodities clearing 
organization in question has actually failed, and therefore entered 
bankruptcy, insolvency, receivership, suspension of operations or a 
similar state--which events would have independently triggered the 
already-existing borrowing authority in Article VIII, Section 5(e).
Consistency With the Clearing Supervision Act
    The stated purpose of the Clearing Supervision Act 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 and strengthening the 
liquidity of systemically important financial market utilities.\8\ 
Section 805(a)(2) of the Clearing Supervision Act \9\ also authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like OCC, for which the Commission is the supervisory agency. Section 
805(b) of the Clearing Supervision Act \10\ states that the objectives 
and principles for risk management standards prescribed under Section 
805(a) shall be to:
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    \8\ 12 U.S.C. 5461(b).
    \9\ 12 U.S.C. 5464(a)(2).
    \10\ 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 Clearing Supervision Act and the Act in furtherance of 
these objectives and principles, including those standards adopted 
pursuant to the Commission rules cited below.\11\ For the reasons set 
forth below, OCC believes that the proposed change is consistent with 
the risk management standards promulgated under Section 805(a) of the 
Clearing Supervision Act.\12\
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    \11\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release 
Nos. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-
08-11) (``Clearing Agency Standards''); 78961 (September 28, 2016), 
81 FR 70786 (October 13, 2016) (S7-03-14) (``Standards for Covered 
Clearing Agencies''). The Standards for Covered Clearing Agencies 
became effective on December 12, 2016. OCC is a ``covered clearing 
agency'' as defined in Rule 17Ad-22(a)(5) and therefore is subject 
to section (e) of Rule 17Ad-22.
    \12\ 12 U.S.C. 5464(b)(1) and (4).
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    Rule 17Ad-22(e)(7)(viii) requires that a covered clearing agency 
(``CCA'') address foreseeable liquidity shortfalls that would not be 
covered by the CCA's liquid resources and seek to avoid unwinding, 
revoking, or delaying the same-day settlement of payment 
obligations.\13\ As stated above, OCC believes that it could be 
foreseeable, though extremely unlikely, that a bank or securities or 
commodities clearing organization may fail to make timely settlement 
with OCC as the result of an event that does not result in a loss to 
OCC from the bankruptcy, insolvency, resolution, suspension of 
operations or similar event of such bank or securities or commodities 
clearing organization. The proposed change would improve OCC's ability 
to address such situations by expanding OCC's borrowing authority to 
enable OCC to borrow against the Clearing Fund in order to avoid 
disrupting its ordinary settlement cycle (and thusly, to avoid imposing 
the same disruption on Clearing Members).
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    \13\ 17 CFR 240.17Ad-22(e)(7)(viii).
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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 the proposed change was filed with the Commission or (ii) the date 
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 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.
    OCC 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, including whether the advance 
notice is consistent with the Clearing Supervision 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 [email protected]. Please include 
File Number SR-OCC-2017-806 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-OCC-2017-806. 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. 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 at 
http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_806.pdf.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-OCC-2017-806 and 
should be submitted on or before December 8, 2017.

[[Page 54434]]

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24920 Filed 11-16-17; 8:45 am]
 BILLING CODE 8011-01-P