Document ID: SEC-2020-1482-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2020-09-16T04:00Z

[Federal Register Volume 85, Number 180 (Wednesday, September 16, 2020)]
[Notices]
[Pages 57897-57899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20358]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89809; File No. SR-OCC-2020-008]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Enhance OCC's Stock Loan Close-
Out Process

September 10, 2020.

I. Introduction

    On July 14, 2020, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-008 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to require 
Clearing Members that OCC instructs to buy-in or sell-out securities to 
execute such transactions and provide OCC notice of such action by the 
settlement time on the business day after OCC gives the instruction.\3\ 
The Proposed Rule Change was published for public comment in the 
Federal Register on July 30, 2020.\4\ The Commission has received no 
comments regarding the Proposed Rule Change.\5\ This order approves the 
Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, 85 FR at 45943.
    \4\ Securities Exchange Act Release No. 89393 (Jul. 24, 2020), 
85 FR 45943 (Jul. 30, 2020) (File No. SR-OCC-2020-008) (``Notice of 
Filing''). OCC also filed a related advance notice (SR-OCC-2020-805) 
(``Advance Notice'') with the Commission 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 and Rule 19b-4(n)(1)(i) under the 
Exchange Act. 12 U.S.C. 5465(e)(1). 15 U.S.C. 78s(b)(1) and 17 CFR 
240.19b-4, respectively. The Advance Notice was published in the 
Federal Register on August 14, 2020. Securities Exchange Act Release 
No. 89515 (Aug. 10, 2020), 85 FR 49697 (Aug. 14, 2020) (File No. SR-
OCC-2020-805).
    \5\ Since the proposal contained in the Proposed Rule Change was 
also filed as an advance notice, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or Advance Notice.

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[[Page 57898]]

II. Background

    OCC serves as the sole clearing agency for standardized U.S. 
securities options listed on Commission-registered national securities 
exchanges (``listed options'').\6\ OCC also operates two programs under 
which it clears stock loan transactions (the ``Stock Loan 
Programs'').\7\ As described in more detail below, OCC proposes to 
align the timeframes for closing out the open stock loan and non-stock 
loan positions of a defaulting Clearing Member.
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    \6\ See Securities Exchange Act Release No. 85121 (Feb. 13, 
2019), 84 FR 5157 (Feb. 20, 2019) (File No. SR-OCC-2015-02).
    \7\ OCC's two Stock Loan Programs are the ``Stock Loan/Hedge 
Program'' and the ``Market Loan Program.'' Under its Stock Loan/
Hedge Program, OCC clears transactions initiated directly between 
Clearing Members on a bilateral basis. Under its Market Loan 
Program, OCC clears transactions initiated on either a broker-to-
broker basis or anonymously through the matching of bids and offers.
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    In the event of a Clearing Member default, OCC would close out the 
defaulting Clearing Member's open positions, liquidate collateral, and 
deposit the proceeds from such a close-out into a Liquidating 
Settlement Account.\8\ Generally, OCC would seek to close out the 
defaulting Clearing Member's open positions through an auction 
conducted, before market open, on the day after a default occurs. Under 
its rules, however, OCC may also seek to close out open positions 
cleared under its Stock Loan Programs by instructing non-defaulting 
Clearing Member counterparties to the open position to execute buy-in 
or sell-out transactions by the end of the business day following the 
default.\9\ In the event that a Clearing Member counterparty fails to 
execute buy-in or sell-out transactions as instructed, OCC would 
terminate the relevant stock loan positions based on end of day prices 
from the business day following the default. Pursuant to the Proposed 
Rule Change, OCC proposes to change (1) the time by which buy-in or 
sell-out transactions for defaulted open stock loan positions must be 
executed and (2) the price at which OCC would terminate positions not 
closed out through the execution of buy-in or sell-out transactions.
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    \8\ See OCC Rule 1104; available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf. See 
also Notice of Filing, 85 FR at 45944.
    \9\ ``Buy-in'' refers to a non-defaulting lender purchasing 
replacement stock. ``Sell-out'' refers to a non-defaulting borrower 
selling the loaned securities in order to recoup its collateral. See 
Notice of Filing, 85 FR at 45943, n. 3.
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    Current rules. Under its Rule 2211 and Rule 2211A, OCC may instruct 
a Clearing Member who is a party to stock loan transactions with a 
defaulting Clearing Member to execute buy-in or sell-out transactions, 
as applicable, with respect to each open stock borrow or loan position 
of the defaulting Clearing Member.\10\ Currently, a Clearing Member so 
instructed is obligated to execute the required transactions and 
provide notice of such execution to OCC by the close of the business on 
the day following receipt of such an instruction. If a Clearing Member 
fails to execute buy-in or sell-out transactions as instructed, OCC may 
terminate the relevant stock loan transactions. OCC would terminate 
such transactions based on prices from the end of the day after OCC 
issued buy-in or sell-out instructions (i.e., the same day by which the 
Clearing Member was obligated to execute the buy-in or sell-out 
transactions).
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    \10\ See OCC Rules 2211 and 2211A. Typically, OCC issues such 
instructions on the day of default. See Notice of Filing, 85 FR at 
45944.
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    Proposed change to execution time. OCC proposes to amend its Rules 
2211 and 2211A with regard to the time by which a Clearing Member must 
execute buy-in or sell-out transactions and provide notice to OCC of 
such transactions. OCC would continue to require that such transactions 
be executed by or before the business day following receipt of the 
instruction to execute such transaction. OCC proposes, however, to move 
up the time by which the transaction must be executed from the close of 
business to ``settlement time,'' which OCC's current rules define as 
9:00 a.m. Central Time.\11\
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    \11\ See By-Law Article I, Section 1.S.(16); available at 
https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf.
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    OCC considered requiring the execution of buy-in or sell-out 
transaction by the close of business on the day it instructed a 
Clearing Member to execute such transactions; however, Clearing Members 
expressed a preference for setting the deadline at 9:00 a.m. Central 
Time the following business day because doing so would allow a non-
defaulting Clearing Member the opportunity to trade at market 
opening.\12\ Because OCC typically issues buy-in or sell-out 
instructions on the day of default, the proposed rule would require 
such transactions to be executed by 9:00 a.m. Central Time on the 
business day following the default. The required transactions would, 
therefore, be executed on the same day on which OCC seeks to close out 
a defaulting Clearing Member's other positions through its auction 
procedures. OCC believes allowing non-defaulting Clearing Members to 
trade at market opening on the morning following default would provide 
additional time to execute the buy-in and sell-out transactions in a 
manner consistent with OCC's two-day liquidation assumption.\13\ The 
proposed change would provide OCC with authority under its rules to 
compel execution of buy-in or sell out transactions designed to close 
out a defaulting Clearing Member's stock loan positions at a point in 
time closer to OCC's other default management processes (i.e., 
auctions) than is currently permitted under OCC's rules.
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    \12\ See Notice of Filing, 85 FR at 45944-45.
    \13\ See Notice of Filing, 85 FR at 45945.
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    Proposed change to termination price. OCC also proposes to amend 
its Rules 2211 and 2211A with regard to the price on which termination 
of stock loan positions would be based if a Clearing Member fails to 
execute buy-in or sell-out transactions within the required timeframes. 
Under the proposal, OCC would close out such positions based on end-of-
day prices from the same day on which OCC instructed the Clearing 
Member to execute buy-in or sell-out transactions (i.e., the day before 
the Clearing Member was obligated to execute the buy-in or sell-out 
transactions).\14\ Such a price would be the last settlement price 
captured in OCC's systems prior to the time by which the non-defaulting 
Clearing Member was required to execute buy-in or sell-out 
transactions.\15\ OCC believes that using such a price, already 
available in its system, would be superior to other options because it 
would allow for an automated process not susceptible to the delays and 
errors of manually pulling price information.\16\
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    \14\ For example, OCC might rely on such end-of-day prices if 
Clearing Members were unable to execute buy-in or sell-out 
transactions to terminate open stock loan positions during the 
morning of the business day following the default because of circuit 
breaker activity. The use of the end-of-day prices from the day of 
default, as opposed to end-of-day prices following a full day of 
trading, would provide closer alignment of market conditions for 
OCC's auction and stock loan terminations than the current rules.
    \15\ See Notice of Filing, 85 FR at 45944.
    \16\ See Notice of Filing, 85 FR at 45945.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\17\ After carefully 
considering the Proposed Rule Change,

[[Page 57899]]

the Commission finds that the proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OCC. More specifically, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the 
Exchange Act \18\ and Rule 17Ad-22(e)(13) thereunder.\19\
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    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(13).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions.\20\ Based on its review of the record, the Commission 
believes that the changes proposed in the Proposed Rule Change are 
consistent with the promotion of prompt and accurate clearance and 
settlement of securities transactions for the reasons described below.
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    As a central counterparty and SIFMU,\21\ it is imperative that OCC 
maintain default management processes designed to contain losses. As 
described above, OCC may, in the event of a Clearing Member default, 
seek to close out stock loan positions by requiring Clearing Members to 
execute buy-in or sell-out transactions while closing out non-stock 
loan positions and liquidating collateral via an auction. Pursuant to 
the Proposed Rule Change, OCC proposes to more closely align the 
timeframe within which buy-in and sell-out transactions would occur 
with the timeframe of a default auction. In the event that such 
transactions do not occur within the required timeframes, OCC further 
proposes to terminate such stock loan transactions based on end of day 
prices from the same day on which OCC instructed the Clearing Member to 
execute buy-in or sell-out transactions. Such prices would likely 
represent the last market price received before OCC would auction off 
the rest of the defaulting Clearing Member's portfolio prior to the 
market open on the following morning.
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    \21\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
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    Aligning the timeframes for closing out stock loan positions and 
non-stock loan positions and collateral would reduce the potential for 
significant market movements occurring between the time by which OCC 
closes out positions and liquidates collateral related to such 
positions. Avoiding the potential for such market movements would, in 
turn, increase the likelihood that such collateral would be sufficient 
to mitigate losses arising out of the close out of stock loan 
positions. Mitigating such losses would increase likelihood that OCC 
could liquidate a defaulting Clearing Member's portfolio without 
realizing severe credit losses.
    OCC is the sole registered clearing agency for the U.S. listed 
options markets. Increasing the likelihood that OCC could liquidate a 
defaulting Clearing Member's portfolio without realizing severe credit 
losses strengthens OCC's ability to manage Clearing Member defaults, 
which, in turn, facilitates the clearance and settlement of listed 
options. The Commission believes that the Proposed Rule Change would 
promote the prompt and accurate clearance and settlement of securities 
transactions and is, therefore, consistent with the requirements of 
Section 17A(b)(3)(F) of the Exchange Act.\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(13) Under the Exchange Act

    Rule 17Ad-22(e)(13) under the Exchange Act requires that a covered 
clearing agency establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to ensure the covered 
clearing agency has the authority and operational capacity to take 
timely action to contain losses and liquidity demands and continue to 
meets its obligations.\23\
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    \23\ 17 CFR 240.17Ad-22(e)(13).
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    As described above OCC, proposes to use its authority to alter the 
time when OCC will close out a defaulting Clearing Member's open stock 
loan positions. The proposed change would move the point in time by 
which OCC can close out open stock loan positions closer to the point 
in time by which OCC would seek to close the defaulting Clearing 
Member's non-stock loan positions and liquidate the defaulting Clearing 
Member's collateral via an auction. Aligning the timeframes for closing 
out stock loan positions and non-stock loan positions and collateral 
would reduce the potential for significant market movements occurring 
between the time by which OCC closes out positions and liquidates 
collateral related to such positions. Avoiding the potential for such 
market movements would, in turn, increase the likelihood that such 
collateral would be sufficient to mitigate losses arising out of the 
close out of stock loan positions.
    OCC also proposes to terminate stock loan positions not closed out 
through buy-in or sell-out transactions based on end of day prices from 
the same day on which OCC instructed the Clearing Member to execute 
buy-in or sell-out transactions. As described above, such prices would 
likely represent the last market price received before OCC would 
auction off the rest of the defaulting Clearing Member's portfolio 
prior to the market open on the following morning. Similar to the 
change in the time by which Clearing Members would be instructed to 
execute buy-in or sell-out transactions, the proposed change in 
termination price would mitigate losses arising out of the close out of 
open stock loan positions by reducing the potential for significant 
market movements between the close out of positions and liquidation of 
related collateral. Taken together, the Commission believes that 
proposed changes regarding the close out a defaulting Clearing Member's 
open stock loan positions would enhance OCC's authority to take timely 
action to contain losses.
    Accordingly, the Commission believes that Proposed Rule Change 
would be consistent with Rule 17Ad-22(e)(13) under the Exchange 
Act.\24\
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    \24\ 17 CFR 240.17Ad-22(e)(13).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \25\ and the rules and regulations thereunder.
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    \25\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\26\ that the Proposed Rule Change (SR-OCC-2020-008) be, 
and hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20358 Filed 9-15-20; 8:45 am]
BILLING CODE 8011-01-P