Document ID: SEC-2019-0735-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2019-05-30T04:00Z

[Federal Register Volume 84, Number 104 (Thursday, May 30, 2019)]
[Notices]
[Pages 25089-25092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11219]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85924; File No. SR-OCC-2019-803]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Advance Notice Concerning the Options Clearing 
Corporation's Proposal To Enter Into a New Credit Facility Agreement

May 23, 2019.
    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) \2\ under the Securities Exchange Act of 
1934 (``Exchange Act'' or ``Act''),\3\ notice is hereby given that on 
April 26, 2019, the Options Clearing Corporation (``OCC'') filed with 
the Securities and Exchange Commission (``Commission'') an advance 
notice (``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).
    \3\ 15 U.S.C. 78a et seq.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice is submitted in connection with a proposed 
change to OCC's operations in the form of the replacement of a 
revolving credit facility that OCC maintains for a 364-day term and 
that it may use: (i) In anticipation of a potential default by or 
suspension of a Clearing Member; (ii) to meet obligations arising out 
of the default or suspension of a Clearing Member; (iii) to meet 
reasonably anticipated 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; or (iv) to meet obligations 
arising out of 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 has provided 
a summary of the terms and conditions of the proposed renewal in 
confidential Exhibit 3. The proposed change is described in additional 
detail in Item 10 below.
    The advance notice is available on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp. All terms with initial 
capitalization that are not otherwise defined herein have the same 
meaning as set forth in the OCC By-Laws and Rules.\4\
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    \4\ OCC's By-Laws and Rules can be found on OCC's public 
website: http://optionsclearing.com/about/publications/bylaws.jsp.
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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 advance notice 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 Proposed Change
Background
    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 and that it may use: (i) In 
anticipation of a potential default by or suspension of a Clearing 
Member; (ii) to meet obligations arising out of the default or 
suspension of a Clearing Member; (iii) to meet reasonably anticipated 
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; or (iv) to meet obligations arising out of 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 (``Permitted Use Circumstances''). In any 
such Permitted Use Circumstance, OCC has certain conditional authority 
under its By-Laws and Rules to borrow or otherwise obtain funds from 
third parties using Clearing Member margin deposits and/or Clearing 
Fund contributions.\5\
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    \5\ See generally Article VIII of OCC's By-Laws and OCC Rules 
1006(f), 1102 and 1104(b).
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    OCC's existing credit facility (``Existing Facility'') was 
implemented as of June 28, 2018, through the execution of a credit 
agreement among OCC, the administrative agent, collateral 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, securities issued or 
guaranteed by the U.S. Government or the Government of Canada, S&P 500 
Market Index equities, Exchange-Traded Funds (``ETFs''), American 
Depositary Receipts (``ADRs'') or certain government-sponsored 
enterprise (``GSE'') debt securities. Certain mandatory prepayments or 
deposits of additional collateral are required depending on changes in 
the collateral's

[[Page 25090]]

market value. In connection with OCC's past implementation of the 
Existing Facility, OCC filed an advance notice with the Commission on 
May 25, 2018, and the Commission published a Notice of No-Objection on 
June 27, 2018.\6\
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    \6\ See Securities Exchange Act Release No. 83529 (June 27, 
2018), 83 FR 31237 (July 3, 2018) (SR-OCC-2018-802).
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Description of the Proposal
    Renewal. The Existing Facility is set to expire on June 27, 2019. 
OCC is currently negotiating the terms of a new credit facility (``New 
Facility'') on substantially similar terms as the Existing Facility, 
and the definitive documentation concerning the New Facility is 
expected to be substantially similar to the definitive documentation 
concerning the Existing Facility. The proposed terms and conditions 
that are expected to be applicable to the New Facility, subject to 
agreement by the lenders, are set forth in the Summary of Terms and 
Conditions, which is not a public document.\7\
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    \7\ 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.
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    The conditions regarding the availability of the New Facility, 
which OCC anticipates will be satisfied on or about June 26, 2019, 
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 that is provided in 
confidential Exhibit 3, although it may include certain changes to 
business terms as may be necessary to obtain the agreement of lenders 
with sufficient funding commitments and certain changes as may be 
necessary regarding administrative and operational terms being 
finalized between the parties.
    Certain changes are presently expected in connection with the New 
Facility regarding the securities collateral that OCC would be 
permitted to pledge to obtain a loan. Specifically, as described below, 
OCC would be permitted to pledge securities that are issued or 
guaranteed by certain foreign governments.
    Expansion of Permitted Collateral. As noted above, OCC proposes to 
expand the types of permitted collateral under the New Facility. As 
proposed, OCC would be permitted to pledge a wider range of collateral 
under the New Facility to the extent that Clearing Members are 
permitted to use such collateral to make margin deposits and/or 
Clearing Fund contributions.
    As described above, to obtain a loan under the Existing Facility 
OCC must pledge as collateral certain cash or securities that Clearing 
Members have contributed to the Clearing Fund or deposited as margin. 
Under OCC's By-Laws and Rules, Government Securities presently may be 
deposited by Clearing Members as margin assets \8\ and Clearing Fund 
contributions.\9\ The term Government Securities is defined in relevant 
part in OCC's By-Laws to mean ``securities issued or guaranteed by the 
United States or Canadian Government, or by any other foreign 
government acceptable to OCC . . .'' \10\ The Summary of Terms and 
Conditions for the New Facility contemplates that it would expand the 
scope of such collateral that OCC may pledge to include other 
categories of Government Securities that OCC may accept in the future. 
Specifically, the expanded Government Securities collateral regarding 
Clearing Member margin assets and Clearing Fund contributions would be 
debt securities that are issued by the Federal Republic of Germany, the 
Republic of France, Japan or the United Kingdom (``Additional G7 
Governments'').\11\ Under the proposed terms of the New Facility, debt 
securities of Additional G7 Governments would only be able to be used 
as collateral if they have minimum ratings of A (by Standard & Poor's) 
and A2 (by Moody's).\12\
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    \8\ See OCC Rule 604(b)(1).
    \9\ See OCC Rule 1002(a).
    \10\ See OCC By-Laws, Art. I, Section 1.G.(5).
    \11\ These four countries, like the U.S. and Canada, are also 
members of what is referred to as the Group of Seven, or simply the 
G7, that meets annually to confer regarding economic policies.
    \12\ Like other Government Securities that may be pledged as 
collateral under the Existing Facility, debt securities of the 
Additional G7 Governments would be subject to certain haircuts based 
on their remaining time to maturity.
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    Although OCC has not yet decided to accept as Clearing Member 
collateral any debt securities issued by the Additional G7 Governments, 
it may do so prior to the expiration of the New Facility because OCC 
believes that it would benefit some Clearing Members that have such 
securities and that would like to use them as collateral. Before OCC 
may accept a particular foreign sovereign's debt securities as margin 
assets or Clearing Fund contributions, the Collateral Risk Management 
Policy \13\ provides that the Credit and Liquidity Risk Working Group 
within OCC must perform an analysis of the sovereign credit, market, 
and liquidity risks associated therewith, and it must also consider 
operational aspects of maintaining custody of the collateral and the 
manner in which OCC can perfect a security interest in the collateral 
given applicable bankruptcy and insolvency laws. Upon requisite 
approvals, including regarding any necessary rule filings with the 
Commission, OCC would accept the relevant debt securities of the 
Additional G7 Governments as Government Securities, and, in turn, it 
would be able to pledge such Government Securities in Permitted Use 
Circumstances to support the New Facility.\14\
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    \13\ See Securities Exchange Act Release No. 82311 (December 13, 
2017), 82 FR 60252 (December 19, 2017) (SR-OCC-2017-008).
    \14\ The Summary of Terms and Conditions explicitly provides 
that the securities of Additional G7 Governments may constitute 
collateral under the New Facility only after they are permitted to 
be pledged by Clearing Members into the Clearing Fund or deposited 
as margin deposits by Clearing Members. In 2017, the Commission 
issued a notice of no objection in connection with a similar change 
in the renewal of the credit facility where the terms were amended 
to permit OCC to pledge certain securities as collateral that OCC 
had not yet approved as acceptable collateral for margin deposits. 
See Securities Exchange Act Release No. 81058 (June 30, 2017), 82 FR 
31371, 31373 (July 6, 2017) (SR-OCC-2017-803).
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    Adding debt securities of Additional G7 Governments as permitted 
Government Securities collateral to the New Facility serves the purpose 
of aligning the scope of permitted collateral for the New Facility with 
the scope of Clearing Member collateral that may become available to 
OCC for borrowing purposes. Should OCC draw upon the New Facility in 
connection with a Permitted Use Circumstance at a time when the 
proposed debt securities of the Additional G7 Governments are permitted 
as margin assets and/or Clearing Fund contributions, OCC believes that 
it would be appropriate for it to be able to pledge those debt 
securities of the Additional G7 Governments.
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 markets OCC serves in general because it 
would allow OCC to obtain short-term funds in the Permitted Use 
Circumstances. The existence of the

[[Page 25091]]

New Facility would therefore help OCC minimize losses in the event of a 
Permitted Use Circumstance, 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 deposits 
or Clearing Fund contributions 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. Expanding the scope of collateral that OCC is permitted 
to pledge to the New Facility to include the debt securities of the 
Additional G7 Governments would further this purpose by giving OCC 
greater flexibility to pledge a broader range of collateral that it 
determines is appropriate under the circumstances.
    OCC otherwise believes that the proposed change would not otherwise 
affect or alter the management of risk at OCC because the New Facility 
would generally preserve the same terms and conditions as the Existing 
Facility.
Consistency With the Payment, Clearing and Settlement 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.\15\ 
Section 805(a)(2) of the Clearing Supervision Act \16\ 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 \17\ states that the objectives 
and principles for risk management standards prescribed under Section 
805(a) shall be to:
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    \15\ 12 U.S.C. 5461(b).
    \16\ 12 U.S.C. 5464(a)(2).
    \17\ 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 Exchange Act in 
furtherance of these objectives and principles.\18\ Rule 17Ad-22 
requires registered clearing agencies, like OCC, 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.\19\ 
Therefore, the Commission has stated \20\ that it believes it is 
appropriate to review changes proposed in advance notices against Rule 
17Ad-22 and the objectives and principles of these risk management 
standards as described in Section 805(b) of the Clearing Supervision 
Act.\21\
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    \18\ 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'').
    \19\ 17 CFR 240.17Ad-22.
    \20\ See supra note 6.
    \21\ 12 U.S.C. 5464(b).
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    OCC believes that the proposed changes are consistent with Section 
805(b)(1) of the Clearing Supervision Act \22\ because the New Facility 
would provide OCC with continued access to a stable and reliable source 
of committed liquidity that can be accessed in a timely manner to meet 
its settlement obligations, contain losses and liquidity pressures and 
mitigate OCC's liquidity risk. Accordingly, OCC believes that the 
proposed changes: (i) Are designed to promote robust risk management; 
(ii) are consistent with promoting safety and soundness; and (iii) are 
consistent with reducing systemic risks and promoting the stability of 
the broader financial system.
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    \22\ 12 U.S.C. 5464(b)(1).
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    OCC believes that the New Facility is also consistent with the 
requirements of Rule 17Ad-22(e)(7) under the Act.\23\ Rule 17Ad-
22(e)(7) requires OCC to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor, and manage liquidity risk that arises in or is borne 
by OCC, including measuring, monitoring, and managing its settlement 
and funding flows on an ongoing and timely basis, and its use of 
intraday liquidity, as specified in the rule.\24\ In particular, Rule 
17Ad-22(e)(7)(i) under the Act \25\ directs that OCC meet this 
obligation by, among other things, ``[m]aintaining sufficient liquid 
resources at the minimum in all relevant currencies to effect same-day 
. . . settlement of payment obligations with a high degree of 
confidence under a wide range of foreseeable stress scenarios that 
includes, but is not limited to, the default of the participant family 
that would generate the largest aggregate payment obligation for [OCC] 
in extreme but plausible market conditions.''
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    \23\ 17 CFR 240.17Ad-22(e)(7).
    \24\ Id.
    \25\ 17 CFR 240.17Ad-22(e)(7)(i).
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    As described above, the New Facility would provide OCC with a 
readily available liquidity resource that would enable it to, among 
other things, continue to meet its obligations in a timely fashion in a 
Permitted Use Circumstance and as an alternative to selling Clearing 
Member collateral under what may be stressed and volatile market 
conditions. The expansion of permitted collateral under the New 
Facility to include the debt securities of Additional G7 Governments 
would better enable OCC to manage liquidity risk associated with its 
settlement obligations in the event that OCC in the future accepts such 
debt securities as Government Securities by giving OCC the ability to 
pledge that broader range of Clearing Member collateral to the New 
Facility in Permitted Use Circumstances. For these reasons, OCC 
believes that the proposal is consistent with Rule 17Ad-
22(e)(7)(i).\26\
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    \26\ Id.
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    Rule 17Ad-22(e)(7)(ii) under the Act requires OCC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to hold qualifying liquid resources sufficient to 
satisfy payment obligations owed to Clearing Members.\27\ Rule 17Ad-
22(a)(14) of the Act defines ``qualifying liquid resources'' to 
include, among other things, lines of credit without material adverse 
change provisions, that are readily available and convertible into 
cash.\28\ As with the Existing Facility, the New Facility would not be 
subject to any material adverse change provision and would continue to 
be designed to permit OCC to, among other things, help ensure that OCC 
has sufficient, readily-available qualifying liquid resources to meet 
the cash settlement obligations of its largest Clearing Member Group. 
Therefore, OCC believes that the proposal is consistent with Rule 17Ad-
22(e)(7)(ii).\29\
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    \27\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \28\ 17 CFR 240.17Ad-22(a)(14).
    \29\ 17 CFR 240.17Ad-22(e)(7)(ii).
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    For the foregoing reasons, OCC believes that the proposed changes 
are consistent with Section 805(b)(1) of the

[[Page 25092]]

Clearing Supervision Act \30\ and Rule 17Ad-22(e)(7) \31\ under the 
Act.
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    \30\ 12 U.S.C. 5464(b)(1).
    \31\ 17 CFR 240.17Ad-22(e)(7).
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Accelerated Commission Action Requested
    Pursuant to Section 806(e)(1)(I) of the Clearing Supervision 
Act,\32\ OCC requests that the Commission notify OCC that it has no 
objection to the New Facility not later than Monday, June 24, 2019, 
which shall be two business days prior to the expected June 26, 2019 
availability of the New Facility. OCC requests Commission action by 
this date to ensure that there is no period 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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    \32\ 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 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 website 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 rule-comments@sec.gov. Please include 
File Number SR-OCC-2019-803 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2019-803. 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 website (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 website 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 the self-regulatory organization 
and on OCC's website at https://www.theocc.com/about/publications/bylaws.jsp.
    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-2019-803 and 
should be submitted on or before June 14, 2019.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-11219 Filed 5-29-19; 8:45 am]
 BILLING CODE 8011-01-P