Document ID: SEC-2016-0109-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2016-01-20T05:00Z

[Federal Register Volume 81, Number 12 (Wednesday, January 20, 2016)]
[Notices]
[Pages 3208-3210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-00976]

[[Page 3208]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76821; File No. SR-OCC-2015-805]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Filing, as Modified by 
Amendment Nos. 1, 2 and 3, Concerning The Options Clearing 
Corporation's Non-Bank Liquidity Facility

January 4, 2016.
    On November 5, 2015, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
advance notice SR-OCC-2015-805 pursuant to Section 806(e)(1) of the 
Payment, Clearing, and Settlement Supervision Act of 2010 (``Payment, 
Clearing and Settlement Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) 
under the Securities Exchange Act of 1934 (``Exchange Act'').\2\ On 
November 11, 2015, OCC filed Amendment No.1 to the advance notice, 
which amended and replaced in its entirety the advance notice as 
originally submitted on November 5, 2015. On November 17, 2005, OCC 
filed Amendment No. 2 to the advance notice, which partially amended 
the advance notice as submitted on November 11, 2015. On November 24, 
2015, OCC filed Amendment No. 3 to the advance notice, which amends and 
replaces in its entirety the advance notice as submitted on November 
11, 2015, and amended on November 17, 2015. The advance notice was 
published for comment in the Federal Register on December 18, 2015.\3\ 
The Commission did not receive any comments on the advance notice 
publication. This publication serves as a notice that the Commission 
does not object to the changes set forth in the advance notice.
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    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight 
Council designated OCC a systemically important financial market 
utility (``FMU'') 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 the Payment, Clearing, and Settlement Supervision Act and file 
advance notices with the Commission. See 12 U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Securities Exchange Act Release No. 76641 (December 14, 
2015), 80 FR 79114 (December 18, 2015) (SR-OCC-2015-805).
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I. Description of the Advance Notice

    OCC filed this advance notice to renew its non-bank liquidity 
facility (``Non-Bank Liquidity Facility'') with certain proposed 
changes. Specifically, OCC is proposing to: (i) Extend the existing 
confirmation (``Existing Confirmation'') \4\ for one year under the 
Master Repurchase Agreement (``MRA'') with the same terms and 
conditions; (ii) enter into a second confirmation (``Second 
Confirmation,'' and collectively with the Existing Confirmation, 
``Confirmations'') under the MRA, also on the same terms and conditions 
except with a June 2016 expiration date; and (iii) maintain, between 
the Confirmations, an aggregate commitment amount of no less than $1 
billion and no greater than $1.5 billion under the Non-Bank Liquidity 
Facility with the existing institutional investor (``Counterparty'') 
and its agent.\5\ According to OCC, the Second Confirmation has the 
same terms, conditions, operations, and mechanics as the Existing 
Confirmation, except for the expiration date and commitment amount.
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    \4\ The Existing Confirmation is the original $1 billion Master 
Confirmation executed under the Master Repurchase Agreement, as 
described in Securities Exchange Act Release No. 73979 (January 2, 
2015), 80 FR 1062 (January 8, 2015) (SR-OCC-2014-809).
    \5\ OCC represents that it intends for the commitment amount of 
the extended Existing Confirmation to be $500 million and the 
commitment amount of the Second Confirmation to be $500 million. OCC 
states that it will have the flexibility to change the commitment 
amount of each Confirmation at each renewal provided that at all 
times OCC would maintain the aggregate commitment level between the 
two Confirmations under the Non-Bank Liquidity Facility at no less 
than $1 billion and no greater than $1.5 billion. According to OCC, 
the MRA and any effective Confirmation(s) constitute the Non-Bank 
Liquidity Facility.
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    OCC also has requested that the Commission not object to its 
proposal to renew the Existing Confirmation and the Second Confirmation 
annually on the same terms and conditions \6\ with the same 
Counterparty without filing an advance notice, provided that there has 
been no negative change to the Counterparty's credit profile or the 
Counterparty has not experienced a material adverse change (as defined 
below) since entering into the Confirmations or the latest renewal of 
the either Confirmation, whichever is later.
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    \6\ For the purposes of clarity, OCC states that it will not 
consider changes to the costs of entering into a Confirmation, or 
the rate of a transaction permitted under a Confirmation, to be a 
change to a term or condition that will require the filing of a 
subsequent advance notice filing provide that such costs or rate is 
at the then prevailing market rate.
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Background

    OCC's overall liquidity plan includes access to a diverse set of 
liquidity funding sources, which include bank borrowing arrangements 
(i.e., OCC's syndicated credit facility \7\) and the Non-Bank Liquidity 
Facility. OCC states that the Non-Bank Liquidity Facility is designed 
to reduce the concentration of OCC's counterparty exposure in its 
overall liquidity plan by diversifying its lender base among banks and 
non-bank, non-clearing member institutional investors, such as pension 
funds or insurance companies.
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    \7\ See Securities Exchange Act Release No. 76062 (October 1, 
2015), 80 FR 64028 (October 22, 2015) (SR-OCC-2015-803).
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    The currently-approved Non-Bank Liquidity Facility is comprised of 
two parts: The MRA and the Existing Confirmation, which contains 
certain individualized terms and conditions of transactions executed 
between OCC, an institutional investor and its agent. The MRA is 
structured like a typical repurchase arrangement in which the buyer 
(i.e., the Counterparty) purchases from OCC, from time to time, United 
States government securities (``Eligible Securities'').\8\
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    \8\ OCC states that it will use United States government 
securities that are included in clearing fund contributions by 
clearing members and margin deposits of any clearing member that has 
been suspended by OCC for the repurchase arrangements. Article VIII, 
Section 5(e) of OCC's By-Laws and OCC Rule 1104(b) authorize OCC to 
obtain funds from third parties through securities repurchases using 
these sources. The officers who may exercise this authority include 
the Executive Chairman and the President.
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    Under the arrangement, OCC, as the seller, transfers Eligible 
Securities to the buyer in exchange for a payment by the buyer to OCC 
in immediately available funds (``Purchase Price''). The buyer will 
simultaneously agree to transfer the purchased securities back to OCC 
at a specified later date (``Repurchase Date'') or on OCC's demand 
against the transfer of funds by OCC to the buyer in an amount equal to 
the outstanding Purchase Price plus the accrued and unpaid price 
differential (together, ``Repurchase Price''), which is the interest 
component of the Repurchase Price.
    The Confirmations establish tailored provisions of the actual 
repurchase transactions permitted under the MRA. OCC provides that, by 
entering into the Confirmation, the Counterparty is obligated to enter 
repurchase transactions even if OCC experiences a material adverse 
change,\9\ to make funds available to OCC within 60 minutes of OCC's 
delivery of eligible securities, and to not rehypothecate purchased 
securities.\10\ The Confirmations also set

[[Page 3209]]

forth the terms and maximum dollar amounts of the transaction permitted 
under the MRA.
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    \9\ OCC represents that, in this context, a ``material adverse 
change'' is defined as a change that would have a materially adverse 
effect on the business or financial condition of a company.
    \10\ See Securities Exchange Act Release No. 73979 (January 2, 
2015), 80 FR 1062 (January 8, 2015) (SR-OCC-2014-809).
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Extension of the Existing Confirmation

    To provide continued access to liquidity resources, OCC proposes to 
extend the Existing Confirmation under the Non-Bank Liquidity Facility. 
OCC represents that the extended Existing Confirmation will have the 
same terms, conditions, operations, and mechanics as the Existing 
Confirmation entered into under the Non-Bank Liquidity Facility, but 
for the expiration date, which will be January 2017, and the commitment 
amount, which will be $500 million.
    According to OCC, the extended Existing Confirmation will continue 
to state that OCC is entitled to receive funds from the Non-Bank 
Liquidity Facility within 60 minutes of requesting such monies and 
delivering eligible securities. OCC also states that the buyer will not 
be able to rehypothocate eligible securities sold to it in a Non-Bank 
Liquidity Facility transaction, and OCC will be able to substitute 
eligible securities held by the buyer. Additionally, OCC represents 
that it will have early termination rights for any transaction entered 
into under the Non-Bank Liquidity Facility as well as have additional 
protections in the case of ``material adverse changes'' to OCC. For 
example, OCC states that it will require that material adverse changes 
to OCC, such as the failure of a clearing member, will not be deemed a 
default event. OCC believes this provision is important because it 
provides OCC with certainty of funding, even in adverse or difficult 
market conditions. According to OCC, this commitment to provide funding 
will be a key distinction from ordinary repurchase arrangements and a 
key requirement for OCC.

Second Confirmation

    OCC proposes to enter into the Second Confirmation that will permit 
transactions of up to $500 million and will expire in June 2016. 
According to OCC, the Second Confirmation will have the same terms, 
conditions, operations, and mechanics as the Existing Confirmation of 
the Non-Bank Liquidity Facility, but for the commitment amount and the 
term.
    OCC believes that the Second Confirmation, with a June 2016 
expiration date, will help ensure continued access to a minimum amount 
of liquidity to OCC by staggering the expiration of the committed 
liquidity funding sources. OCC's current committed liquidity funding 
sources, which are its syndicated credit facility \11\ and the Existing 
Confirmation, currently expire each year in October and January, 
respectively. OCC believes that staggering the expiration dates of 
Confirmations under the Non-Bank Liquidity Facility in relationship to 
each other and in relationship to the other liquidity funding source in 
OCC's overall liquidity plan will mitigate the risk of a precipitous 
decrease in OCC's access to liquidity as a result of a an unsuccessful 
renewal of any one funding source.
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    \11\ See Securities Exchange Act Release No. 76062 (October 1, 
2015), 80 FR 64028 (October 22, 2015) (SR-OCC-2015-803).
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Aggregate Commitment Amount Under the Non-Bank Liquidity Facility

    OCC's current aggregate committed funding available under its Non-
Bank Liquidity Facility ($1.0 billion) and its bank syndicated credit 
facility ($2.0 billion) is $3.0 billion. OCC proposes to maintain the 
aggregate commitment amount under the Non-Bank Liquidity Facility at no 
lower than $1.0 billion and no higher than $1.5 billion, so that the 
aggregate total funding available is between $3.0 billion and $3.5 
billion. OCC believes that this will provide it with the flexibility 
to: (i) React to shifting liquidity needs in a swift manner within 
funding parameters approved by the Commission, and (ii) reallocate the 
amount of funding available under the Confirmations at the time either 
of the Confirmations is to be renewed to manage liquidity needs and 
enhance its ability to ensure continual liquidity resources.
    OCC states that it will continue to evaluate the aggregate 
commitment amount of the Non-Bank Liquidity Facility so that OCC's 
available liquidity resources remain properly calibrated to its 
activities and settlement obligations, and to the extent: (i) OCC 
determines its liquidity needs merit funding levels below the $1.0 
billion or above the $1.5 billion thresholds for the Non-Bank Liquidity 
Facility, (ii) OCC should seek to change the terms and conditions of 
the Non-Bank Liquidity Facility, or (iii) the Counterparty has 
experienced a negative change to its credit profile or a material 
adverse change since entering into the Confirmations or the latest 
renewal of the either Confirmation, OCC will submit a proposal with the 
Commission for approval first.

II. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, its stated 
purpose is instructive.\12\ The stated purpose 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 FMUs and strengthening the liquidity of 
systemically important FMUs.\13\ Section 805(a)(2) of the Payment, 
Clearing and Settlement Supervision Act \14\ authorizes the Commission 
to prescribe risk management standards for the payment, clearing, and 
settlement activities of designated clearing entities and financial 
institutions engaged in designated activities for which it is the 
Supervisory Agency or the appropriate financial regulator. Section 
805(b) of the Payment, Clearing and Settlement Supervision Act \15\ 
states that the objectives and principles for the risk management 
standards prescribed under Section 805(a) shall be to:
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    \12\ See 12 U.S.C. 5461(b).
    \13\ Id.
    \14\ 12 U.S.C. 5464(a)(2).
    \15\ 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 Payment, Clearing and Settlement Supervision Act \16\ 
and the Exchange Act (``Clearing Agency Standards'').\17\ The Clearing 
Agency Standards require registered clearing agencies 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.\18\ 
Therefore, it is appropriate for the Commission to review advance 
notices against these Clearing Agency Standards and the objectives and 
principles of these risk management standards as described in Section 
805(b) of the Payment, Clearing and Settlement Supervision Act.\19\
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    \16\ 12 U.S.C. 5464(a)(2).
    \17\ See Exchange Act Rule 17Ad-22. 17 CFR 240.17Ad-22. 
Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 
66220 (November 2, 2012) (S7-08-11).
    \18\ Id.
    \19\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposal in the advance notice is 
consistent with the Clearing Agency Standards, in particular, Exchange 
Act Rule 17Ad-22(d)(11).\20\ Exchange Act Rule 17Ad-22(d)(11) \21\ 
requires that

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registered clearing agencies ``establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable . . . establish default procedures that ensure that the 
clearing agency can take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
participant default.'' The proposal 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 changes 
should help OCC minimize losses in the event of such a default, 
suspension, or insolvency, by allowing it to obtain funds on extremely 
short notice to ensure clearance and settlement of transactions in 
options and other contracts without interruption. Therefore, the 
Commission believes that the proposal is consistent with Exchange Act 
Rule 17Ad-22(d)(11).\22\
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    \20\ 17 CFR 240.17Ad-22(d)(11).
    \21\ Id.
    \22\ Id.
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    By ensuring that OCC has continued access to its Non-Bank Liquidity 
Facility, the Commission believes the proposal contained in the Advance 
Notice is consistent with the objectives and principles described in 
Section 805(b) of the Act,\23\ including that it is consistent with 
promoting robust risk management, and promoting safety and soundness. 
The Commission believes that the proposal is consistent with promoting 
robust risk management because it allows OCC to maintain access to a 
committed liquidity resource to help meet its settlement obligations in 
a manner that is timely and does not increase OCC's counterparty 
exposure to clearing members or clearing member affiliated commercial 
banking institutions. In addition, the proposal will provide OCC the 
ability to adjust the aggregate commitment level of its Non-Bank 
Liquidity Facility--to no lower than $1 billion and no greater than 
$1.5 billion--to meet changing liquidity demands. The Commission also 
believes that the proposal is consistent with promoting safety and 
soundness of OCC. As stated above, the Non-Bank Liquidity Facility now 
will include two Confirmations with staggered expiration dates, which 
should mitigate the risk of a precipitous decrease in liquidity 
resources in the event OCC is unable to renew any one of its committed 
liquidity sources.
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    \23\ 12 U.S.C. 5464(b).
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    For these reasons, stated above, the Commission does not object to 
the advance notice.

VI. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\24\ that the 
Commission DOES NOT OBJECT to the proposed change, and authorizes OCC 
to implement the change in the advance notice (SR-OCC-2015-805) as of 
the date of this notice.
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    \24\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-00976 Filed 1-19-16; 8:45 am]
 BILLING CODE 8011-01-P