Document ID: SEC-2020-1579-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Options Clearing Corp.
Posted Date: 2020-10-07T04:00Z

[Federal Register Volume 85, Number 195 (Wednesday, October 7, 2020)]
[Notices]
[Pages 63305-63312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22096]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90065; File No. SR-OCC-2020-011]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Adopt a New Second Amended 
and Restated Cross-Margining Agreement Between The Options Clearing 
Corporation and The Chicago Mercantile Exchange

October 1, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 22, 2020, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by OCC. The Commission is publishing 
this notice to

[[Page 63306]]

solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by The Options Clearing Corporation 
(``OCC'') would adopt a new Second Amended and Restated Cross-Margining 
Agreement (``Proposed X-M Agreement'') between OCC and the Chicago 
Mercantile Exchange (``CME''). This proposal is designed to: (1) Update 
the existing X-M Agreement with the Proposed X-M Agreement to bring it 
into conformity with current operational procedures and eliminate 
provisions that are out-of-date; (2) improve the clarity and 
readability by consolidating certain redundant provisions and moving 
certain operational details from the existing X-M Agreement to a 
standalone service level agreement; and (3) streamline and consolidate 
certain related Clearing Member agreements.
    The Proposed X-M Agreement is attached hereto as Exhibit 5 of 
filing SR-OCC-2020-011. The Proposed X-M Agreement includes the 
following as appendices each of which is marked to show changes: 
Proprietary Cross-Margin Account Agreement and Security Agreement; Non-
Proprietary Cross-Margin Account Agreement and Security Agreement; and 
Market Professional's Agreement for Cross-Margining.\3\
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    \3\ Each of the Clearing Member agreement forms includes a 
version for Joint and Affiliated Clearing Members.
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    This proposed rule change does not require any changes to the text 
of OCC's By-Laws or Rules. All terms with initial capitalization that 
are not defined herein have the same meaning as set forth in OCC's By-
Laws and Rules.\4\
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    \4\ OCC's By-Laws and Rules can be found on OCC's public 
website: https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules#rule-filings.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, OCC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. 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), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
    The purpose of this proposed rule change is to adopt a new Second 
Amended and Restated Cross-Margining Agreement between OCC and CME that 
would: (1) Update the existing X-M Agreement with the Proposed X-M 
Agreement to bring it into conformity with current operational 
procedures and eliminate provisions that are out-of-date; (2) improve 
the clarity and readability by consolidating certain redundant 
provisions and moving certain operational details to a standalone 
service level agreement; and (3) streamline and consolidate certain 
related Clearing Member agreements.
Background
    OCC and CME are currently parties to an Amended and Restated Cross-
Margining Agreement dated May 28, 2008, as further amended by Amendment 
No. 1 dated October 23, 2008 \5\ and Amendment No. 2 dated May 20, 2009 
\6\ (the ``Existing X-M Agreement''). OCC and CME first implemented 
their cross-margining program (the ``X-M Program'') in 1989. The 
purpose of the X-M Program is to: (1) Facilitate the cross-margining of 
positions in options cleared by OCC with positions in futures and 
commodity options cleared by CME and (2) address the fact that Clearing 
Members may have been required to meet higher margin requirements at 
each clearinghouse than were warranted by the risk of combined 
positions, because each portfolio was margined separately without 
regard to positions held in the other portfolio.\7\ After the 1987 
Market Break, several government reports recommending market structure 
reforms found that cross-margining arrangements between clearinghouses 
should be implemented or expanded, because they could have a profound 
effect on mitigating liquidity stress to key market participants at 
critical times.\8\ For example, the Bachmann Task Force, which was 
formed at the request of SEC Chairman Breeden to address the issue of 
safety and soundness of the clearance and settlement system in the 
United States, published a report on Clearance and Settlement Reform in 
the U.S. Securities Markets, and the staff of the SEC's Division of 
Market Regulation \9\ also published its own report to analyze factors 
involved in the depth and rapidity of the market decline. Both reports 
noted that the existence of separate clearinghouses for each market 
segment increases systemic exposure because no single clearinghouse is 
able to accurately assess intermarket exposure among its clearing 
members and among their customers.\10\ Accordingly, the Bachmann Report 
specifically advanced that the cross-margining agreement in place 
between OCC and CME benefited dual participants with hedged positions 
with the respective clearing organizations,\11\ and it stated that OCC 
and relevant futures exchanges should be encouraged to expand their 
cross-margining programs because they ``reduce clearing system risk by 
substituting correlated positions for cash or cash equivalent margins 
and provide financing relief and settlement harmonization.'' \12\ Since 
the X-M Program was implemented, the parties have amended it twice.\13\
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    \5\ Securities Exchange Act Release No. 58258 (July 30, 2008), 
73 FR 46133 (August 7, 2008) (SR-OCC-2008-12) (amending the 
agreement to, among other things, permit money market fund shares as 
margin).
    \6\ Securities Exchange Act Release No. 60063 (June 8, 2009), 74 
FR 28738 (June 17, 2009) (SR-OCC-2009-10) (amending the agreement to 
redefine the term ``Eligible Contracts'' and deleting the list of 
such contracts attached as Schedule A).
    \7\ Securities Exchange Act Release Nos. 26607 (March 7, 1989), 
48 FR 10608 (March 14, 1989) (SR-OCC-89-1); 27296 (September 26, 
1989) (SR-OCC-89-11).
    \8\ See Report of the Bachmann Task Force on Clearance and 
Settlement Reform in U.S. Securities Markets, Submitted to The 
Chairman of the U.S. Securities and Exchange Commission (May 1992) 
(the ``Bachmann Report''); The October 1987 Market Break, A Report 
by the Division of Market Regulation, U.S. Securities and Exchange 
Commission (February 1988) (the ``1987 Market Break Report'').
    \9\ This Division is now known as the Division of Trading and 
Markets.
    \10\ See Bachmann Report at 11 citing the Report of the 
Presidential Task Force on Market Mechanisms at 64 (January 1988); 
1987 Market Break Report at 10-57 (stating that ``[i]n a fully 
integrated cross-margin account, margin requirements could be fixed 
to reflect more accurately the net risk of such positions taken as a 
whole, thus reducing certain margin requirements . . .'').
    \11\ See Bachmann Report at 12.
    \12\ See Bachmann Report at 31.
    \13\ See, e.g., Securities Exchange Act Release Nos. 32534 (June 
28, 1993), 58 FR 36234 (July 6, 1993) (SR-OCC-92-98); 38584 (May 8, 
1997), 62 FR 26602 (May 14, 1997); See also supra notes 5 and 6.
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The Existing X-M Agreement
    The Existing X-M Agreement governs OCC and CME's participation in a 
cross-margining program (the ``X-M Program''), which permits positions 
in certain futures and futures options contracts cleared by CME to be 
cleared in a special proprietary or non-proprietary cross-margining 
account (an ``X-M Account'') at CME, which is then paired with a 
corresponding X-M

[[Page 63307]]

Account (proprietary or non-proprietary, as the case may be) at OCC, in 
which securities options contracts are cleared (such contracts, 
``Eligible Contracts''). OCC Clearing Members that are also CME members 
(``Joint Clearing Members''), or that have qualified affiliates that 
are CME members (``Affiliated Clearing Members''), provided that they 
have signed the required X-M Program clearing member participation 
agreement, are permitted to participate in the X-M Program. Currently, 
there are nine Joint Clearing Members and one pair of Affiliated 
Clearing Members that participate in the X-M Program. Each Joint 
Clearing Member or pair of Affiliated Clearing Members electing to 
participate in the X-M Program and establish a pair of X-M Accounts is 
required to execute the appropriate account agreements in the forms 
prescribed by OCC and CME and to designate the account as either 
``proprietary'' or ``non-proprietary.'' \14\
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    \14\ The Existing X-M Agreement also permits the establishment 
of ``X-M Pledge Accounts,'' which are X-M Accounts in respect of 
which the Clearing Member grants a security interest in all 
contracts purchased or carried in the particular account to a bank, 
as security for a loan. X-M Pledge Accounts may be either 
proprietary or non-proprietary. The New X-M Agreement would 
eliminate the ability to establish such X-M Pledge Accounts because 
they are no longer being used. Historically, pledge accounts were 
only used for the purpose of supporting the pledging of money market 
mutual fund shares as collateral. Now that money market mutual fund 
shares are not acceptable collateral for the XM Program, there is no 
longer a need for the use of X-M Pledge Accounts.
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    Proprietary X-M accounts are confined to the confirmed trades and 
positions of non-customers of Clearing Members and other proprietary 
``market professionals.'' \15\ A non-proprietary X-M Account is limited 
to options market-makers and other ``market professionals.''
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    \15\ See OCC By-Laws Article I, Section 1.O.(1).
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    Non-proprietary X-M Accounts are treated as futures customer 
accounts, because they are carried subject to the segregation 
provisions of Section 4d of the Commodity Exchange Act \16\ rather than 
as securities accounts subject to Rule 15c3-3 \17\ and other customer 
protection rules under the Securities Exchange Act of 1934.\18\ X-M 
Accounts that are paired for purposes of the X-M Program are treated 
for margin purposes as if they were a single account, making it 
possible to margin the paired X-M Accounts based on the net risk of the 
potentially offsetting positions within them. The Existing X-M 
Agreement governs the calculation, collection, and holding of margin 
with respect to the paired X-M Accounts, as well as the handling of 
daily settlement.
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    \16\ 7 U.S.C. 6d.
    \17\ 17 CFR 240.15c3-3.
    \18\ 17 CFR 240.8c-1; 17 CFR 240.15c2-1.
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    The Existing X-M Agreement also addresses how OCC and CME may use 
the contracts and margin held in X-M Accounts in the event of the 
default of a Joint Clearing Member or Affiliated Clearing Member. Upon 
suspending a Joint Clearing Member or Affiliated Clearing Member, the 
suspending clearinghouse is required to immediately notify the other 
clearinghouse of the suspension. Both OCC and CME would then 
immediately liquidate the contracts and margin in each X-M Account 
carried for the suspended Joint Clearing Member or the Affiliated 
Clearing Members, unless OCC and CME otherwise agree to delay 
liquidation or to transfer the contracts. OCC and CME are required to 
use their best efforts to coordinate the transfer or liquidation of 
such contracts and to close out any hedged positions simultaneously or, 
if transferring the positions, to transfer them to the same clearing 
firm or pair of affiliated clearing firms.
    Any funds received by either OCC or CME upon liquidation of the 
proprietary and non-proprietary X-M Accounts, respectively, may be used 
to offset expenses arising from the liquidation of such account, and 
any net proceeds thereafter are to be deposited in a corresponding 
proprietary or non-proprietary liquidating account established jointly 
by OCC and CME. The funds in a proprietary or non-proprietary 
liquidating account are to be used only to set off any liquidating 
deficits or settlement obligations remaining with respect to the 
corresponding proprietary or non-proprietary X-M Account, respectively. 
To the extent the proprietary liquidating account has a surplus, after 
satisfying all deficits and obligations, the proceeds may be applied to 
set off any net liquidating deficits or settlement obligations arising 
from the Clearing Member's non-proprietary X-M Accounts at OCC or CME.
    After these offsets, if a liquidating account still has a deficit, 
each of OCC and CME bear 50% of the remaining shortfall. If a 
proprietary liquidating account has a surplus, OCC and CME each are 
entitled to 50% of the surplus to satisfy any losses whatsoever arising 
from the other obligations of the defaulting Clearing Member. However, 
if one clearinghouse's net loss is less than 50% of the remaining 
surplus and the other's is greater, the former is only entitled to the 
surplus up to the amount of its loss, and the latter is entitled to 
receive the balance up to the amount of its loss. After all of this, if 
any amounts remain in the liquidating accounts, such funds are returned 
to the Joint Clearing Member or pair of Affiliated Clearing Members or 
their respective representatives.
The Proposed X-M Agreement
    The Proposed X-M Agreement retains the same basic framework 
described above regarding the Existing X-M Agreement, and it would not 
fundamentally alter the scope of the X-M Program or the rights and 
responsibilities of OCC and CME. The primary purposes for proposing to 
update the Existing X-M Agreement with the Proposed X-M Agreement are 
to: (1) Bring the Existing X-M Agreement into conformity with current 
operational procedures; (2) eliminate provisions in the Existing X-M 
Agreement that are out-of-date; and (3) improve the clarity and 
readability of the agreement by consolidating redundant provisions. The 
Proposed X-M Agreement would also move several of the operational 
details regarding the X-M Accounts to the OCC-CME Cross-Margining 
Service Level Agreement (``SLA''). OCC and CME believe that having such 
operational details in a separate document produces a more streamlined 
Proposed X-M Agreement that would be easier to comprehend and that 
would therefore allow OCC and CME to more easily review the service 
levels and modify them as appropriate without having to amend the 
entire Proposed X-M Agreement. OCC believes that these changes would 
make the Proposed X-M Agreement and SLA easier to read and comprehend 
and would promote consistency with the requirement in Rule 17Ad-
22(e)(1) \19\ that OCC must establish, implement, maintain and enforce 
written policies and procedures reasonably designed to, as applicable, 
provide for a well-founded, clear and transparent legal basis for each 
aspect of its activities.
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    \19\ 17 CFR 240.17Ad-22(e)(1).
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    Key changes from the Existing X-M Agreement to the Proposed X-M 
Agreement are described in detail below.
Eligible Contracts and Accepted Transactions
    The Proposed X-M Agreement would not change the scope of products 
eligible for participation in the X-M Program. However, it would 
include a definition of ``Eligible Contracts'' in Section 1 that 
conforms with the substance of the definition that was adopted in 2009 
as part of Amendment

[[Page 63308]]

No. 2 to the Existing X-M Agreement.\20\ Consistent with these changes, 
the definition of ``Eligible Contracts'' in the Proposed X-M Agreement 
would include any contracts that have been ``jointly designated'' by 
OCC and CME as eligible for inclusion in the list of eligible contracts 
jointly maintained by OCC and CME. Prior to designating a new set of 
contracts as Eligible Contracts, OCC and CME would be required to 
evaluate and approve the additional contracts through internal 
processes that consider each clearing organization's risk policies.
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    \20\ See supra note 13.
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    Section 1 of the Proposed X-M Agreement would also be amended to 
introduce the new defined term ``Accepted Transaction'' and to provide 
a mechanism for confirming what specific transactions are subject to 
the Proposed X-M Agreement. The purpose of this change is not to change 
the scope of the X-M Program but rather to provide certainty and 
clarity regarding the specific transactions--the ``Accepted 
Transactions''--for which OCC and CME would be jointly responsible. 
``Accepted Transactions'' would be defined to include all positions 
that are Eligible Contracts and have been included on the ``daily 
margin detail report'' generated by OCC and transmitted to CME. 
Positions included in the ``daily margin detail report'' would be 
deemed to be the final record of positions in which OCC and CME are 
obligated under the Proposed X-M Agreement.
The Service Level Agreement
    As part of the update to the Proposed X-M Agreement, certain 
operational terms previously covered in the Existing X-M Agreement 
would be addressed in the SLA. For example, this includes provisions 
from the Existing X-M Agreement in Section 6 regarding acceptable forms 
of collateral, Section 7 regarding the timing, methods and forms of 
daily settlement procedures, and Section 15 regarding OCC and CME's 
commitment to share information regarding Joint and Affiliated Clearing 
Members, banks, and their own financial status. The Proposed X-M 
Agreement would address the existence of this SLA in a proposed Section 
2, stating that all ``times, methods and forms of deliveries, 
notification and consents'' pertaining to the X-M Program and X-M 
Accounts are provided for in the SLA. CME and OCC would also agree to 
review the SLA at least annually.
Account Structure
    The same basic account structure in Section 2 of the Existing X-M 
Agreement would still be used in Section 3 of the Proposed X-M 
Agreement. Proprietary and/or non-proprietary paired clearing accounts 
would still be established for Joint and Affiliated Clearing Members 
that participate in the X-M Program, and OCC and CME would continue to 
have a joint security interest in the contracts, margin, and other 
property held in the joint accounts. However, as noted above, the 
Proposed X-M Agreement would remove all references to X-M Pledge 
Accounts because such accounts are no longer in use. Along with 
removing all references to such accounts throughout the Proposed X-M 
Agreement, Section 3 of the Existing X-M Agreement, entitled 
``Establishment of X-M Pledge Accounts,'' would be deleted in its 
entirety.
    The Proposed X-M Agreement would also change some of the defined 
terms that are used to describe the accounts related to the X-M Program 
to describe their purpose more accurately. For example, the 
``Proprietary Joint Settlement Account'' and ``Segregated Joint Margin 
Account'' would be referred to as the ``Proprietary Joint Margin Cash 
Account'' and ``Segregated Joint Margin Cash Account,'' and the 
``Proprietary Joint Custody Account'' and ``Segregated Joint Custody 
Account'' would be referred to as the ``Proprietary Joint Margin 
Custody Account'' and ``Segregated Joint Margin Custody Account.'' The 
terms ``Proprietary Bank Account'' and ``Segregated Funds Bank 
Account'' would also be added to the defined terms section for 
readability and consistency, though they were already used in the body 
of the Existing X-M Agreement. The proposed addition of such terms to 
the defined terms section would not change for the purposes of the 
agreement. The defined term ``Liquidating Accounts'' would also be 
added to the agreement to cover the Non-Proprietary and Proprietary 
Liquidating Accounts created in the event of a Clearing Member 
suspension and liquidation.
Margin and Posted Collateral
    The Proposed X-M Agreement would replace the provisions in Section 
5 of the Existing X-M Agreement regarding the methodology for 
determining the initial margin requirements for each X-M Account with a 
statement that, with respect to each pair of X-M Accounts, the amount 
of cash, securities or other property required to be deposited as 
collateral would be determined by using OCC's approved margin 
methodology, as in effect as of the date of the Proposed X-M Agreement. 
As a practical matter, this change would not represent a change from 
the existing operation of the X-M Program because, consistent with the 
authority in Section 5, CME already elects to use the margin 
calculation that is produced by OCC. The Proposed X-M Agreement would 
also require OCC to provide 30 calendar days prior notice to CME of any 
proposed changes to OCC's margin methodology, and any changes to the 
way collateral requirements are calculated with respect to X-M Accounts 
would be required to be agreed upon in writing in advance by OCC and 
CME. The Proposed X-M Agreement would also specify that OCC and CME 
would each determine the net amount of premiums, exercise settlement 
amounts, and variation margin due for its respective products because 
the determination is made based upon the products cleared by OCC and 
CME, and adopts the defined terms ``Net Pay/Collect'' to refer to such 
amount. Each clearinghouse would be required to notify the other of the 
Net Pay/Collect amount in accordance with the SLA.
    Like under the Existing X-M Agreement, OCC and CME would each still 
have the ability to charge additional margin at any amount as it deems 
appropriate without the consent of the other and each would be 
responsible for determining the adequacy of the margin requirement for 
each cross-margin account.
    As discussed above, Section 6 of the Proposed X-M Agreement would 
no longer specify the eligible forms of initial margin, instead 
referring to the SLA. The SLA would revise the list of eligible 
collateral to include cash, treasuries, and letters of credit from pre-
approved U.S. depository institutions, and eliminate the eligibility of 
government sponsored entity debt and money market funds. OCC and CME 
are proposing to eliminate the eligibility of these instruments 
because, in practice, OCC no longer accepts them as collateral for the 
X-M Program. This is because no money market mutual funds currently 
meet OCC's requirements for such margin assets set forth in OCC Rule 
604(b)(3), and OCC's liquidity facilities do not currently accept 
government sponsored entity debt as collateral. Consequently, all 
references to government sponsored entity debt and money market funds 
are removed from the Proposed X-M Agreement. The Proposed X-M Agreement 
would also clarify that the more conservative limits

[[Page 63309]]

would apply to the extent OCC and CME's rules with respect to 
concentration limits for eligible margin differ. Furthermore, if OCC 
reduces any of its required haircuts for eligible margin below CME's 
required haircuts, OCC is required to provide prompt notice to CME.
    The Proposed X-M Agreement would also provide that OCC and CME 
would each be permitted to invest any cash deposited as collateral in 
their joint margin cash accounts overnight in certain eligible 
investments and with certain custodians, depositories, and 
counterparties, as OCC and CME may mutually agree, with each 
clearinghouse sharing equally in any proceeds received, or losses 
incurred, from such overnight investments. This formalizes the existing 
practice of OCC and CME and provides clarity that OCC and CME share 
equally in any proceeds or losses from overnight investments.
    Additionally, the Proposed X-M Agreement would no longer use the 
term ``Margin'' or ``Initial Margin'' with respect to the collateral 
deposited in an X-M Account. Instead, it would use the term ``Posted 
Collateral.'' OCC proposes the change because it is a more accurate 
characterization of the margin requirement set by OCC's System for 
Theoretical Analysis and Numerical Simulations (``STANS'')--which is 
the methodology used to determine the collateral requirement for the X-
M Program and does not produce a separate Initial Margin requirement. 
References to margin requirements and deficits or surpluses in respect 
to such requirements are proposed to be replaced with references to the 
defined terms ``Collateral Requirement,'' ``Collateral Deficit,'' and 
``Collateral Excess,'' respectively.
Daily Settlement
    Section 7 of the Proposed X-M Agreement would be revised to 
increase the time OCC and CME would have to provide approval or non-
approval of revised Settlement Instructions from 15 minutes to 30 
minutes. Based on OCC and CME's experience operating the X-M Program, 
OCC believes the change from 15 to 30 minutes would provide additional 
time which would be useful during the process of performing a full 
review of any revised Settlement Instructions and making determinations 
for approval or non-approval of the revised Settlement Instructions. 
Furthermore, OCC has determined that the proposed change to add 
additional time to review revised Settlement Instructions will not 
negatively impact on the timing of other processes performed under the 
Proposed X-M Agreement.
    As described above, details regarding the timing, methods, and form 
of daily settlement in the X-M Accounts have been moved to the SLA, and 
Section 7 of the Proposed X-M Agreement would be amended to reflect 
that fact. Section 7 would also be amended to conform to existing 
reporting practices for OCC and CME with respect to settlement. For 
example, under the Existing X-M Agreement each clearing organization 
issues a ``Margin and Settlement Report'' to each Joint Clearing Member 
or pair of Affiliated Clearing Members for which it is the Designated 
Clearing Organization. However, in practice, OCC has been the only 
Designated Clearing Organization. Accordingly, the related provisions 
would be modified so that the information contained in that report is 
only provided by OCC to the Clearing Members. The definition of 
``Margin and Settlement Report'' in Section 1 of the Proposed X-M 
Agreement is correspondingly modified and would refer to the report 
more specifically as the ``Account Summary by Clearing Corporation 
Report.''
    The Proposed X-M Agreement would also update Section 7 to provide 
for the communication of intra-day instructions to X-M clearing banks 
with respect to the X-M Accounts, to facilitate the deposit of 
collateral in response to an intra-day margin call from CME or OCC. A 
defined term for ``Intra-day Instruction'' would also be added to 
Section 1 to accommodate this change.
Suspension and Liquidation
    Section 8 of the Proposed X-M Agreement essentially retains the 
Existing X-M Agreement's procedures for the handling of X-M Accounts in 
the event of the default of a Joint Clearing Member or pair of 
Affiliated Clearing Members, as described above, with certain 
modifications. First, paragraphs 8(a) and (b) would be revised to state 
more generally that each clearinghouse will follow its own rules with 
respect to the default of a Clearing Member; provided, however, that 
each clearinghouse would also use its best efforts to coordinate with 
the other clearinghouse regarding the liquidation or transfer of 
Accepted Transactions. The proposed changes that expressly provide that 
each clearinghouse would follow its own rules with respect to the 
default of a Clearing Member are not intended to substantively change 
the terms in the Existing X-M Agreement. Instead, they are meant to 
provide each clearinghouse with greater flexibility to amend their 
suspension and liquidation procedures pursuant to the normal rule 
change process without having to also amend the Proposed X-M Agreement. 
The Proposed X-M Agreement also now expressly contemplates the 
potential use of a joint liquidating auction with respect to X-M 
Accounts during a Clearing Member default scenario.
    Second, new sections 8(c) and (d) would be added to the Proposed X-
M Agreement to provide that upon the suspension of a defaulted Clearing 
Member, the clearinghouses would establish a plan pursuant to which 
Accepted Transactions of the Clearing Member would be liquidated or 
transferred. The plan would be required, at a minimum, to (i) identify 
the primary point of contact at each clearinghouse responsible for 
coordinating communications and actions related to the plan; (ii) 
current-day settlement information related to the suspended Clearing 
Member; and (iii) whether any transactions in addition to Accepted 
Transactions would be guaranteed. If by the close of the markets on the 
business day that follows the last successful margin collection for the 
suspended Clearing Member the clearinghouses do not take action under a 
plan or have not otherwise established a plan, then the clearinghouses 
would be required to take certain steps to transfer cleared contracts 
prior to the open of trading on the next business day. Specifically, 
contracts cleared by each respective clearinghouse would be transferred 
into an account under its control to allow that clearinghouse to 
liquidate or transfer the contracts pursuant to its rules. The closing 
prices for the cleared contracts used to determine final proceeds and 
any liquidity obligations of the clearinghouses would be the prices as 
of the business day that immediately follows the last successful margin 
collection for the suspended Clearing Member.
    Third, Section 8 would also be revised to provide that each of OCC 
and CME agree to enter into any agreements reasonably necessary to 
ensure that the other can obtain liquidity during a default scenario 
and will be jointly and equally responsible for providing liquidity to 
ensure all obligations of a non-defaulting Clearing Member with respect 
to the X-M Accounts on a timely basis. OCC believes this change would 
help ensure OCC and CME have sufficient access to liquidity and thereby 
provide for efficient and effective default management in the event of 
a Clearing Member default.
    Finally, OCC and CME also would agree to conduct joint default 
management drills for the cross-margin accounts at least annually. OCC 
believes

[[Page 63310]]

that this change would promote consistency with the requirement in Rule 
17Ad-22(e)(13) that OCC as a covered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to ``[e]nsure the covered clearing agency has the 
authority and operational capacity to take timely action to contain 
losses and liquidity demands and continue to meet its obligations by, 
at a minimum, requiring [its] participants and, when practicable, other 
stakeholders to participate in the testing and review of its default 
procedures, including any close-out procedure, at least annually and 
following material changes thereto.'' \21\
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    \21\ 17 CFR 240.17Ad-22(e)(13).
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Miscellaneous Changes
    Regarding other changes, first the ``Recitals'' to the Proposed X-M 
Agreement would be updated to reflect OCC and CME's respective SEC and 
CFTC registration statuses and designations as systemically important 
by the Financial Stability Oversight Council. Related to this, defined 
terms would be added for ``FSOC,'' ``Dodd Frank Act,'' ``DCO,'' 
``Exchange Act,'' and ``SEC.''
    Second, Section 9 of the Proposed X-M Agreement would be amended to 
clarify that the requirement that one clearinghouse notify the other 
when it becomes subject to a court order to disclose ``confidential 
information'' is only required if it is permitted by law.
    Third, Section 10 of the Proposed X-M Agreement would rephrase the 
section to only reference Losses because the definition of Losses under 
the Proposed X-M Agreement would be revised to include claims and other 
potential loss events.
    Fourth, Section 13 of the proposed agreement would change the 
process and timing related to termination of the agreement because OCC 
and CME believe the revised language would reduce risk in the event of 
a termination.
    Fifth, the Proposed X-M Agreement would also revise Section 14, to 
clarify that while OCC and CME are not permitted to reject any 
transaction effected in an X-M Account without the other's express 
consent, this condition would not interfere with their respective 
abilities to implement recovery and orderly wind-down plans under their 
own rules, as required under Rule 17Ad-22(e)(3)(ii) \22\ and CFTC Rule 
39.39(b).\23\
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    \22\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \23\ 17 CFR 39.39(b).
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    Sixth, as discussed above in the description of the SLA, Section 15 
of the Existing X-M Agreement regarding information sharing between OCC 
and CME would be deleted from the Proposed X-M Agreement and moved to 
the SLA. OCC believes the more succinctly drafted language in the SLA 
maintains consistent rights and/or obligations for OCC and CME to share 
information which will continue to allow OCC and CME to efficiently 
manage the risks presented by Joint and Affiliated Clearing Members.
    Seventh, Section 15 of the Proposed X-M Agreement regarding 
notifications differs from the corresponding provisions in Section 16 
of the Existing X-M Agreement, in that it would allow for the use of 
electronic mail to satisfy notice requirements, except with respect to 
notifications relating to the termination of the Proposed X-M 
Agreement. It would also eliminate facsimile as an appropriate method 
of communication. OCC believes this change conforms to current 
communication procedures and standards and ensures notices will be 
received in a timely manner through a communication method that is 
monitored regularly.
    Finally, the Proposed X-M Agreement would also add Section 17 to 
clarify that each of OCC and CME would be responsible for obtaining 
their own regulatory approvals in connection with the implementation of 
the Proposed X-M Agreement.
Additional Changes To Defined Terms
    In addition to the proposed and modified defined terms described 
above, the Proposed X-M Agreement would make certain additional 
modifications to Section 1 of the Existing X-M Agreement. Many of these 
are non-substantive, including adding defined terms that are already 
used and defined elsewhere in the Existing X-M Agreement but that are 
not currently listed in Section 1--e.g., the defined terms ``AAA,'' 
``Affiliated Clearing Member,'' ``CME Clearing Member,'' ``CME Rules,'' 
``Confidential Information,'' ``Indemnitor,'' ``Indemnified Party,'' 
``Losses,'' ``OCC Clearing Member,'' and ``OCC Rules.'' The Proposed X-
M Agreement would also modify the definition of ``Affiliate'' to remove 
the statement that 10% ownership of common stock will be deemed prima 
facie control of that entity for purposes of determining whether an 
entity is under direct or indirect control of a Clearing Member, to 
instead reflect that OCC and CME believe that a facts-and-circumstances 
approach is more appropriate. The definition of ``Business Day'' would 
be modified to provide that when one or more markets on which cleared 
contracts trade are closed but banks are open, OCC and CME would each 
make their own determination regarding whether and to what extent to 
treat any such day as a Business Day for purposes of Section 7 of the 
Proposed X-M Agreement regarding daily settlements.
Clearing Member Agreements
    In conjunction with the streamlining efforts at the heart of the 
Proposed X-M Agreement, OCC is proposing to consolidate certain of the 
template Clearing Member agreements that it maintains for the X-M 
Program. As noted above, a Clearing Member that intends to participate 
in the X-M Program must execute the appropriate Clearing Member 
agreement. Currently, there are six such template agreements, and the 
appropriate agreement for the participating Clearing Member depends on 
the type of account it will be using as its X-M Account (i.e., 
proprietary, non-proprietary, or market professional) and whether the 
Clearing Member will be participating in the X-M Program as a Joint 
Clearing Member or with an Affiliated Clearing Member. To maintain 
fewer templates and streamline the Clearing Member documentation, the 
six template agreements would be consolidated into three. Specifically, 
Joint Clearing Members and Affiliated Clearing Members would use the 
same template agreement for the appropriate account type (i.e., 
proprietary, non-proprietary, or market professional). The revised 
Clearing Member agreements include language providing for OCC and CME's 
ability to move positions between Clearing Member accounts, as 
necessary, based upon Clearing Member instruction, to maintain 
positions in the appropriate account type. The substance of the 
agreements is not otherwise being altered.
(2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Act \24\ and the rules thereunder applicable to OCC. Section 
17A(b)(3)(F) of the Act requires, among other things, that the rules of 
a clearing agency be designed to remove impediments to and perfect the 
mechanism of a national system for the prompt and accurate clearance 
and settlement of securities transactions.\25\ OCC believes that the 
proposal is consistent with this requirement for the following reasons.

[[Page 63311]]

The proposed change would improve the clarity and transparency of the 
Existing X-M Agreement by moving several of the operational details to 
an SLA to produce a more streamlined Proposed X-M Agreement that would 
be easier to comprehend. Maintaining a separate SLA would also allow 
OCC and CME to more easily review the service levels and modify them as 
appropriate without having to amend the entire Proposed X-M Agreement--
improving the ease with which the parties would be able to keep the 
legal requirements of X-M Program consistent with evolving operational 
needs. Further, as described above, certain aspects of the Existing X-M 
Agreement would be clarified to reflect current practice. For example, 
the Proposed X-M Agreement would remove provisions related to the X-M 
Pledge Accounts to reflect the fact that they are no longer used. Also, 
the Proposed X-M Agreement would modify provisions related to the 
calculation of the margin requirements for X-M Accounts to reflect the 
fact that OCC's margin methodology has historically been and will 
continue to be the margin methodology that is used.
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    \24\ 15 U.S.C. 78q-1.
    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act also requires that the rules of a 
clearing agency be designed, in general, to protect investors and the 
public interest.\26\ OCC believes the proposal is consistent with this 
requirement because, under the Proposed X-M Agreement, the X-M Program 
would continue to benefit dual participants with hedged positions at 
the respective clearing organizations by permitting them to meet margin 
requirements that are based on the risk of the combined positions.
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    \26\ Id.
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    Rule 17Ad-22(e)(20) \27\ requires that a covered clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ``identify, monitor, and manage risks 
related to any link \28\ the covered clearing agency establishes with 
one or more other clearing agencies, financial market utilities, or 
trading markets.'' OCC and CME have each been designated as 
systemically important financial market utilities and OCC believes that 
the X-M Program meets the definition of a ``link'' for this purpose. 
Replacing the Existing X-M Agreement with a Proposed X-M Agreement that 
better reflects OCC and CME's current operational procedures, and which 
relocates several of the operational details to an SLA that allows them 
to be reviewed and updated on a more regular basis, furthers the 
purpose of identifying and managing risks arising from the OCC-CME 
linkage and therefore promotes robust risk management and reducing 
systemic risk. Accordingly, OCC believes that adopting the Proposed X-M 
Agreement is consistent with Rule 17Ad-22(e)(20).\29\
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    \27\ 17 CFR 240.17Ad-22(e)(20).
    \28\ A ``link'' for purposes of Rule 17Ad-22(e)(20) means ``a 
set of contractual and operational arrangements between two or more 
clearing agencies, financial market utilities, or trading markets 
that connect them directly or indirectly for the purposes of 
participating in settlement, cross margining, expanding their 
services to additional instruments or participants, or for any other 
purposes material to their business.'' [emphasis added.] See 17 CFR 
240.17Ad-22(a)(8).
    \29\ 17 CFR 240.17Ad-22(e)(20).
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    OCC also believes that the proposed change would promote compliance 
with Rule 17Ad-22(e)(1),\30\ which requires OCC as a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to ``provide for a well-founded, 
clear, transparent, and enforceable legal basis for each aspect of its 
activities in all relevant jurisdictions.'' The Proposed X-M Agreement 
would move several of the operational details regarding the X-M 
Accounts to a standalone SLA, which OCC believes would produce a more 
streamlined Proposed X-M Agreement that would be easier to comprehend. 
The proposed change would also allow OCC and CME to more easily review 
the service levels and modify them as appropriate without having to 
amend the entire Proposed X-M Agreement--thereby promoting the ability 
of the parties to keep the agreements that are the legal basis for the 
X-M Program consistent with evolving operational needs. Accordingly, 
OCC believes that the proposed change is consistent with Rule 17Ad-
22(e)(1).
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    \30\ 17 CFR 240.17Ad-22(e)(1).
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    OCC further believes that the proposed change would promote 
compliance with Rule 17Ad-22(e)(13),\31\ which requires OCC as a 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to ``ensure [it] 
has the authority and operational capacity to take timely action to 
contain losses and liquidity demands and continue to meet its 
obligations by, at a minimum, requiring [its] participants and, when 
practicable, other stakeholders to participate in the testing and 
review of its default procedures, including any close-out procedures, 
at least annually and following material changes thereto.'' The 
Proposed X-M Agreement specifically requires OCC and CME to conduct 
joint default management drills with respect to the X-M Account at 
least annually. It also includes new language providing that each of 
OCC and CME will enter into any agreements reasonably necessary to 
ensure that the other can obtain liquidity during a default scenario 
and that they will be jointly and equally responsible for providing 
liquidity to ensure all obligations of non-defaulting Clearing Members 
with respect to the X-M Accounts on a timely basis. These changes are 
specifically designed to ensure OCC and CME retain operational capacity 
with respect to the X-M Program during a Clearing Member default, and 
OCC accordingly believes they are consistent with Rule 17Ad-22(e)(13).
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    \31\ 17 CFR 240.17Ad-22(e)(13).
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    OCC also believes that the proposed change would promote compliance 
with Rule 17Ad-22(e)(17),\32\ which requires OCC as a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to ``manage the covered clearing 
agency's operational risks by,'' among other things, ``identifying the 
plausible sources of operational risk . . . and mitigating their impact 
through the use of appropriate systems, policies, procedures, and 
controls [and] ensuring that systems have a high degree of security, 
resiliency, operational reliability, and adequate, scalable capacity.'' 
As described above, certain aspects of the Existing X-M Agreement do 
not reflect current operational realities with respect to the X-M 
Program, which potentially could be a source of operational risk to 
OCC. OCC believes that the Proposed X-M Agreement would reduce this 
potential source of operational risk by removing and updating 
provisions and requirements that are out of date, like those related to 
determining the margin requirements for an X-M Account or various 
required methods of communication and notification. Accordingly, OCC 
believes that the proposed change is consistent with Rule 17Ad-
22(e)(17). In these ways, OCC believes the proposed changes are 
consistent with Section 17A(b)(3)(F) of the Act \33\ and Rules 17Ad-
22(e)(1), (13), (17), and (20).\34\
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    \32\ 17 CFR 240.17Ad-22(e)(17).
    \33\ 15 U.S.C. 78q-1(b)(3)(F).
    \34\ 17 CFR 240.17Ad-22(e)(1), (13), (17), and (20).

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[[Page 63312]]

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \35\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposal would impose any burden on competition.\36\ 
The primary purpose of the proposed rule change is to update and 
clarify the existing X-M Agreement to reflect current practices and 
also streamline Clearing Member agreements. The proposed rule change 
would not affect any individual Clearing Member's current rights or 
ability to access OCC services or disadvantage or favor any particular 
user in relationship to another. As such, OCC believes that the 
proposed changes would not have any impact or impose any burden on 
competition.
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    \35\ 15 U.S.C. 78q-1(b)(3)(I).
    \36\ Id.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
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.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self- regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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-2020-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2020-011. 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 proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for 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 such filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's website at 
https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules#rule-filings.
    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-2020-011 and 
should be submitted on or before October 28, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22096 Filed 10-6-20; 8:45 am]
BILLING CODE 8011-01-P