Document ID: SEC-2015-0817-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2015-05-13T04:00Z

[Federal Register Volume 80, Number 92 (Wednesday, May 13, 2015)]
[Notices]
[Pages 27431-27432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11480]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74894; File No. SR-OCC-2015-007]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Enhance the Measurement Used To 
Establish Minimum Capital Requirements for Banks Approved To Issue 
Letters of Credit

May 7, 2015.
    On March 6, 2015, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2015-007 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ On March 25, 2015, the proposed rule change was 
published for comment in the Federal Register.\3\ The Commission did 
not receive any comments on the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 74536 (March 19, 2015), 
80 FR 15846 (March 25, 2015) (SR-OCC-2015-007).
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I. Description

    OCC is amending its by-laws and rules in order to enhance the 
measurement used to establish minimum capital requirements for banks 
approved to issue letters of credit that may be deposited by clearing 
members as a form of margin asset. Currently, OCC's Rule 604, 
Interpretation and Policy .01, requires U.S. banks to have $100,000,000 
or more in shareholders' equity, and non-U.S. banks to have 
$200,000,000 or more in shareholders' equity, in order to be approved 
as an issuer of letters of credit that may be deposited by clearing 
members to meet their margin obligations at OCC. The purpose of these 
minimum capital requirements is to ensure that issuers of letters of 
credit whose letters of credit are deposited at OCC as a margin asset 
by clearing members have the ability to honor a demand for payment by 
OCC under such letters of credit should a need to do so arise, such as 
in the case of a clearing member default.
    The financial requirements set forth in OCC's Rule 604 concerning 
issuers of letters of credit have been in place for many years.\4\ 
However, since OCC adopted Rule 604 and Interpretation and Policy .01 
under Rule 604, bank financial reporting standards have changed. Today, 
bank regulators place a greater emphasis on Tier 1 Capital as opposed 
to shareholders' equity \5\ such that Tier 1 Capital is now considered 
the primary component of a bank's total regulatory capital.\6\ 
Moreover, OCC notes that Tier 1 Capital is a more conservative measure 
of a bank's financial health as it ignores subordinated debt, 
intermediate-term preferred stock, cumulative and long-term preferred 
stock and a portion of a bank's allowance for loan and lease losses.
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    \4\ See Securities and Exchange Act Release No. 19422 (January 
12, 1983), 48 FR 2481 (SR-OCC-1982-08).
    \5\ Tier 1 Capital is the measure used by the Basel Committee on 
Banking Supervision to measure the financial health of a bank. The 
goal of the Basel Committee on Banking Supervision is to strengthen 
the regulation, supervision and risk management of the banking 
sector. The Basel Committee on Banking Supervision's most recent set 
of reform measures, Basel III, is located at: http://www.bis.org/publ/bcbs189.pdf.
    \6\ See https://www.kansascityfed.org/Publicat/BasicsforBankDirectors/BasicsforBankDirectors.pdf.
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    OCC believes that by measuring a bank's financial health based on 
Tier 1 Capital, instead of shareholders' equity, OCC will reduce its 
credit risk to banks issuing letters of credit deposited by clearing 
members as a form of margin asset. As stated above, Tier 1 Capital is a 
more conservative measure of a bank's

[[Page 27432]]

financial health. Should OCC need to demand payment on a letter of 
credit deposited by a clearing member as a margin asset, such as in the 
case of a clearing member default, it is less likely that the bank 
issuing such letter of credit will not perform upon its payment 
commitment because the bank will be required to hold a greater amount 
of capital in order to be an OCC letter of credit bank. In turn, credit 
risk presented to OCC as a result of accepting letters of credit as a 
form of margin asset is reduced.\7\
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    \7\ OCC does not anticipate that the proposed rule change will 
impact any of the banks already approved to issue letters of credit 
that may be deposited by clearing members as a form of margin since 
all such banks maintain amounts of Tier 1 Capital that exceed, as 
applicable, $100 million for U.S. banks or $200 million for Non-U.S. 
banks.
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    In light of the more universal acceptance of Tier 1 Capital for 
bank financial reporting standards and the potential to reduce the 
credit risk associated with the issuance of letters of credit, OCC is 
amending Rule 604, Interpretation and Policy .01, to substitute Tier 1 
Capital for shareholders' equity. Pursuant to the rule change, as 
approved, OCC is also adding paragraph ``c'' to Interpretation and 
Policy .01 under Rule 604 to adopt a definition of Tier 1 Capital that 
leverages the definition of Tier 1 Capital used by a bank's regulatory 
agency. OCC believes that such a definition is appropriate given that 
OCC accepts letters of credit from banks regulated by different 
regulatory authorities.\8\ In addition, OCC is making a conforming 
change to OCC Rule 604, Interpretation and Policy .04, so that any one 
bank may not issue letters of credit for an individual clearing member 
exceeding 15% of the bank's Tier 1 Capital (instead of shareholders' 
equity).
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    \8\ See OCC Rule 604(c). For example, OCC accepts letters of 
credit issued by banks regulated by The Federal Reserve Board, The 
Office of the Comptroller of the Currency, The Australian Prudential 
Regulation Authority and The German Federal Financial Supervisory 
Authority.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \9\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization.
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    \9\ 15 U.S.C. 78s(b)(2)(C).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A(b)(3)(F) of the Act, which requires, among other 
things, that the rules of a clearing agency are designed to assure the 
safeguarding of securities and funds which are in the custody and 
control of the clearing agency or for which it is responsible.\10\ The 
rule change, as proposed, should help ensure the safeguarding of 
securities and funds which are in the custody and control of OCC, or 
for which OCC is responsible, because OCC will assess banks that issue 
letters of credit to be deposited as margin by clearing members using a 
more conservative capital requirement. This more conservative capital 
requirement thereby increases the likelihood that the bank will have 
the ability to honor a demand for payment made by OCC. For the same 
reason, OCC believes that the adoption of a more conservative capital 
requirement for banks approved to issue letters of credit that may be 
deposited by clearing members as a form of margin asset is consistent 
with the requirement of Rule 17Ad-22(d)(3), promulgated under the Act, 
which requires OCC hold assets in a manner that minimizes risk of loss 
or delay in access to them.\11\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(d)(3).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A of the Act \12\ and 
the rules and regulations thereunder.
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    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-OCC-2015-007) be, and it 
hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-11480 Filed 5-12-15; 8:45 am]
 BILLING CODE 8011-01-P