Document ID: SEC-2017-2019-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Options Clearing Corp.
Posted Date: 2017-12-11T05:00Z

[Federal Register Volume 82, Number 236 (Monday, December 11, 2017)]
[Notices]
[Pages 58230-58232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26554]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82221; File No. SR-OCC-2017-805]

Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection To Advance Notice Filing Concerning the Use of 
the Society of Worldwide Interbank Financial Telecommunication 
(``SWIFT'') Messaging Network in OCC's Cash Settlement Process

December 5, 2017.
    The Options Clearing Corporation (``OCC'') filed on October 10, 
2017 with the Securities and Exchange Commission (``Commission'') 
advance notice SR-OCC-2017-805 (``Advance Notice'') 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 \2\ 
(``Exchange Act'') to propose changes to the current process OCC uses 
to conduct cash settlement with Clearing Members \3\ by requiring 
Clearing Banks to integrate the use of the Society of Worldwide 
Interbank Financial Telecommunication (``SWIFT'') messaging network. 
The proposed changes are intended to enhance the resiliency, 
efficiency, and consistency of the cash settlement process and thereby 
mitigate risks that are associated with the existing cash settlement 
process. The Advance Notice was published for comment in the Federal 
Register on November 17, 2017.\4\ The Commission has not received any 
comments on the Advance Notice to date. This publication serves as 
notice of no objection to 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 (``SIFMU'') 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.
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Unless specified otherwise, capitalized terms shall have the 
meaning OCC ascribes in its By-Laws and Rules.
    \4\ Notice of Filing of Advance Notice Concerning the use of the 
Society of Worldwide Interbank Financial Telecommunication Messaging 
Network in OCC's Cash Settlement Process, Exchange Act Release No. 
82055 (Nov. 13, 2017), 82 FR 54448 (Nov. 17, 2017) (``Notice of 
Filing of Advance Notice'').
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I. Background

    In connection with OCC's performance of clearance and settlement 
services, OCC and its Clearing Members are obligated to perform cash 
settlement functions pursuant to OCC's By-Laws and Rules. For example, 
a Clearing Member may be obligated to pay OCC the premium for a cleared 
contract, or OCC may be obligated to pay a Clearing Member the 
settlement value of a cleared contract.\5\ The cash settlement process 
for these and other clearance and settlement services is facilitated by 
Clearing Banks, which are banks or trust companies that have entered 
agreements with OCC to settle on behalf of Clearing Members and at 
which OCC and Clearing Members each maintain accounts.\6\ Currently, 
there are eight Clearing Banks with which OCC effects cash settlements 
through the ENCORE clearing system (``OCS'').\7\
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    \5\ See Article VI, Section 4 of OCC's By-Laws (Obligations of 
Purchasing Clearing Members); see also Chapter V of OCC's Rules 
(Daily Cash Settlement); Article VI, Section 6.01 of OCC's By-Laws 
(requiring, among other things, that OCC be substituted through 
novation as the buyer of every seller and seller to every buyer with 
respect to obligations owing to persons having positions in cleared 
contract); Article I, Section 1.S.(16) of OCC's By-Laws (defining 
the term ``settlement time'').
    \6\ See OCC Rule 101.C.(1) (defining the term ``clearing bank'' 
to mean ``a bank or trust company which has entered into an 
agreement with [OCC] in respect of settlement of confirmed trades on 
behalf of Clearing Members.'').
    \7\ See generally OCC Completes Second Major Installation of 
EncoreTM Clearing System (November 25, 2002) available at 
https://www.theocc.com/about/newsroom/releases/2002/11_25.jsp.
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    OCC generates settlement instructions associated with Cleared 
Contracts and Stock Loans of Clearing Members by running specific 
predefined settlement profiles \8\ throughout the day. These settlement 
instructions are categorized as either start-of-day instructions or 
intra-day instructions. The resulting settlement instructions are 
generally transmitted by OCC to Clearing Banks by way of OCS, at which 
point the Clearing Banks are able to view batches of settlement 
instructions within OCS.\9\ Clearing Bank staff review the settlement 
instructions by logging into OCS and opening the settlement batch.\10\
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    \8\ Predefined settlement profiles are programmed to track 
various types of obligations to pay or collect cash in connection 
with Cleared Contracts and Stock Loans that are in turn used to 
generate settlement instructions.
    \9\ A settlement batch is a set of individual debit or credit 
settlement instructions that may either instruct a Clearing Bank to 
move funds to or from an OCC settlement account or to or from a 
Clearing Member's account at the same Clearing Bank.
    \10\ One of the Clearing Banks, however, currently does not 
utilize OCS as its primary means of effecting cash settlement. 
Instead, the Clearing Bank primarily receives settlement 
instructions from OCC via facsimile, reviews the settlement 
instructions, approves or rejects them, and then returns a facsimile 
confirmation to OCC. After receipt of the confirmation, OCC staff 
manually enters the approvals or rejections into OCS. This Clearing 
Bank will transfer to the SWIFT messaging network after 
implementation of the proposals described herein.

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[[Page 58231]]

    Each Clearing Bank has entered into a Cash Settlement Procedures 
Agreement (``CSPA'') with OCC that details the substantive rights and 
responsibilities of the parties and specifies operational procedures 
for which they are responsible regarding start-of-day and intra-day 
settlement instructions. This process includes prescribed communication 
methods and settlement procedures, including a requirement that the 
Clearing Bank act upon the settlement instructions before a defined 
settlement time. If a Clearing Bank does not expressly accept or reject 
a settlement instruction by the specified settlement time, the Clearing 
Bank is deemed to have accepted the instruction.
    The processes agreed to in the CSPAs currently are conducted via 
OCS because the SWIFT messaging network is available for cash 
settlement processes in narrow circumstances only. For example, OCC 
states that SWIFT is available to Clearing Members to deposit letters 
of credit for margining purposes provided: (i) They are denominated in 
U.S. dollars, (ii) they are issued by banks or trust companies, (iii) 
they are approved by OCC as margin assets, and (iv) the issuer of any 
such letter of credit submits amendments to OCC using the SWIFT 
network. OCC states that it manages this process through a SWIFT system 
that interfaces with OCC's OCS so that OCC is able to track and process 
the amendment messages.\11\
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    \11\ See Notice of Filing of Advance Notice.
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    The proposals set forth in OCC's Advance Notice would change its 
current cash settlement process with Clearing Members by: (i) Requiring 
Clearing Banks to expand the use of the SWIFT messaging network, and 
(ii) creating a new standardized CSPA template. Collectively, OCC 
believes these changes would improve OCC's resiliency, efficiency, and 
consistency, thereby mitigating risks.\12\ The specifics of the 
proposals are described in detail below.
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    \12\ See Notice of Filing of Advance Notice for a more detailed 
description of the specific rule changes OCC is proposing.
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II. Description of the Advance Notice

A. Proposed Change To Increase SWIFT Utilization

    OCC's Advance Notice states that the changes to its cash settlement 
process are intended to improve OCC's current cash settlement process 
by implementing the SWIFT messaging network as the primary means of 
transmitting daily cash settlement between OCC and the Clearing Banks. 
Currently, OCS requires Clearing Banks to process aspects of the cash 
settlement process manually, including logging into OCS to reject 
settlement instructions or to accept in instances where Clearing Banks 
opt to actively accept settlement instructions prior to the specified 
settlement time. These requirements result in inconsistent operational 
practices across Clearing Banks since OCS is a proprietary online cash 
settlement system and not all Clearing Banks use OCS consistently.\13\ 
Furthermore, the manual processing steps introduce risks for error and 
can result in elongated times for processing, response, and approval. 
Requiring all of the Clearing Banks to integrate the use of SWIFT into 
their operations facilitating OCC's cash settlement with Clearing 
Members would eliminate the facsimile, telephone, and email 
communications as primary communication methods for settlement 
processing while harmonizing the cash settlement process across all 
Clearing Banks.
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    \13\ See supra note 10.
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    Due to the automated nature of the SWIFT messaging network, OCC 
believes that implementing SWIFT would reduce manual processing and 
approval steps. For instance, settlement instructions would be 
automatically transmitted to Clearing Banks over the SWIFT network so 
that Clearing Bank staff would not need to log into OCS to accept or 
reject them. Similarly, OCC automatically would receive any acceptances 
provided.\14\ In addition, OCC could monitor all cash-settlement 
related SWIFT messages it sends or receives.
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    \14\ If a Clearing Bank fails to accept the settlement 
instructions, OCC would follow up with the Clearing Bank to 
determine the reason no acceptance was provided and to coordinate 
with the Clearing Bank that appropriate action is taken with respect 
to the instructions.
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    Accordingly, OCC believes that the proposed changes would increase 
the efficiency, accuracy, and resiliency of OCC's cash settlement 
process while eliminating certain risks inherent in both having 
Clearing Banks using different systems that employ manual processes. In 
addition, OCC states that the changes would adopt communication 
procedures and standards that are internationally accepted and 
therefore are consistent with the requirements in Rule 17Ad-22(e)(22) 
under the Exchange Act.\15\
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    \15\ 17 CFR 240.17Ad-22(e)(22).
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B. Proposed Changes to CSPA

    The CSPA is the principal form of agreement that: (i) Governs the 
rights and responsibilities of OCC and each Clearing Bank, (ii) details 
operational procedures (including backup procedures) and security 
protocols, and (iii) identifies individuals at OCC and at the Clearing 
Bank who are authorized to act on behalf of each party with respect to 
cash settlement instructions. According to OCC, the CSPAs currently in 
effect between OCC and its Clearing Banks were implemented over many 
years as OCC's operations expanded and it became appropriate to 
maintain service agreements with a range of Clearing Banks. In 
addition, many of OCC's CSPAs have not been renegotiated in a long 
time. Accordingly, OCC states that there are substantial deviations 
among some of the terms and conditions of the respective CSPAs and the 
corresponding Clearing Bank practices.
    As a part of the transition to SWIFT, Clearing Banks would enter 
into new CSPAs with OCC. Each CSPA would be based on a standardized 
template developed by OCC in collaboration with its Clearing Banks. 
Each CSPA would establish various deadlines for OCC and the Clearing 
Bank as well as backup procedures.\16\ OCC believes that the 
renegotiation of the CSPAs with the Clearing Banks to accommodate the 
adoption of the SWIFT messaging network as the primary process to 
support daily cash settlement also would allow the agreements to be 
updated to ensure their uniform compliance with the requirements in 
Rule 17Ad-22(e)(22).\17\
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    \16\ A key change is that Clearing Banks would not be deemed to 
have accepted settlement instructions in the absence of a 
communication.
    \17\ 17 CFR 240.17Ad-22(e)(22).
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III. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act of 
2010 (``Act'') does not specify a standard of review for an advance 
notice, the stated purpose of the Act is instructive.\18\ The stated 
purpose of the Act is to mitigate systemic risk in the financial system 
and promote financial stability by, among other things, promoting 
uniform risk management standards for SIFMUs and strengthening the 
liquidity of SIFMUs.\19\
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    \18\ See 12 U.S.C. 5461(b).
    \19\ Id.
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    Section 805(a)(2) of the Act \20\ authorizes the Commission to 
prescribe regulations containing risk-management

[[Page 58232]]

standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency. Section 805(b) of the Act 
\21\ provides the following objectives and principles for the 
Commission's risk-management standards prescribed under Section 805(a):
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    \20\ 12 U.S.C. 5464(a)(2).
    \21\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     To promote safety and soundness;
     To reduce systemic risks; and
     To support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and 
default policies and procedures, among others areas.\22\
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    \22\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Act and the Exchange Act (the ``Clearing Agency 
Rules'').\23\ The Clearing Agency Rules require each covered clearing 
agency, among other things, to establish, implement, maintain, and 
enforce written policies and procedures that are reasonably designed to 
meet certain minimum requirements for operations and risk-management 
practices on an ongoing basis. As such, it is appropriate for the 
Commission to review advance notices for consistency with the 
objectives and principles for risk-management standards described in 
Section 805(b) of the Act and the Clearing Agency Rules.
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    \23\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing 
Agency Standards''). The Commission established an effective date of 
December 12, 2016, and a compliance date of April 11, 2017, for the 
Covered Clearing Agency Standards. On March 4, 2017, the Commission 
granted covered clearing agencies a temporary exemption from 
compliance with Rule 17Ad-22(e)(3)(ii) and certain requirements in 
Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 2017, subject to 
certain conditions. OCC is a ``covered clearing agency'' as defined 
in Rule 17Ad-22(a)(5).
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A. Consistency With Section 805(b) of the Payment, Clearing and 
Settlement Supervision Act

    The Commission believes each proposal in OCC's Advance Notice is 
consistent with promoting robust risk management, promoting safety and 
soundness, reducing systemic risks, and supporting the stability of the 
broader financial system, the stated objectives and principles of 
Section 805(b) of the Act.\24\
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    \24\ 12 U.S.C. 5464(b).
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    First, the Commission believes that OCC's proposal to implement the 
SWIFT messaging network as the primary means of transmitting cash 
settlement instructions between OCC and each Clearing Bank is 
consistent with promoting safety and soundness. The Commission agrees 
with OCC's analysis that usage of the SWIFT messaging network would 
mitigate risks that arise in the existing cash settlement process due 
to manual processing steps and inconsistent practices across OCC's 
Clearing Banks. By having an automated and standardized process that 
sends automatic messages without requiring Clearing Bank staff members 
to log into OCS to manually accept or reject settlement instructions, 
the Commission further believes the proposal would enhance the 
resiliency, efficiency, and consistency of OCC's cash settlement 
process. The Commission therefore believes this specific proposal is 
consistent with promoting safety and soundness.
    Second, the Commission believes that OCC's proposal to update, 
enhance and standardize a uniform set of CSPAs between OCC and each 
Clearing Bank would promote robust risk management. Specifically, the 
Commission believes that this proposal will reduce the risk of 
settlement delay or error that may arise due to each Clearing Bank 
operating according to disparate CSPA terms and requirements. The 
Commission therefore believes this specific proposal is consistent with 
promoting robust risk management.
    Consistent with the conclusions discussed above, the Commission 
also believes that OCC's proposal is consistent with supporting the 
broader stability of the financial system. Specifically, the Commission 
believes that promoting the prompt and accurate messaging between OCC 
and the Clearing Banks would promote safety and soundness of both OCC 
and Clearing Banks. The reduction in errors and delays arising from the 
proposed implementation of SWIFT and more harmonized CSPAs would also 
enhance the reliability and resilience of OCC's cash settlement process 
for Clearing Members, thereby decreasing systemic risks. Accordingly, 
the proposed changes would support the stability of the broader 
financial system. Thus, the Commission believes that the proposals 
contained in the Advance Notice are consistent with the stated 
objectives and principles of Section 805(b) of the Act.

B. Consistency With Rule 17Ad-22(e)(22) Under the Exchange Act

    The Commission further believes that OCC's proposals in the Advance 
Notice are consistent with the Covered Clearing Agency Standards, 
specifically Rule 17Ad-22(e)(22) under the Exchange Act.\25\ Rule 17Ad-
22(e)(22) requires each covered clearing agency to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to, ``use, or at a minimum, accommodate, relevant 
internationally accepted communication procedures and standards in 
order to facilitate efficient payment, clearing, and settlement.'' \26\ 
In adopting this requirement, the Commission stated that, ``[r]elevant 
internationally accepted communication procedures and standards could 
include messaging standards such as SWIFT, FIX and FpML.'' \27\ 
Accordingly, the Commission believes that the proposals to expand the 
usage of the SWIFT messaging network and standardize the CSPAs with 
each Clearing Bank pursuant to the SWIFT messaging network 
implementation are consistent with Rule 17Ad-22(e)(22) under the 
Exchange Act.
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    \25\ 17 CFR 240.17Ad-22(e)(22).
    \26\ Id.
    \27\ Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786, 70842 at n. 510 (October 13, 2016).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(G) of the 
Payment, Clearing and Settlement Supervision Act,\28\ that the 
Commission does not object to Advance Notice (SR-OCC-2017-805) and that 
OCC is authorized to implement the proposed change.
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    \28\ 12 U.S.C. 5465(e)(1)(G).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-26554 Filed 12-8-17; 8:45 am]
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