[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75487-75489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30645]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68438; File No. AN-OCC-2012-04]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Filing To Revise the Method 
for Determining the Minimum Clearing Fund Size To Include Consideration 
of the Amount Necessary To Draw on Secured Credit Facilities

December 14, 2012.

I. Introduction

    On October 18, 2012, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') an 
advance notice concerning a proposed rule change AN-OCC-2012-04 
pursuant to Section 806(e) of Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act''),\1\ entitled 
the Payment, Clearing, and Settlement Supervision Act of 2010 (``Title 
VIII'' or ``Clearing Supervision Act'') and Rule 19b-4 under the 
Securities Exchange Act of 1934 (``Exchange Act'').\2\ The advance 
notice was published in the Federal Register on November 20, 2012.\3\ 
The Commission did not receive comments on the advance notice 
publication. This publication serves as a notice of no objection to the 
proposed rule change discussed in the advance notice.
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68225 (November 14, 
2012), 77 FR 69668 (November 20, 2012). OCC also filed a proposed 
rule change under Section 19(b)(1) of the Exchange Act relating to 
these changes. See Securities Exchange Act Release No. 68130 
(November 1, 2012), 77 FR 66900 (November 7, 2012) (Proposing 
Release). The Commission did not receive comments on the proposed 
rule change.
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II. Description of Proposed Rule Change

A. Background

    On September 23, 2011, the Commission approved a proposed rule 
change by OCC to establish the size of OCC's clearing fund as the 
amount that is required, within a confidence level selected by OCC, to 
sustain the maximum anticipated loss under a defined set of scenarios 
as determined by OCC, subject to a minimum clearing fund size of $1 
billion.\4\ OCC implemented this change in May 2012. Until that time, 
the size of OCC's

[[Page 75488]]

clearing fund was calculated each month as a fixed percentage of the 
average total daily margin requirement for the preceding month, 
provided that the calculation resulted in a clearing fund of $1 billion 
or more.\5\
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    \4\ Securities Exchange Act Release No. 65386 (September 23, 
2011), 76 FR 60572 (September 29, 2011) (SR-OCC-2011-10).
    \5\ If the calculation did not result in a clearing fund size of 
$1 billion or more, then the percentage of the average total daily 
margin requirement for the preceding month that resulted in a fund 
level of at least $1 billion would be applied. However, in no event 
was the percentage permitted to exceed 7%. With the rule change 
approved in September 2011, this 7% limiting factor on the minimum 
clearing fund size was eliminated.
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    Under the formula that is implemented for determining the size of 
the clearing fund as a result of the May 2012 change, OCC's Rule 1001 
provides that the amount of the fund is equal to the larger of the 
amount of the charge to the fund that would result from (i) a default 
by the single ``clearing member group'' \6\ whose default would be 
likely to result in the largest draw against the clearing fund or (ii) 
an event involving the near-simultaneous default of two randomly-
selected ``clearing member groups'' in each case as calculated by OCC 
with a confidence level selected by OCC.\7\ The size of the clearing 
fund continues to be recalculated monthly, based on a monthly averaging 
of daily calculations for the previous month, and it is subject to a 
requirement that its minimum size may not be less than $1 billion.
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    \6\ The term ``clearing member group'' is defined in Article I 
of OCC's By-Laws to mean a clearing member and any member affiliates 
of the clearing member.
    \7\ The confidence levels employed by OCC in calculating the 
charge likely to result from a default by OCC's largest ``clearing 
member group'' and the default of two randomly-selected ``clearing 
member groups'' were approved by the Commission at 99% and 99.9%, 
respectively. However, the Commission approval order notes that OCC 
retains discretion to employ different confidence levels in these 
calculations provided that OCC will not employ confidence levels of 
less than 99% without first filing a proposed rule change.
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B. Proposed Change

    The proposed rule change will implement a minimum clearing fund 
size equal to 110% of the amount of committed credit facilities secured 
by the clearing fund so that the amount of the clearing fund likely 
will exceed the required collateral value that would be necessary for 
OCC to be able to draw in full on such credit facilities. OCC's 
clearing fund is primarily intended to provide a high degree of 
assurance that market integrity will be maintained in the event that 
one or more clearing members, settlement banks, or banks that issue 
letters of credit on behalf of clearing members as a form of margin 
fails to meet its obligations.\8\ This includes the potential use of 
the clearing fund as a source of liquidity should it ever be the case 
that OCC is unable to obtain prompt delivery of, or convert promptly to 
cash, any asset credited to the account of a suspended clearing member.
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    \8\ Under Article VIII, Section 1 of OCC's By-Laws, the clearing 
fund may be used to pay losses suffered by OCC: (1) As a result of 
the failure of a clearing member to perform its obligations with 
regard to any exchange transaction accepted by OCC; (2) as a result 
of a clearing member's failure to perform its obligations in respect 
of an exchange transaction or an exercised/assigned options 
contract, or any other contract or obligations in respect of which 
OCC is liable; (3) as a result of the failure of a clearing member 
to perform its obligations in respect of stock loan or borrow 
positions; (4) as a result of a liquidation of a suspended clearing 
member's open positions; (5) in connection with protective 
transactions of a suspended clearing member; (6) as a result of a 
failure of any clearing member to make any other required payment or 
to render any other required performance; or (7) as a result of a 
failure of any bank or securities or commodities clearing 
organization to perform its obligations to OCC.
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    OCC's committed credit facilities are secured by assets in the 
clearing fund and certain margin deposits of the suspended clearing 
member. In light of the uncertainty regarding the amount of margin 
assets of a suspended clearing member that might be eligible at any 
given point to support borrowing under the secured credit facilities, 
OCC has considered the availability of funds based on a consideration 
of the amount of the clearing fund deposits available as collateral. As 
an example, for OCC to draw on the full amount of its current credit 
facilities secured by the clearing fund, the size of the clearing fund 
likely would need to be approximately $2.2 billion. The $2.2 billion 
figure reflects a 10% increase above the total size of such credit 
facilities, which is meant to account for the percentage discount 
applied to collateral pledged by OCC in determining the amount 
available for borrowing.
    Based on monthly recalculation information, the size of OCC's 
clearing fund during the period from July 2011 to July 2012 was less 
than $2.2 billion on eight occasions. Therefore, to reduce the risk 
that the assets in the clearing fund might at any time be insufficient 
to enable OCC to meet potential liquidity needs by accessing the full 
amount of its committed credit facilities that are secured by the 
clearing fund, OCC is amending the current minimum clearing fund be 
size requirement of $1 billion by providing instead that the minimum 
clearing fund size is the greater of either $1 billion or 110% of the 
amount of such committed credit facilities. OCC is denoting the credit 
facility component of the minimum clearing fund requirement as a 
percentage of the total amount of the credit facilities that OCC 
actually secures with clearing fund assets because OCC negotiates these 
credit facility agreements, including size and other terms, on an 
annual basis and the total size is therefore subject to change.

III. Analysis of Advance Notice

Standard of Review

    A registered clearing agency that has been designated as a 
systemically important financial market utility (``FMU'') by the 
Financial Stability Oversight Council (``FSOC'') must provide advance 
notice of all proposed changes to its rules, procedures, or operations 
that could, as defined in the rules of the supervisory agency, 
materially affect the nature or level of risks presented by the 
clearing agency.\9\ Absent an extension or request for additional 
information, as discussed in greater detail below, the Commission is 
required to notify the clearing agency of any objection regarding the 
proposed change within the 60 day time frame established by Title 
VIII.\10\ A designated clearing agency may not implement a change to 
which its supervisory agency has objected; \11\ however, the clearing 
agency is explicitly permitted to implement a change if it has not 
received an objection from its supervisory agency within the same 60 
day time period.\12\
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    \9\ 12 U.S.C. 5465(e). See also Process for Submissions for 
Review of Security-Based Swaps for Mandatory Clearing and Notice 
Filing Requirements for Clearing Agencies; Technical Amendments to 
Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory 
Organizations, Securities Exchange Act Release No. 67286 (June 28, 
2012), 77 FR 41602 (July 13, 2012) (Adopting Release).
    \10\ 12 U.S.C. 5465(e)(1)(E).
    \11\ 12 U.S.C. 5465(e)(1)(F).
    \12\ 12 U.S.C. 5465(e)(1)(G).
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    Although Title VIII does not specify a standard that the Commission 
must apply to determine whether to object to an advance notice, the 
Commission believes that the purpose of Title VIII, as stated under 
Section 802(b),\13\ is relevant to the review of advance notices.
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    \13\ 12 U.S.C. 5461(b).
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    The stated purpose of Title VIII is to mitigate systemic risk in 
the financial system and promote financial stability, by (among other 
things) authorizing the Federal Reserve Board to promote uniform risk 
management standards for systemically important FMUs, and providing an 
enhanced role for the Federal Reserve Board in the supervising of risk 
management standards for systemically important FMUs.\14\ Therefore, 
the Commission believes that when reviewing advance

[[Page 75489]]

notices for FMUs, the consistency of an advance notice with Title VIII 
may be judged principally by reference to the consistency of the 
advance notice with applicable rules of the Federal Reserve Board 
governing payment, clearing, and settlement activity of the designated 
FMU.\15\
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    \14\ 12 U.S.C. 5461(b).
    \15\ See Financial Market Utilities, 77 FR 45907 (Aug. 2, 2012).
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    Section 805(a) requires the Federal Reserve Board and authorizes 
the Commission to prescribe standards for the payment, clearing, and 
settlement activities of FMUs designated as systemically important, in 
consultation with the supervisory agencies. Section 805(b) of the 
Clearing Supervision Act \16\ requires that the objectives and 
principles for the risk management standards prescribed under Section 
805(a) shall be to:
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    \16\ 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 relevant rules of the Federal Reserve Board prescribing risk 
management standards for designated FMUs by their terms do not apply to 
designated FMUs that are clearing agencies registered with the 
Commission.\17\ Therefore, the Commission believes that the objectives 
and principles by which the Federal Reserve Board is required and the 
Commission is authorized to promulgate such rules, as expressed in 
Section 805(b) of Title VIII,\18\ are the appropriate standards at this 
time by which to evaluate advance notices.\19\ Accordingly, the 
analysis set forth below is organized by reference to the stated 
objectives and principles in Section 805(b).
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    \17\ 12 CFR 234.1(b).
    \18\ 12 U.S.C. 5464(b).
    \19\ The risk management standards that have been adopted by the 
Commission in Rule 17Ad-22 are substantially similar to those of the 
Federal Reserve Board applicable to designated FMUs other than those 
designated clearing organizations registered with the CFTC or 
clearing agencies registered with the Commission. See Clearing 
Agency Standards, Securities Exchange Act Release No. 68080 (Oct. 
22, 2012), 77 FR 66219 (Nov. 2, 2012). To the extent such Commission 
standards are in effect at the time advance notices are reviewed in 
the future, the standards would be relevant to the analysis. 
Moreover, the analysis of clearing agency rule filings under the 
Exchange Act would incorporate such standards directly.
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Discussion of Advance Notice

    The proposed rule change is designed to allow OCC to take full 
advantage of its liquidity resources that are secured by the clearing 
fund by collecting an amount that is at least 10% above the total size 
of the credit facilities to account for any collateral haircut that may 
be applied. This should assist OCC in maintaining market integrity in 
the event that one or more clearing members, settlement banks, or banks 
that issue letters of credit on behalf of clearing members as a form of 
margin fails to meet its obligations. By increasing the likelihood that 
OCC can take full advantage of its liquidity resources that are secured 
by the clearing fund, the proposed rule change should promote robust 
risk management and safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system. For these 
reasons, the Commission does not object to the advance notice.

IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\20\ that, the Commission does not object to 
proposed rule change (File No. AN-OCC-2012-04) and that OCC be and 
hereby is authorized to implement proposed rule change (File No. AN-
OCC-2012-04) as of the date of this notice or the date of the ``Order 
Approving Proposed Rule Change to Revise the Method for Determining the 
Minimum Clearing Fund Size to Include Consideration of the Amount 
Necessary to Draw on Secured Credit Facilities'' (File No. SR-OCC-2012-
22), whichever is later.
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    \20\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30645 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P