[Federal Register Volume 80, Number 26 (Monday, February 9, 2015)]
[Notices]
[Pages 7056-7062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02566]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74202; File No. SR-OCC-2014-813]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of an Advance Notice, as Modified by Amendment No. 1, 
Concerning a Proposed Capital Plan for Raising Additional Capital That 
Would Support The Options Clearing Corporation's Function as a 
Systemically Important Financial Market Utility

February 4, 2015.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Payment, Clearing 
and Settlement Supervision Act'' or ``Clearing Supervision Act'') \1\ 
and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Act'') notice is hereby given that on December 29, 2014, The Options 
Clearing Corporation (``OCC'') filed with the Securities and Exchange 
Commission (``Commission'') the advance notice as described in Items I 
and II below, which Items have been prepared by OCC.\3\ On January 14, 
2015, OCC filed Amendment No. 1 to the advance notice.\4\ The 
Commission is publishing this notice to solicit comments on the advance 
notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ In Items I and II below, OCC states that the purpose of this 
proposal is in part to facilitate compliance with the SEC Proposed 
Rules (as defined below) and address Principle 15 of the Principles 
for Financial Market Infrastructures (``PMFIs''). The Commission 
notes that the SEC Proposed Rules are pending. The Commission will 
evaluate the advance notice under the Clearing Supervision Act and 
the rules currently in force thereunder.
    \4\ According to OCC, Amendment No. 1 to the SR-OCC-2014-813 
(``Filing''): (i) Updates OCC's plan for raising additional capital 
(``Capital Plan'') in connection with negotiations between OCC and 
the options exchanges that own equity in OCC (``Stockholder 
Exchanges'' or ``stockholders'') and that would contribute 
additional capital under the Capital Plan, (ii) corrects 
typographical errors in the Filing, and (iii) updates the Term Sheet 
included as an exhibit to the Filing, which summarizes material 
features of the Capital Plan.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice is filed by OCC in order to set forth a 
proposed Capital Plan for raising additional capital that would support 
OCC's function as a systemically important financial market utility and 
facilitate OCC's compliance with new regulatory requirements applicable 
to systemically important financial market utilities that have been 
proposed by the Commission but have not yet been adopted.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

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

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants or Others

    Written comments on the advance notice were not and are not 
intended to be solicited with respect to the advance notice and none 
have been received.

(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

    The proposed change sets forth the Capital Plan under which the 
Stockholder Exchanges would make an additional capital contribution and 
commit to replenishment capital (``Replenishment Capital'') in 
circumstances discussed below, and would receive, among other things, 
the right to receive dividends from OCC. In addition to the additional 
capital contribution and Replenishment Capital, the main features of 
the Capital Plan are: (i) A policy establishing OCC's fees at a level 
that would be sufficient to cover OCC's estimated operating expenses 
plus a ``Business Risk Buffer'' as described below (``Fee Policy''), 
(ii) the Refund Policy [sic], and (iii) a policy for calculating the 
amount of dividends to be paid to the options exchanges owning equity 
in OCC (``Dividend Policy''). The Capital Plan is proposed to be 
implemented on or about February 27, 2015, subject to all necessary 
regulatory approvals.\5\
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    \5\ The material features of the Capital Plan are summarized in 
the Term Sheet that is included as Exhibit 3. Certain details of the 
Term Sheet may change as a result of further negotiations or changes 
in financial figures, but OCC does not anticipate any material 
changes to the Capital Plan. OCC intends to separately file a 
proposed rule change seeking approval of changes to its By-Laws, 
Certificate of Incorporation and relevant agreements, including its 
Stockholders Agreement, necessary to implement the Capital Plan.
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Purpose of the Proposed Change
    The purpose of this proposed change is to implement the Capital 
Plan, which would significantly increase OCC's capital in connection 
with its increased responsibilities as a systemically important 
financial market utility, and which OCC believes would facilitate OCC's 
compliance with new regulatory requirements applicable to such 
systemically important financial market utilities that have been 
proposed by the Commission but have not yet been adopted.\6\ For 
purposes of this filing, OCC has used the working assumption that the 
new requirements contained in the Commission's proposed amendments to 
Rule 17Ad-22 of the SEC Proposed Rules will be adopted substantially as 
proposed. The proposed change is intended to ensure OCC's ability to 
comply with Rule 17Ad-22, specifically paragraph (e)(15) thereof, when 
the SEC Proposed Rules become effective. In addition, it is intended to 
address Principle 15 of the Principles for Financial Market 
Infrastructures published by the Bank for International Settlements and 
the International Organization of Securities Commissions, which 
provides, among other things, that a financial market utility should 
identify, monitor and manage its general business risk and hold 
sufficient liquid net assets funded by equity to cover potential 
general business losses so that it can continue to operate as a going 
concern. The proposal includes an infusion of substantial additional 
equity capital by the Stockholder Exchanges to be made prior to 
February 27, 2015, subject to regulatory approval, that when added to 
retained earnings accumulated by OCC in 2014 will significantly 
increase OCC's capital levels as compared to historical levels. 
Additionally, the proposed change includes the Replenishment Capital 
commitment, which would provide OCC access to additional equity

[[Page 7057]]

contributed by the Stockholder Exchanges should OCC's equity fall close 
to or below the amount that OCC determines to be appropriate to support 
its business and manage business risk in compliance with Rule 17Ad-22, 
as discussed more fully below.
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    \6\ See Securities Exchange Act Release No. 71699 (March 12, 
2014), 79 FR 29507 (May 22, 2014) (``SEC Proposed Rules'').
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Background
    OCC is a clearing agency registered with the Commission and is also 
a derivatives clearing organization (``DCO'') regulated in its capacity 
as such by the Commodity Futures Trading Commission (``CFTC''). OCC is 
a Delaware business corporation and is owned equally by the Stockholder 
Exchanges, five national securities exchanges for which OCC provides 
clearing services.\7\ In addition, OCC provides clearing services for 
seven other national securities exchanges that trade options (``Non-
Stockholder Exchanges''). In its capacity as a DCO, OCC also provides 
clearing services to four futures exchanges.
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    \7\ The Stockholder Exchanges are: Chicago Board Options 
Exchange, Incorporated; International Securities Exchange, LLC; 
NASDAQ OMX PHLX LLC; NYSE MKT LLC; and NYSE Arca, Inc.
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    OCC has been designated systemically important by the Financial 
Stability Oversight Council pursuant to the Payment, Clearing and 
Settlement Supervision Act, and the Commission is OCC's ``Supervisory 
Agency'' under Section 803(8) of the Payment, Clearing and Settlement 
Supervision Act. OCC is therefore a ``covered clearing agency'' 
(``CCA'') as defined in proposed amendments to the Commission's Rule 
17Ad-22(a)(7) and would be required to comply with the provisions of 
proposed Rule 17Ad-22 applicable to CCA's, including paragraph (e)(15) 
thereof.\8\
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    \8\ SEC Proposed Rules at 32-33, FR 29507, 29515 (May 22, 2014).
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    Proposed Rule 17Ad-22(e)(15) provides:

    Each covered clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable: . . . Identify, monitor, and manage the 
covered clearing agency's general business risk and hold sufficient 
liquid net assets funded by equity to cover potential general 
business losses so that the covered clearing agency can continue 
operations and services as a going concern if those losses 
materialize, including by:
    (i) Determining the amount of liquid net assets funded by equity 
based upon its general business risk profile and the length of time 
required to achieve recovery or orderly wind-down, as appropriate, 
of its critical operations and services if such action is taken;
    (ii) Holding liquid net assets funded by equity equal to the 
greater of either (x) six months of the covered clearing agency's 
current operating expenses, or (y) the amount determined by the 
board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered 
clearing agency, as contemplated by the plans established under 
paragraph (e)(3)(ii) of this section, and which:
    (A) shall be in addition to resources held to cover participant 
defaults or other risks covered under the credit risk standard in 
paragraph (b)(3) or paragraph (e)(4)(i)-(iii) of this section, as 
applicable, and the liquidity risk standard in paragraph (e)(7)(i) 
and (ii) of this section; and
    (B) Shall be of high quality and sufficiently liquid to allow 
the covered clearing agency to meet its current and projected 
operating expenses under a range of scenarios, including adverse 
market conditions; and
    (iii) Maintaining a viable plan, approved by the board of 
directors and updated at least annually, for raising additional 
equity should its equity fall close to or below the amount required 
under paragraph (e)(15)(ii) of this section.\9\
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    \9\ SEC Proposed Rules at 417-418, FR 29507, 29616 (May 22, 
2014).

    Over the last nine months, OCC has devoted substantial efforts to: 
(1) Develop a 5-year forward looking model of expenses; (2) quantify 
maximum recovery and wind-down costs under OCC's Recovery and Wind-Down 
Plan; (3) assess and quantify OCC's operational and business risks; (4) 
model projected capital accumulation taking into account varying 
assumptions concerning business conditions, fee levels, buffer margin 
levels and refunds; and (5) develop an effective mechanism that 
provides OCC access to replenishment capital in the event of losses 
that could cause OCC to be non-compliant with the SEC Proposed Rules. 
Incorporating the results of those efforts, the proposed change is 
intended to provide OCC with the means to increase its stockholder 
equity and, in particular, to obtain timely compliance with Rule 17Ad-
22(e)(15) \10\ as proposed by the Commission. A more detailed 
discussion of the manner in which the proposed change would allow OCC 
to comply with Rule 17Ad-22(e)(15) appears below.
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    \10\ SEC Proposed Rules at 222-223, FR 29507, 29547-29548 (May 
22, 2014).
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OCC's Projected Capital Requirement
    Using the methods described in detail below, OCC will annually 
determine a ``Target Capital Requirement'' consisting of (i) a 
``Baseline Capital Requirement'' equal to the greatest of (x) six 
months operating expenses for the following year, (y) the maximum cost 
of the recovery scenario from OCC's Recovery and Wind-Down Plan, and 
(z) the cost to OCC of winding down operations as set forth in the 
Recovery and Wind-Down Plan, plus (ii) a ``Target Capital Buffer'' 
linked to plausible loss scenarios from operational risk, business risk 
and pension risk. OCC has determined that its currently appropriate 
``Target Capital Requirement'' is $247 million, reflecting a Baseline 
Capital Requirement of $117 million, which is equal to six months of 
projected operating expenses, plus a Target Capital Buffer of $130 
million. This Target Capital Buffer would provide a significant capital 
cushion to offset potential business losses.
    As of December 31, 2013, OCC had total shareholders' equity of 
approximately $25 million,\11\ meaning that OCC proposes to add 
additional capital of $222 million to meet its 2015 Target Capital 
Requirement. In addition, OCC would be obligated under paragraph 
(e)(15)(iii) \12\ of proposed Rule 17Ad-22 to maintain ``a viable 
plan'' for raising additional equity should its equity fall close to or 
below the amount required under paragraph (e)(15)(ii) of the Rule; \13\ 
i.e., the Baseline Capital Requirement. OCC has determined that its 
viable plan for Replenishment Capital should provide for a 
``Replenishment Capital Amount'' which would give OCC access to 
additional capital as needed up to a maximum of the Baseline Capital 
Requirement, which is currently $117 million.\14\ Therefore, OCC's 
proposed Capital Plan would provide OCC in 2015 with ready access to 
approximately $364 million in equity capital as follows:
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    \11\ See OCC 2013 Annual Report, Financial Statements, 
Statements of Financial Condition, available on OCC's Web site, 
http://optionsclearing.com/components/docs/about/annual-reports/occ_2013_annual_report.pdf.
    \12\ SEC Proposed Rules at 418, FR 29507, 29616 (May 22, 2014).
    \13\ SEC Proposed Rules at 417, FR 29507, 29616 (May 22, 2014).
    \14\ The obligation to provide Replenishment Capital will be 
capped at $200 million, which OCC projects will sufficiently account 
for increases in its capital requirements for the foreseeable 
future.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Baseline Capital Requirement.........................       $117,000,000
Target Capital Buffer................................        130,000,000
                                                      ------------------
Target Capital Requirement...........................        247,000,000
Replenishment Capital Amount.........................        117,000,000
                                                      ------------------
  Total OCC Capital Resources........................        364,000,000
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Procedures Followed in Order To Determine Capital Requirement
    Various measures were used in determining the appropriate level of 
capital necessary to comply with the

[[Page 7058]]

SEC Proposed Rules. An outside consultant conducted a ``bottom-up'' 
analysis of OCC's risks and quantified the appropriate amount of 
capital to be held against each risk. The analysis was comprehensive 
across risk types, including credit, market pension, operation, and 
business risk. Based on internal operational risk scenarios and loss 
modeling at or above the 99% confidence level, OCC's operational risk 
was quantified at $226 million and pension risk at $21 million, 
resulting in the total Target Capital Requirement of $247 million. 
Business risk was addressed by taking into consideration that OCC has 
the ability to fully offset potential revenue volatility and manage 
business risk to zero by adjusting the levels at which fees and refunds 
are set and by adopting a ``Business Risk Buffer'' of 25% when setting 
fees. Other risks, such as counterparty risk and on-balance sheet 
credit and market risk, were considered to be immaterial for purposes 
of requiring additional capital based on means available to OCC to 
address those risks that did not require use of OCC's capital. As 
discussed in more detail below in the context of OCC's Fee Policy, the 
Business Risk Buffer of 25% is achieved by setting OCC's fees at a 
level intended to achieve target annual revenue that will result in a 
25% buffer for the year after paying all operating expenses.
    An analysis was also performed to identify OCC's risk in terms of 
the regulatory requirements set forth in proposed Rule 17Ad-
22(e)(15)(ii). This analysis estimated that, currently, OCC's maximum 
recovery costs would be $100 million and projected wind-down costs 
would be $73 million. OCC's projected expenses for 2015 are $234 
million, so that six months projected expenses are $234 million/2 = 
$117 million. The greater of recovery or wind-down costs and six months 
of operating expenses is therefore $117 million, and OCC's Baseline 
Capital Requirement (minimum regulatory requirement) is therefore $117 
million. OCC then computed the appropriate amount of a Target Capital 
Buffer from operational risk, business risk, and pension risk. This 
resulted in a determination that the current Target Capital Buffer 
should be $130 million. Thus, the Target Capital Requirement is $117 
million + $130 million = $247 million.
Overview of, and Basis for, OCC's Proposal To Acquire Additional Equity 
Capital
    In order to meet its Target Capital Requirement, and after 
consideration of available alternatives, OCC's Board approved a 
proposal from OCC's Stockholder Exchanges under which OCC would meet 
its Target Capital Requirement of $247 million in early 2015 as 
follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Shareholders' Equity as of 1/1/2014..................        $25,000,000
Shareholders Equity Accumulated Through Retained              72,000,000
 Earnings \15\.......................................
                                                      ------------------
Additional Contribution from Stockholder Exchanges...        150,000,000
Target Capital Requirement...........................        247,000,000
Replenishment Capital Amount.........................        117,000,000
                                                      ------------------
  Total OCC Capital Resources........................        364,000,000
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    The additional contribution of the Stockholder Exchanges would be 
made in respect of their Class B Common Stock on a pro rata basis. The 
Stockholder Exchanges will also commit to provide additional equity 
capital up to the Replenishment Capital Amount, which is currently $117 
million, in the event Replenishment Capital is needed. While the 
Replenishment Capital Amount will increase as the Baseline Capital 
Requirement increases, it would be capped at a total of $200 million 
that could be outstanding at any point in time. OCC has estimated that 
the Baseline Capital Requirement would not exceed this amount before 
2022. When the limit is being approached, OCC would revise the Capital 
Plan as needed to address future needs. In consideration for their 
capital contributions and replenishment commitments, the Stockholder 
Exchanges will receive dividends as described in the Dividend Policy 
discussed below for so long as they remain stockholders and maintain 
their contributed capital and commitment to replenish capital up to the 
Replenishment Capital Amount, subject to the $200 million cap.
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    \15\ See Proposed Rule Change by The Options Clearing 
Corporation to Reflect the Elimination of a Discount to the Clearing 
Fee Schedule, Securities Exchange Act Release No. 71769 (March 21, 
2014), 79 FR 17214 (March 27, 2014) (SR-OCC-2014-05) (Filing for 
immediate effectiveness of a proposed rule change with the 
Commission to reinstate OCC's permanent clearing fee schedule for 
securities options and securities futures that became effective May 
1, 2007 (``Permanent Schedule Reinstatement Filing'')). The $72 
million is after giving effect to the approximately $40 million 
refund referred to below.
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Fee, Refund, and Dividend Policies
    Upon reaching the Target Capital Requirement, the Capital Plan 
requires OCC to set its fees at a level that utilizes a Business Risk 
Buffer of 25%. The purpose of this Business Risk Buffer is to ensure 
that OCC accumulates sufficient capital to cover unexpected 
fluctuations in operating expenses, business capital needs, and 
regulatory capital requirements. Furthermore, the Capital Plan requires 
OCC to maintain Fee, Refund, and Dividend Policies, described in more 
detail below, which are designed to ensure that OCC's shareholders' 
equity remains well above the Baseline Capital Requirement. The 
required Business Risk Buffer of 25% is below OCC's 10-year historical 
pre-refund average buffer of 31%. The target will remain 25% so long as 
OCC's shareholders' equity remains above the Target Capital Requirement 
amount. The reduction in buffer margin from OCC's 10-year average of 
31% to 25% reflects OCC's commitment to operating as an industry 
utility and ensuring that market participants benefit as much as 
possible from OCC's operational efficiencies in the future. This 
reduction will permit OCC to charge lower fees to market participants 
rather than maximizing refunds to clearing members and dividend 
distributions to Stockholder Exchanges. OCC will review its fee 
schedule on a quarterly basis to manage revenue as closely to this 
target as possible.\16\ For example, if the Business Risk Buffer is 
materially above 25% after the first quarter of a particular year, OCC 
may decrease fees for the remainder of the year, and conversely if the 
Business Risk Buffer is materially below 25% at this time, OCC may 
increase fees for the remainder of the year.
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    \16\ If OCC's fee schedule needs to be changed in order to 
achieve the 25% Business Risk Buffer, OCC would file a proposed rule 
change seeking approval of the revised fee schedule.
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    The Capital Plan would allow OCC to refund approximately $40 
million from 2014 fees to clearing members in 2015 and to reduce fees 
in an amount to be determined by the Board, effective in the second 
quarter 2015. OCC will announce new fee levels early in 2015 and will 
make them effective following notification to clearing members and any 
necessary approval by the Commission. OCC will endeavor to provide 
clearing members with no less than 60-day advance notice of the 
effectiveness of changes to fee levels, particularly those that result 
in increases to fee levels. No dividends will be declared until 
December 2015 and no dividends will be paid until 2016.
    Changes to the Fee, Refund or Dividend Policies will require the 
affirmative vote of two-thirds of the directors then in office and 
approval of

[[Page 7059]]

the holders of all of OCC's outstanding Class B Common Stock. The 
formulas for determining the amount of refunds and dividends under the 
Refund and Dividend Policies, respectively, which are described in more 
detail below, are based on, among other things, the current tax 
treatment of refunds as a deductible expense. The Refund and Dividend 
Policies would each provide that in the event that refunds payable 
under the Refund Policy are not tax deductible, the policies would be 
amended to restore the relative economic benefits between the 
recipients of the refunds and the Stockholder Exchanges.\17\
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    \17\ This sentence and the previous sentence relate to a 
provision added to the Refund and Dividend Policies and designed to 
preserve the original business understanding between OCC and the 
Stockholder Exchanges even if refunds are no longer deductible.
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Fee Policy
    Under the Fee Policy, in setting fees each year, OCC would 
calculate an annual revenue target based on a forward twelve months 
expense forecast divided by the difference between one and the Business 
Risk Buffer of 25%, i.e., OCC will divide the expense forecast by .75. 
Establishing a Business Risk Buffer at 25% would allow OCC to manage 
the risk that fees would generate less revenue than expected due to 
lower-than-expected trading volume or other factors, or that expenses 
would be higher than projected. The Fee Policy also will include 
provisions from existing Article IX, Section 9 of the By-Laws to the 
effect that the fee schedule may also include additional amounts 
necessary to (i) maintain such reserves as are deemed reasonably 
necessary by the Board to provide facilities for the conduct of OCC's 
business and to conduct development and capital planning activities in 
connection with OCC's services to the options exchanges, Clearing 
Members and the general public, and (ii) accumulate such additional 
surplus as the Board may deem advisable to permit OCC to meet its 
obligations to Clearing Members and the general public; however, these 
provisions will be used only in extraordinary circumstances and to the 
extent that the Board has determined that the required amount of such 
additional reserves or additional surplus will exceed the full amount 
that will be accumulated through the Business Risk Buffer (prior to 
payment of refunds or dividends) so OCC's fees will ordinarily be based 
on its projected operating expenses and the Business Risk Buffer of 
25%.
    Under the proposed change, OCC would calculate its annual revenue 
target as follows:
    Annual Revenue Target = Forward 12 Months Expense Forecast/(1-.25).
    Because OCC's clearing fee schedules typically reflect different 
rates for different categories of transactions, fee projections would 
include projections as to relative volume in each such category. The 
clearing fee schedule would therefore be set to achieve a blended or 
average rate per contract sufficient, when multiplied by total 
projected contract volume, to achieve the Annual Revenue Target. Under 
extraordinary circumstances, OCC would then add any amount determined 
to be necessary for additional reserves or surplus and divide the 
resulting number by the projected contract volume to determine the 
applicable average fee per cleared contract needed to achieve the 
additional amounts required. Consistent with past practice, OCC would 
notify its clearing members of the fees it determines it would apply 
for any particular period by describing the change in an information 
memorandum distributed to all clearing members. Consistent with past 
practice, OCC would also notify regulators of the fees it determines it 
would apply for any particular period by filing an amendment to its 
Schedule of Fees as a proposed rule change for immediate effectiveness 
under Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(2) 
thereunder.\18\
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    \18\ See, e.g., the Permanent Schedule Reinstatement Filing, 
supra n. 14 [sic]; Proposed Rule Change by The Options Clearing 
Corporation to Reduce the Per Contract Clearing Fee for Routing 
Trades Executed in Accordance With the Options Order Protection and 
Locked/Crossed Market Plan to $.01 per Contract, Securities Exchange 
Act Release No. 68025 (October 12, 2012), 77 FR 63398 (October 16, 
2012) (SR-OCC-2012-18).
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Refund Policy
    Under the Refund Policy, except at a time when Replenishment 
Capital is outstanding as described below, OCC would declare a refund 
to Clearing Members in December of each year, beginning in 2015, in an 
amount equal to 50% of the excess, if any, of (i) pre-tax income for 
the year prior to the refund over (ii) the sum of (x) the amount of 
pre-tax income after the refund necessary to produce after-tax income 
sufficient to maintain shareholders' equity at the Target Capital 
Requirement for the following year plus (y) the amount of pre-tax 
income after the refund necessary to fund any additional reserves or 
additional surplus not already included in the Target Capital 
Requirement. Such refund will be paid in the year following the 
declaration after the issuance of OCC's audited financial statements, 
provided that (i) the payment does not result in total shareholders' 
equity falling below the Target Capital Requirement, and (ii) such 
payment is otherwise permitted by applicable Delaware law and 
applicable federal laws and regulations. OCC would not be able to pay a 
refund on a particular date unless dividends were paid on the same 
date. If Replenishment Capital has been contributed and remains 
outstanding, OCC would not pay refunds until such time as the Target 
Capital Requirement is restored through the accumulation of retained 
earnings. Refunds in accordance with the Refund Policy would resume 
once the Target Capital Requirement is restored and all Replenishment 
Capital is repaid in full, provided that the restoration of the Target 
Capital Requirement and the repayment of Replenishment Capital occurred 
within 24 months of the issuance date of the Replenishment Capital. If, 
within 24 months of the issuance date of any Replenishment Capital, 
such Replenishment Capital has not been repaid in full or shareholders' 
equity has not been restored to the Target Capital Requirement, OCC 
would no longer pay refunds to clearing members, even if the Target 
Capital Requirement is restored and all Replenishment Capital is repaid 
at a later date.
Dividend Policy
    The Dividend Policy would provide that, except at a time when 
Replenishment Capital is outstanding as described below, OCC would 
declare a dividend on its Class B Common Stock in December of each year 
in an aggregate amount equal to the excess, if any, of (i) after-tax 
income for the year, after application of the Refund Policy (unless the 
Refund Policy has been eliminated, in which case the refunds shall be 
deemed to be $0) over (ii) the sum of (A) the amount required to be 
retained in order to maintain total shareholders' equity at the Target 
Capital Requirement for the following year, plus (B) the amount of any 
additional reserves or additional surplus not already included in the 
Target Capital Requirement. Such dividend will be paid in the year 
following the declaration after the issuance of OCC's audited financial 
statements, provided that (i) the payment does not result in total 
shareholders' equity falling below the Target Capital Requirement, and 
(ii) such payment is otherwise permitted by applicable Delaware law and 
applicable federal laws and regulations. If

[[Page 7060]]

Replenishment Capital has been contributed and remains outstanding, OCC 
would not pay dividends until such time as the Target Capital 
Requirement is restored.
OCC's Status as an Industry Utility
    OCC has always been operated on an ``industry utility'' model. The 
Stockholder Exchanges have heretofore contributed only minimal capital 
to OCC.\19\ OCC's By-Laws currently require that OCC set its clearing 
fees at a level that is designed to cover operating expenses and to 
maintain such reserves and accumulate such additional capital as are 
deemed reasonably necessary for OCC to meet its obligations to its 
clearing members and the public. Clearing fees that are collected in 
excess of these amounts are refunded annually on a pro rata basis to 
the clearing members who paid them. Under this model, OCC has never 
paid dividends to the Stockholder Exchanges. However, OCC has paid 
significant refunds to clearing members each year. OCC is aware that a 
portion--possibly a significant portion--of those refunds are not 
passed through by the clearing members to their end user customers. 
Accordingly, by adopting an approach that includes paying dividends to 
the Stockholder Exchanges that have invested a significant amount of 
additional capital ($150 million) but that also reduces the historical 
pre-refund average buffer of 31% by adopting a Business Risk Buffer of 
25%, OCC believes that the proposed approach maintains, and perhaps 
better aligns with, an industry utility model.
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    \19\ OCC's common stock and paid in capital total $2,659,999. 
See OCC 2013 Annual Report, Financial Statements, Statements of 
Financial Condition, available on OCC's Web site, http://optionsclearing.com/components/docs/about/annual-reports/occ_2013_annual_report.pdf.
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    Given the very large increase in capital that OCC has determined to 
be appropriate in order to assure compliance with regulatory 
requirements and meet the increased responsibilities imposed upon it as 
a systemically important financial market utility, OCC has determined 
that the best alternative available to it is to obtain a substantial 
further capital contribution from the Stockholder Exchanges. This 
cannot be accomplished without modification of the past practice of not 
providing dividends to stockholders. Accordingly, it would be necessary 
for OCC to establish the new Fee Policy, Refund Policy, and Dividend 
Policy. Because of the Business Risk Buffer being set at 25%, the 
combination of the Fee, Refund and Dividend Policies will effectively 
cap the dividends to be paid to the Stockholder Exchanges at a level 
that the Board (with the advice of outside financial experts) has 
determined results in a reasonable rate of return on contributed 
capital, particularly in comparison to the implied cost of capital to 
the clearing members and their customers of instead pursuing an 
approach which required the accumulation of retained earnings through 
higher fees and no refunds for several years. OCC will continue to 
refund a significant percentage of excess clearing fees to clearing 
members, thereby benefiting both clearing members and their customers. 
The Capital Plan therefore effectively preserves OCC's industry utility 
model of providing its services in an efficient manner, but enhances 
the benefits to the end user customers by charging lower initial fees 
as a result of the decrease in the buffer margin from OCC's 10-year 
average of 31% to 25%.
    Clearing members and customers will benefit from the proposed 
Capital Plan because it will allow OCC to continue to provide clearing 
services at low cost. As noted, OCC expects that this capital infusion 
from stockholders will enable OCC to provide a significant refund of 
2014 fees. OCC further expects that its current clearing fees will be 
reduced significantly based on the Business Risk Buffer of 25% 
beginning in 2015 with refunds restored, and that these lower fees will 
continue for the foreseeable future.
    Stockholder Exchanges will benefit from the dividend return they 
receive and, perhaps more importantly, they will be assured that OCC 
will be in a position to provide clearing services for their markets on 
an on-going basis within the same basic structure that has served these 
markets well since their inception and without the need to radically 
change the structure to address potential demands of outside equity 
investors. Non-Stockholder Exchanges will also benefit by continuing to 
receive OCC's clearing services for their products on the same basis as 
they presently do.\20\
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    \20\ Non-Stockholder Exchanges contribute capital by purchasing 
a promissory note in the principal amount of $1,000,000. See Section 
2 of Article VIIB of OCC's By-Laws. The required Capital 
Contribution of Non-Stockholder exchanges will not change under the 
Capital Plan.
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    OCC also believes that the Capital Plan will better align the 
interests of Stockholder Exchanges and clearing members with respect to 
expenses, since changes to the level of operating expenses directly 
affect the Target Capital Requirement. In sum, OCC believes that the 
present proposal represents a fair and reasonable balancing of the 
interests of the Stockholder Exchanges, the other exchanges for which 
OCC provides clearing services, clearing members, customers, and the 
general public while providing an immediate infusion of capital and a 
structure within which OCC can meet its obligations to the public as a 
systemically important financial market utility, as well as the 
requirements under the SEC Proposed Rules.
Replenishment Capital Plan
    OCC proposes to put in place a Replenishment Capital Plan whereby 
OCC's Stockholder Exchanges are obligated to provide on a pro rata 
basis a committed amount of Replenishment Capital should OCC's total 
shareholders' equity fall below the hard trigger (as defined below). 
The aggregate committed amount for all five Stockholder Exchanges in 
the form of Replenishment Capital that could be outstanding at any time 
would be capped at the excess of (i) the lesser of (A) the Baseline 
Capital Requirement, which is currently $117 million, at the time of 
the relevant funding or (B) $200 million, over (ii) amounts of 
outstanding Replenishment Capital (``Cap''). The $200 million figure in 
the Cap formula takes into account projected growth in the Baseline 
Capital Requirement for the foreseeable future. The commitment to 
provide Replenishment Capital would not be limited by time, but only by 
the Cap. Replenishment Capital could be called in whole or in part 
after the occurrence of a ``hard trigger'' event described below, 
subject to the Cap. If the Baseline Capital Requirement approaches or 
exceeds $200 million, the Board can consider, as part of its annual 
review of the Replenishment Capital Plan that is required by the SEC 
Proposed Rules, alternative arrangements to obtain replenishment 
capital in excess of the $200 million committed under the Replenishment 
Capital Plan. In addition, the Refund Policy and the Dividend Policy 
will provide that, in the absence of obtaining any such alternative 
arrangements, the amount of the difference will be subtracted from 
amounts that would otherwise be available for the payment of refunds 
and dividends.
    Replenishment Capital contributed to OCC under the Replenishment 
Capital Plan would take the form of a new class of common stock 
(``Class C Common Stock'') of OCC to be issued to the Stockholder 
Exchanges solely in exchange for Replenishment Capital contributions.

[[Page 7061]]

    The Replenishment Capital Plan would be part of OCC's overall 
Capital Plan. In implementing the Replenishment Capital Plan, OCC's 
management would monitor OCC's levels of shareholders' equity to 
identify certain triggers, or reduced capital levels, that might 
require action. OCC has identified two key triggers--a soft trigger and 
a hard trigger--and proposes that OCC take certain steps upon the 
occurrence of either as described in more detail below.
    The ``soft trigger'' for re-evaluating OCC's capital would occur if 
OCC's shareholders' equity falls below the sum of (i) the Baseline 
Capital Requirement and (ii) 75% of the Target Capital Buffer. The soft 
trigger would be a warning sign that OCC's capital had fallen to a 
level that required attention and responsive action to prevent it from 
falling to unacceptable levels. Upon a breach of the soft trigger, 
OCC's senior management and the Board would review alternatives to 
increasing capital, and take appropriate action as necessary, including 
increasing fees or decreasing expenses, to restore shareholders' equity 
to the Target Capital Requirement.
    The ``hard trigger'' for making a mandatory Replenishment Capital 
call would occur if shareholders' equity falls below 125% of the 
Baseline Capital Requirement (``Hard Trigger Threshold''). The hard 
trigger would be a sign that corrective action more significant and 
with a more immediate impact than increasing fees or decreasing 
expenses should be taken to increase OCC's capital, either as part of a 
recovery plan or a wind-down plan for OCC's business. OCC's 
shareholders' equity would have to fall more than $100,000,000 below 
the fully funded capital amount described above in order for the Hard 
Trigger Threshold to be breached. As a result, OCC views the breach of 
the Hard Trigger Threshold as unlikely and occurring only as a result 
of a significant, unexpected event. Upon a breach of the Hard Trigger 
Threshold, the Board would have to determine whether to attempt a 
recovery, a wind-down of OCC's operations or a sale or similar 
transaction, subject in each case to any necessary stockholder 
consent.\21\ If the Board decides to wind-down OCC's operations, OCC 
would access the Replenishment Capital in an amount sufficient to fund 
the wind-down, as such amount would be determined by the Board, and 
subject to the Cap described above. If the Board decides to attempt a 
recovery of OCC's capital and business, OCC would access the 
Replenishment Capital in an amount sufficient to return shareholders' 
equity to an amount equal to $20 million above the Hard Trigger 
Threshold, subject to the Cap described above.
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    \21\ The requirement for stockholder consent would arise under 
OCC's Restated Certificate of Incorporation, which would provide 
that any decision to attempt a recovery would require separate 
approval by the stockholders, while a decision to wind-down would 
require separate approval by the stockholders.
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    While Replenishment Capital is outstanding, no refunds or dividends 
would be paid and, if any Replenishment Capital remains outstanding for 
more than 24 months or the Target Capital Requirement is not restored 
during that period, changes would be made to how OCC calculates refunds 
and dividends, as described in more detail above under Refund Policy 
and Dividend Policy. In addition, while Replenishment Capital is 
outstanding, OCC would first utilize the entire amount of Available 
Funds to repurchase, on a pro rata basis from each Stockholder, to the 
extent permitted by applicable Delaware and federal law and 
regulations, outstanding shares of Class C Common Stock as soon as 
practicable after completion of the financial statements following the 
end of each calendar quarter at a price equal to the original amount 
paid for such shares, plus an additional ``gross up'' amount to 
compensate the holders of the Class C Common Stock for taxes on 
dividend income (if any) that they may have to recognize as a result of 
such repurchase.\22\ For this purpose, ``Available Funds'' would equal, 
as of the end of any calendar quarter, the excess, if any, of (x) 
shareholders' equity over (y) the Minimum Replenishment Level. The 
``Minimum Replenishment Level'' would mean $20 million above the Hard 
Trigger Threshold, so that OCC's shareholders' equity would remain at 
or above the Minimum Replenishment Level after giving effect to the 
repurchase.
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    \22\ Based on current federal rates, if the full amount of the 
payment is classified as a dividend and the recipient is entitled to 
a dividends received deduction, this gross up is estimated to be 
approximately 12% of the payment.
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Compliance with Rule 17Ad-22(e)(15)
    The capital base described above will permit OCC to hold at all 
times cash and other assets of high quality and sufficiently liquid to 
allow OCC to meet its current and projected operating expenses under a 
range of scenarios, including adverse market conditions. In compliance 
with proposed Rule 17Ad-22(e)(15),\23\ OCC proposes at all times to 
hold liquid net assets funded by equity sufficient to cover potential 
general business losses so that OCC can continue operations and 
services as a going concern if those losses materialize, which assets 
will always be greater than either (x) six months of the covered 
clearing agency's current operating expenses, or (y) the amount 
determined by the Board to be sufficient to ensure a recovery or 
orderly wind-down of critical operations and services of the covered 
clearing agency, as contemplated by the plans established under 
paragraph (e)(3)(ii) \24\ of the proposed Rule. These assets will be 
held in addition to resources held to cover participant defaults or 
other risks covered under the credit risk standard in paragraph (b)(3) 
or paragraph (e)(4)(i)-(iii) \25\ of proposed Rule 17Ad-22, as 
applicable, and the liquidity risk standard in paragraph (e)(7)(i) and 
(ii) \26\ of that proposed rule.
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    \23\ SEC Proposed Rules at 417, FR 29507, 29616 (May 22, 2014).
    \24\ SEC Proposed Rules at 408, FR 29507, 29613 (May 22, 2014).
    \25\ SEC Proposed Rules at 408-409, FR 29507, 29614 (May 22, 
2014).
    \26\ SEC Proposed Rules at 412-413, FR 29507, 29615 (May 22, 
2014).
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    OCC believes that the Replenishment Capital Plan described above 
together with OCC's ability to set fees and retain earnings as 
described above will assure OCC's ability to remain at all times in 
compliance with the requirements of proposed Rule 17Ad-22(e)(15),\27\ 
including providing the basis for maintaining a viable capital plan for 
replenishment capital in compliance with subparagraph (e)(15)(iii) \28\ 
of the rule.
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    \27\ SEC Proposed Rules at 417-418, FR 29507, 29616 (May 22, 
2014).
    \28\ SEC Proposed Rules at 418, FR 29507, 29616 (May 22, 2014).
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Statutory Basis for the Advance Notice
    OCC believes that the proposed change is consistent with Section 
805(b) of the Clearing Supervision Act \29\ because the proposed change 
will reduce systemic risk.\30\ OCC believes that implementation of the 
Capital Plan will provide OCC with an immediate injection of capital 
and future committed capital to help ensure that it can continue to 
provide its clearing services if it suffers business losses as a result 
of a decline in revenues or otherwise. OCC believes that the proposed 
change, as described above, is necessary for it to meet the capital 
requirements under the proposed amendments \31\ to Rule 17Ad-22. For

[[Page 7062]]

these same reasons, the proposed change will reduce systemic risk 
because it will promote confidence that OCC will be able to continue 
operating even if it suffers business losses.
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    \29\ 12 U.S.C. 5464(b).
    \30\ 12 U.S.C. 5464(b)(3).
    \31\ See generally Securities Exchange Act Release No. 71699 
(March 12, 2014), 79 FR 29507 (May 22, 2014).
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Anticipated Effect on and Management of Risk
    OCC believes that the proposed change will reduce OCC's overall 
level of risk because it will help ensure that OCC will be able to 
continue to provide its clearing services even if it suffers 
significant business losses. As described above, the proposed change 
includes a significant infusion of permanent capital. In addition, each 
feature of the Capital Plan would help ensure that OCC's capital is 
sufficient on an ongoing basis to allow it to withstand business 
losses, whether resulting from a decline in revenue or otherwise. The 
Fee Policy would provide for the Business Risk Buffer, which is 
designed to ensure that fees will be sufficient to cover projected 
operating expenses. The Refund Policy and Dividend Policy both would 
allow for refunds of fees or payment of dividends, respectively, only 
to the extent that they would allow OCC to maintain shareholders' 
equity at the Target Capital Requirement. They would also prohibit 
refunds and dividends when Class C Common Stock is outstanding under 
the Replenishment Capital Plan and OCC was in the process of rebuilding 
its capital base. In addition, the Replenishment Capital Plan would 
establish a mandatory mechanism for the contribution of additional 
capital by OCC's stockholder exchanges in the event capital fell below 
desired levels. Together these features of the Capital Plan help ensure 
that OCC maintains levels of capital sufficient to allow it to absorb 
substantial business losses and meet its increased responsibilities 
imposed upon it as a systemically important financial market utility, 
which in turn helps reduce OCC's overall level of risk.

III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The designated clearing agency may implement this change if it has 
not received an objection to the proposed change within 60 days of the 
later of (i) the date that the Commission receives the notice of 
proposed change, or (ii) the date the Commission receives any further 
information it requests for consideration of the notice. The designated 
clearing agency shall not implement this change if the Commission has 
an objection.
    The Commission may, during the 60-day review period, extend the 
review period for an additional 60 days for proposed changes that raise 
novel or complex issues, subject to the Commission providing the 
designated clearing agency with prompt written notice of the extension. 
The designated clearing agency may implement a change in less than 60 
days from the date of receipt of the notice of proposed change by the 
Commission, or the date the Commission receives any further information 
it requested, if the Commission notifies the designated clearing agency 
in writing that it does not object to the proposed change and 
authorizes the designated clearing agency to implement the change on an 
earlier date, subject to any conditions imposed by the Commission.
    The designated clearing agency shall post notice on its Web site of 
proposed changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\32\
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    \32\ See note 5, supra.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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 [email protected]. Please include 
File Number SR-OCC-2014-813 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-2014-813. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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 Web site 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 the filing also will be available for inspection 
and copying at the principal office of OCC and on OCC's Web site http://www.optionsclearing.com/about/publications/bylaws.jsp. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-OCC-2014-813 and should be 
submitted on or before February 24, 2015.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-02566 Filed 2-6-15; 8:45 am]
BILLING CODE 8011-01-P