[Federal Register Volume 81, Number 202 (Wednesday, October 19, 2016)]
[Notices]
[Pages 72138-72141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25233]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79096; File No. SR-OCC-2016-802]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice Filing Concerning The Options 
Clearing Corporation's Escrow Deposit Program

October 13, 2016.
    The Options Clearing Corporation (``OCC'') filed on August 15, 2016 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2016-802 (``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) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') to implement changes to its escrow deposit program. 
The Advance Notice was published for comment in the Federal Register on 
September 20, 2016.\3\ The Commission did not receive any comments on 
the Advance Notice. 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 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. See 12 
U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ See Securities Exchange Act Release No. 78834 (September 14, 
2016), 81 FR 64536 (September 20, 2016) (File No. SR-OCC-2016-802). 
OCC also filed a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, 
seeking approval of changes to its Rules necessary to implement the 
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. This proposed rule change was published in the Federal 
Register on August 31, 2016. Securities Exchange Act Release No. 
78675 (August 25, 2016), 81 FR 60108 (August 31, 2016) (SR-OCC-2016-
009).
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I. Description of the Advance Notice

    OCC is the sole clearing agency for the U.S. listed options markets 
and a systemically important financial market utility. OCC seeks to 
manage risks that could cause a financial loss or settlement disruption 
and, therefore, threaten the stability of the U.S. financial system. 
One way OCC manages such risks is by collecting collateral to protect 
against potential losses stemming from the default of a clearing member 
or its customers. OCC obtains this collateral by collecting margin from 
its clearing members, or from deposits in lieu of margin of clearing 
members' customers through OCC's escrow deposit program. OCC states 
that the users of its escrow deposit program are customers of clearing 
members who, through the escrow deposit program, are permitted to 
collateralize eligible positions directly with OCC (instead of with the 
relevant clearing member who would, in turn, deposit margin at OCC). 
OCC states that when a customer of a clearing member makes a deposit in 
lieu of margin through OCC's escrow deposit program, the relevant 
positions are excluded from the clearing member's margin requirement at 
OCC. OCC believes that the escrow deposit program therefore provides 
users of OCC's services with a means to more efficiently use cash or 
securities they may have available.
    As described by OCC in the Advance Notice, the purpose of the 
proposed change is to improve the resiliency of OCC's escrow deposit 
program (``EDP''). First, OCC states that the changes would increase 
OCC's visibility into and control over collateral deposits made under 
the escrow deposit program. As described in the Advance Notice, 
currently, securities deposits in the EDP (``specific deposits'') are 
held at either the Depository Trust Company (``DTC'') or custodian 
banks, and cash deposits in the EDP (``escrow deposits'') are held at 
custodian banks. While OCC currently can verify the value of the 
securities deposited at DTC through DTC's systems, it lacks similar 
visibility into cash and securities held in custodian bank accounts, 
relying instead on the custodian banks to verify the value of such 
collateral. The proposed changes would require securities in the EDP to 
be held at DTC, providing OCC with increased visibility into the 
collateral, as OCC will be able to view, validate, and value the 
collateral in real time and perform the controls currently performed by 
custodian banks. As stated in the Advance Notice, a bank participating 
in the escrow deposit program (``Tri-Party Custodian Bank'') would also 
provide OCC with online view access to each customer's cash account 
designated for the escrow deposit program, allowing visibility into

[[Page 72139]]

transactional activity and account balances without having to rely upon 
a third party to value or warrant the existence of the collateral.
    Second, OCC states that the proposed changes provide more 
specificity concerning the manner in which OCC would take possession of 
collateral in OCC's escrow deposit program in the event of a clearing 
member or custodian bank default. As described in the Advance Notice, 
proposed Rules 610A(b), 610B(f), 610C(q), and 610C(r) would provide 
that in the event of a clearing member or custodian bank default, OCC 
would have the right to direct DTC to deliver the securities included 
in a member specific deposit, third-party specific deposit or escrow 
deposit to OCC's DTC participant account for the purpose of satisfying 
the obligations of the clearing member or reimbursing itself for losses 
incurred as a result of the failure. Similarly, pursuant to proposed 
Rules 610C(q) and 610C(r), OCC would have the right in the event of a 
Tri-Party Custodian Bank default to take possession of cash included 
within an escrow deposit for the same purposes. Further, Rule 
1106(b)(2) would be amended to provide that OCC may close out a short 
position of a suspended clearing member covered by a member specific, 
third-party specific or escrow deposit, subject to the ability of the 
suspended clearing member or its representative to transfer the short 
position to another clearing member under certain circumstances.
    Third, OCC states the proposed changes would clarify clearing 
members' rights to collateral in the EDP in the event of a customer 
default to the clearing member. According to the Advance Notice, 
Proposed Rules 610B(c) and 610C(f) would provide for the grant of a 
security interest by the customer to the clearing member with respect 
to any given third-party specific deposit and escrow deposit, as 
applicable, with the clearing member's right subordinate to OCC's 
interest. Proposed Rules 610C(d), 610C(o), 610C(p) and 610C(s), 
relating to escrow deposits, and proposed Rules 610B(d) and 610B(e), 
relating to third-party specific deposits, would provide that, in the 
event of a customer default to a clearing member, the clearing member 
would have the right to request a ``hold'' on a deposit, which would 
prevent the withdrawal of deposited securities or cash by a custodian 
bank or the release of a deposit that would otherwise occur in the 
ordinary course. OCC states that placing the ``hold'' instruction gives 
a clearing member the right to request that OCC direct delivery of the 
deposit to the clearing member through DTC's systems, in the case of 
securities, or an instruction to the Tri-Party Custodian Bank in the 
case of cash. OCC believes that providing clearing members with 
transparent instructions regarding how to place a hold instruction on 
and direct delivery of a deposit in the escrow deposit program would be 
a significant enhancement to the current escrow deposit program.
    Fourth, OCC states the changes would improve the readability of the 
rules governing OCC's escrow deposit program by consolidating all such 
rules into a single location in OCC's Rulebook. Upon implementation of 
the proposed change, all securities collateral in OCC's escrow deposit 
program would be held at DTC, and custodian banks would only be allowed 
to hold cash collateral.

Rule Consolidation and Terminology Changes

    OCC's current rules concerning its escrow deposit program are 
located in OCC Rules 503, 610, 613 and 1801. Additionally, OCC and 
custodian banks participating in OCC's escrow deposit program enter 
into an Escrow Deposit Agreement (``EDA''), which also contains 
substantive provisions governing the program. OCC proposes to 
consolidate all of the rules concerning the escrow deposit program, 
including the provisions of the EDA relevant to the revised escrow 
deposit program, into proposed Rules 610, 610A, 610B and 610C. OCC 
states that consolidating the many rules governing the escrow deposit 
program into a single location would significantly enhance the 
understandability and transparency of the rules concerning the escrow 
deposit program for current users of the program as well as any persons 
that may be interested in using the program in the future.
    OCC proposes to rename the types of escrow deposits available 
within the escrow deposit program, as well as rename the term 
``approved depository'' to ``approved custodian.'' Specific deposits, 
which are equity securities deposited by clearing members at DTC at the 
direction of their customers, would now be called ``member specific 
deposits''; third-party escrow deposits, which are equity securities 
deposited by custodian banks at DTC at the direction of their 
customers, would now be called ``third-party specific deposits''; and 
escrow program deposits, which are either cash deposits held at a 
custodian bank for the benefit of OCC, or Government securities 
deposited at DTC by custodian banks at the direction of their 
customers, would now be called ``escrow deposits''. The term ``approved 
depository'' would also be changed to ``approved custodian'' to 
eliminate any potential confusion with the term ``Depository,'' which 
is defined in the Rules to mean DTC.

New Rule Organization

    With respect to the rules governing the escrow deposit program, OCC 
states that proposed Rule 610 would set forth general terms and 
conditions common to all types of deposits permitted under the escrow 
deposit program. Specifically, proposed Rule 610: (1) Sets forth the 
different types of eligible positions for which a deposit in lieu of 
margin may be used, (2) sets forth operational aspects of the escrow 
deposit program such as the days and the times during which a deposit 
in lieu of margin may be made and where the different types of deposits 
in lieu of margin must be maintained (either DTC or a custodian bank), 
(3) provides the conditions under which OCC may take possession of a 
deposit in lieu of margin (from DTC or a custodian bank), and (4) 
describes OCC's security interest in deposits in lieu of margin.\4\ 
Proposed Rule 610 is supplemented by: (1) Proposed Rule 610A for member 
specific deposits, (2) proposed Rule 610B for third-party specific 
deposits, and (3) proposed Rule 610C for escrow deposits.
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    \4\ OCC would continue to maintain a perfected security interest 
in deposits in the escrow deposit program under the proposed Rules 
notwithstanding changes to the location of the rules that perfect 
such security interest. OCC's security interest in securities 
deposits in the escrow deposit program, which are held at DTC, is 
perfected by operation of DTC's rules. OCC's security interest in 
cash deposits in the escrow deposit program is perfected under 
proposed Rules 610C(i), 610C(j) and 610C(k), which replace Sections 
3.3, 3.4, 4.3, 4.4, 5.3, 5.4 and 21 of the EDA. Proposed Rule 610(g) 
also concerns OCC's security interest in deposits in escrow deposit 
program.
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Agreements Concerning the Escrow Deposit Program

    In addition to the above-described Rule changes, many provisions of 
the EDA would be moved in to the Rules. OCC proposes to eliminate the 
EDA and replace it with a streamlined agreement entitled the 
``Participating Escrow Bank Agreement.'' OCC states that the 
Participating Escrow Bank Agreement would provide that custodian banks 
are subject to all terms of the Rules governing the revised escrow 
deposit program, as they may be amended from time to time.\5\ OCC 
states that the

[[Page 72140]]

Participating Escrow Bank Agreement would contain eligibility 
requirements for custodian banks, including representations regarding 
the custodian bank's Tier 1 Capital, and provide OCC with express 
representations concerning the bank's authority to enter into the 
Participating Escrow Bank Agreement.
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    \5\ Under the Participating Escrow Bank Agreement, however, OCC 
will agree to provide custodian banks with advance notice of 
material amendments to the Rules relating to deposits in lieu of 
margin and custodian banks will have the opportunity to withdraw 
from the escrow deposit program if they object to the amendments. As 
a general matter, the Participating Escrow Bank Agreement will not 
be negotiable, although OCC may determine to vary certain non-
material terms in limited circumstances.
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    OCC is also proposing, under Proposed Rule 610C(b), to require 
customers wishing to deposit cash collateral and custodian banks 
holding escrow deposits comprised of cash to enter into a tri-party 
agreement involving OCC, the customer and the applicable custodian 
bank. While cash collateral pledged in the escrow deposit program will 
continue to be facilitated through existing interfaces, OCC states that 
pledges would be required to be made in the customer's account at the 
Tri-Party Custodian Bank. OCC states that the Tri-Party Agreement would 
govern the customer's use of cash in the program, confirm the grant of 
a security interest in the customer's account to OCC and the relevant 
clearing member (as set forth in proposed Rule 610C(f)), and cause 
customers of clearing members to be subject to all terms of the Rules 
governing the revised escrow deposit program. Each custodian bank 
entering into the Tri-Party Agreement would also agree to follow the 
directions of OCC with respect to cash escrow deposits without further 
consent by the customer.

II. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the Commission 
believes that the stated purpose of the Payment, Clearing and 
Settlement Supervision Act is instructive.\6\ The stated purpose of the 
Payment, Clearing and Settlement Supervision Act is to mitigate 
systemic risk in the financial system and promote financial stability 
by, among other things, promoting uniform risk management standards for 
systemically important financial market utilities and strengthening the 
liquidity of systemically important financial market utilities.\7\
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    \6\ See 12 U.S.C. 5461(b).
    \7\ Id.
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    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \8\ authorizes the Commission to prescribe risk 
management standards for the payment, clearing, and settlement 
activities of designated clearing entities and financial institutions 
engaged in designated activities for which it is the supervisory agency 
or the appropriate financial regulator. Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act \9\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \8\ 12 U.S.C. 5464(a)(2).
    \9\ 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 Commission has adopted risk management standards under Section 
805(a)(2) of the Payment, Clearing and Settlement Supervision Act 
(``Clearing Agency Standards'') and the Exchange Act.\10\ The Clearing 
Agency Standards became effective on January 2, 2013, and require 
registered clearing agencies to establish, implement, maintain, and 
enforce written policies and procedures that are reasonably designed to 
meet certain minimum requirements for their operations and risk 
management practices on an ongoing basis. As such, it is appropriate 
for the Commission to review advance notices against these Clearing 
Agency Standards, and the objectives and principles of these risk 
management standards as described in Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act.\11\
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    \10\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
    \11\ 12 U.S.C. 5464(b).
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    The Commission believes the proposed change is consistent with the 
objectives and principles described in Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act,\12\ and the Clearing Agency 
Standards, in particular, Rule 17Ad-22(d)(1),\13\ Rule 17Ad-
22(d)(3),\14\ and Rule 17Ad-22(d)(11) \15\ under the Exchange Act, as 
described in detail below.
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    \12\ Id.
    \13\ 17 CFR 240.17Ad-22(d)(1).
    \14\ 17 CFR 240.17Ad-22(d)(3).
    \15\ 17 CFR 240.17Ad-22(d)(11).
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A. Consistency With Section 805(b)(1) of the Act

    The objectives and principles of Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act are to promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system.\16\ The proposed 
change is consistent with the objectives and principles described in 
Section 805(b)(1) of the Act, including consistency with promoting 
robust risk management.\17\ OCC collects margin and deposits in lieu of 
margin to protect OCC and market participants from risks resulting from 
the default of a clearing member. The proposed change will enhance 
OCC's ability to validate and value EDP deposits in real time and 
enhance its ability to expeditiously take possession of such deposits 
in the event of a default. These enhancements will enable OCC to better 
ensure that it monitors and maintains adequate financial resources in 
the event of a clearing member default and thereby promote robust risk 
management. As such, the Commission believes that the proposed change 
is consistent with the promotion of robust risk management.
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    \16\ 12 U.S.C. 5464(b).
    \17\ 12 U.S.C. 5464(b)(1).
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B. Consistency With Exchange Act Rule 17Ad-22(d)

    Rule 17Ad-22(d)(1) under the Exchange Act requires OCC to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide a well-founded, transparent, 
and enforceable legal framework for each aspect of its activities in 
all relevant jurisdictions.\18\ Through the proposed change, OCC will 
provide clarity to clearing members, their customers, and potential 
users of OCC's escrow deposit program regarding the operations of the 
escrow deposit program and the manner in which OCC would risk manage a 
clearing member or customer default using the escrow deposit program. 
For example, the proposed change would better codify OCC's and clearing 
members' rights to EDP collateral in the event of a clearing member or 
customer default and provide greater transparency regarding the 
operational steps involved in taking possession of such collateral. 
Moreover, consolidating the rules governing the EDP and terms 
previously located in the EDA into a single location will enhance the 
transparency of the applicable EDP rules. As such, the Commission 
believes the proposed change is consistent with Exchange Act Rule 17Ad-
22(d)(1).\19\
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    \18\ 17 CFR 240.17Ad-22(d)(1).
    \19\ Id.
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    In addition, the Commission believes that the proposed change is 
consistent with Exchange Act Rule 17Ad-22(d)(3).\20\ Rule 17Ad-22(d)(3) 
requires OCC to, among other things, establish,

[[Page 72141]]

implement, maintain and enforce written policies and procedures 
reasonably designed to hold assets in a manner that minimizes risk of 
loss or delay or in its access to them.\21\ Under the proposed change, 
all non-cash collateral in the EDP would be held at DTC, which will 
allow OCC to validate and value collateral in real time and quickly 
obtain possession of deposited securities in an event of default 
without involving custodian banks by issuing a transfer instruction 
through DTC's systems. With respect to cash collateral, the proposed 
change would codify OCC's right to take possession of cash within an 
escrow account upon a clearing member or custodian bank default and 
provide OCC with online view access to each customer's cash account at 
the custodian bank. Together, these changes would allow OCC monitor the 
adequacy of collateral in the EDP and be able to more quickly take 
possession of collateral in the EDP in the event of a clearing member 
default, which would, thereby, reduce potential losses to OCC, other 
clearing members and market participants.
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    \20\ 17 CFR 240.17Ad-22(d)(3).
    \21\ Id.
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    Finally, the Commission believes that the proposed change is 
consistent with Exchange Act Rule 17Ad-22(d)(11), which requires OCC 
to, among other things, establish, implement, maintain and enforce 
written policies and procedures reasonably designed to make key aspects 
of their default procedures publicly available.\22\ The Commission 
believes that the proposed change is consistent with Rule 17Ad-
22(d)(11) because it would incorporate the substantive terms of the 
EDP, and specifically the rules concerning default management, into 
OCC's Rules, which are publicly available on OCC's Web site, rather 
than in private agreements.
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    \22\ 17 CFR 240.17Ad-22(d)(11).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\23\ that the 
Commission does not object to Advance Notice (SR-OCC-2016-802) and that 
OCC is authorized to implement the proposed change.
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    \23\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25233 Filed 10-18-16; 8:45 am]
 BILLING CODE 8011-01-P