[Federal Register Volume 82, Number 210 (Wednesday, November 1, 2017)]
[Notices]
[Pages 50719-50725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23731]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81949; File No. SR-OCC-2017-009]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of Proposed Rule Change Related to The Options 
Clearing Corporation's Counterparty Credit Risk Management Policy

October 26, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 12, 2017, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared primarily by OCC. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by OCC would formalize OCC's Counterparty 
Credit Risk Management Policy (``CCRM Policy'' or ``Policy''), which 
promotes compliance with multiple requirements applicable to OCC under 
Rule 17Ad-22, including Rules 17Ad-22(e)(3) concerning frameworks for 
the comprehensive management of risks, (e)(4) concerning credit risk 
management, (e)(16) concerning the safeguarding of assets, (e)(18) 
concerning risk-based participation criteria, (e)(19) concerning risks 
form indirect participants, and (e)(20) concerning linkages.\3\ The 
CCRM Policy is included as confidential Exhibit 5.\4\
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    \3\ 17 CFR 240.17Ad-22(e)(3), (4), (16), (18), (19), and (20).
    \4\ The Commission notes that Exhibit 5 is included in the 
filing, not in this Notice.
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    The proposed rule change does not require any changes to the text 
of OCC's By-Laws or Rules. All terms with initial capitalization that 
are not otherwise defined herein have the same meaning as set forth in 
the OCC By-Laws and Rules.\5\
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    \5\ OCC's By-Laws and Rules can be found on OCC's public Web 
site: http://optionsclearing.com/about/publications/bylaws.jsp.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

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

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(1) Purpose
Background
    As a central counterparty providing clearance, settlement, and risk 
management services, OCC is exposed to and must manage a range of 
risks, including credit risk. The purpose of the CCRM Policy is to 
outline OCC's overall approach to identify, measure, monitor, and 
manage its exposures to direct and indirect participants, Liquidity

[[Page 50720]]

Providers,\6\ asset custodians, settlement banks, letter of credit 
issuers, investment counterparties, other clearing agencies, and 
financial market utilities (``FMUs'') \7\ (each a ``Counterparty'') 
arising from its payment, clearing, and settlement processes. OCC notes 
that the CCRM Policy is part of a broader framework used by OCC to 
manage credit risk, including OCC's By-Laws, Rules, and other policies 
and procedures that are designed collectively to ensure that OCC 
appropriately manages counterparty credit risk and to promote 
compliance with Rule 17Ad-22.\8\
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    \6\ Under the CCRM Policy, ``Liquidity Provider'' is defined as 
a Commercial Bank or a non-banking institution--generally a pension 
fund--that provides a committed liquidity facility to OCC.
    \7\ Under the CCRM Policy, ``Financial Market Utility'' is 
defined as a derivatives clearing organization partnering with OCC 
to provide a cross-margin program; a clearing agency providing 
settlement services of securities arising from the exercise, 
assignment or maturity of options or futures; or the Depository 
providing book-entry securities transfers and asset custodian 
services.
    \8\ 17 CFR 240.17Ad-22.
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    The CCRM Policy would be maintained by OCC to promote compliance 
with a number of rules adopted under Section 17A of the Securities 
Exchange Act of 1934, as amended (``Act''),\9\ and the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'').\10\ In particular, the Policy is designed to 
address certain aspects of Rules 17Ad-22(e)(3) concerning frameworks 
for the comprehensive management of risks, (e)(4) concerning credit 
risk management, (e)(16) concerning the safeguarding of assets, (e)(18) 
concerning risk-based participation criteria, (e)(19) concerning risks 
form indirect participants, and (e)(20) concerning linkages.\11\
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    \9\ 15 U.S.C. 78q-1.
    \10\ 12 U.S.C. 5461 et seq.
    \11\ 17 CFR 240.17Ad-22(e)(3), (4), (16), (18), (19), and (20).
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Counterparty Credit Risk Management Policy
    OCC's CCRM Policy outlines the key components of OCC's framework 
for identifying, measuring, monitoring, and managing OCC's exposures to 
its Counterparties. This framework includes: (1) The identification of 
credit risk, (2) Counterparty access and participation standards, (3) 
the measurement of its Counterparty exposures, (4) the monitoring and 
managing of Counterparty exposures, and (5) voluntary termination of 
Counterparty relationships. Each of these components is described in 
more detail below.
Identification of Credit Risk
    The CCRM Policy identifies various ways in which credit risk 
originates from the failure of a Counterparty to perform. With respect 
to a Clearing Member, the CCRM Policy details a number of different 
ways in which OCC may be exposed to credit risk. This includes the 
potential failure of a Clearing Member to pay for purchased options, to 
meet expiration-related settlement obligations, or to make certain 
mark-to-market variation payments or initial margin deposits. It also 
includes the potential insufficiency of a defaulting Clearing Member's 
margin and Clearing Fund deposits in a liquidation scenario. Other 
sources of credit risk identified in the CCRM Policy include the 
inability of OCC to access collateral (e.g., cash or securities) from a 
custodian or investment counterparty that is needed to facilitate a 
liquidation, or a failure by an issuer of a letter of credit to honor 
its corresponding obligations. The CCRM Policy also identifies that 
certain relationships with other FMUs, such as cross-margining programs 
and cash market settlement services, represent critical linkages that 
may present certain degrees of credit exposure based on the terms and 
design of the linkage. The CCRM Policy also notes that OCC may face 
additional risks from Counterparties, such as the potential failure of 
a Liquidity Provider to honor a borrowing request.
Counterparty Access and Participation Standards
    Under the CCRM Policy, OCC's management of Counterparty credit 
risks begins with an initial evaluation process intended to ascertain 
that Counterparties meet certain minimum financial and operational 
standards and are considered as having a low probability of defaulting 
on their obligations prior to engaging or effecting any new 
transactions or expansion of business with OCC. To accomplish this 
objective, OCC shall evaluate each Counterparty against established 
minimum standards of creditworthiness, overall financial condition, and 
operational capabilities. Pursuant to the Policy, the standards used to 
evaluate Counterparties shall be objective, risk-based, and publicly-
disclosed in order to permit fair and open access. These standards 
shall be developed independently for Clearing Members, Commercial and 
Central Banks, investment counterparties, Liquidity Providers and FMUs, 
accounting for differences in their regulatory reporting and overall 
business operations.
Clearing Membership Standards
    OCC's minimum participation standards for Clearing Member are found 
in Article V of OCC's By-Laws, Chapters II and III of OCC's Rules, and 
other publicly-disclosed supplemental documentation (together, 
``Participation Standards Documentation''). Under the Policy, OCC's 
Credit Risk Management and Member Services departments shall evaluate 
each Clearing Member applicant against the minimum standards of 
creditworthiness and for its overall financial condition and 
operational capabilities as provided in the Participation Standards 
Documentation. Such evaluation shall also consider the Counterparty's 
aggregation of exposure on an individual and related-entities level, as 
applicable, as well as any material exposure that may arise from tiered 
participation arrangements. The Credit Risk Management and Member 
Services departments shall document the results of this evaluation in a 
memorandum, including the Clearing Member applicant's ability to meet 
relevant participation standards, and report those results to OCC's 
Executive Chairman, Chief Operating Officer or Chief Administrative 
Officer for review and approval, where appropriate, or for 
recommendation to the Risk Committee or Board of Directors.\12\
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    \12\ Pursuant to Article V, Section 2 of the By-Laws, the 
Executive Chairman, Chief Operating Officer and Chief Administrative 
Officer each have delegated authority to approve Clearing Member 
applicants provided that (1) there is no recommendation to impose 
additional membership criteria in accordance with Article V of the 
By-Laws and (2) the Risk Committee is given not less than five days 
to determine the application should be reviewed at a meeting of the 
Risk Committee. Pursuant to Interpretation and Policy .06 to Article 
V, Section 1 of the By-Laws, the Risk Committee has the authority to 
impose additional requirements on Clearing Member applicants, such 
as increased capital or margin requirements as well as restrictions 
on clearing activities. The Risk Committee also has the authority to 
approve waivers of certain clearing membership requirements under 
Article V, Section 1 of the By-Laws. Approvals of a Clearing Member 
business expansion by the Executive Chairman, Chief Operating 
Officer or Chief Administrative Officer are subsequently presented 
to the Risk Committee for ratification, except in limited 
circumstances detailed in Article V, Section 1.03(e) of the By-Laws.
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Commercial and Central Banks
    OCC's minimum standards for asset custodians, settlement banks, 
letter of credit issuers and investment counterparties are found in OCC 
Rule 604 and relevant OCC procedures. The Credit Risk Management 
department shall coordinate with various

[[Page 50721]]

departments (such as Collateral Services or Treasury) to evaluate each 
bank against the minimum standards of creditworthiness and for its 
overall financial condition and operational capabilities as provided in 
OCC Rule 604 and related OCC procedures. Such evaluation shall also 
consider the Counterparty's aggregation of exposure on an individual 
and related-entities level, as applicable, as well as whether OCC would 
be able to structure its custodial relationships in a manner that 
allows prompt access to its own and its Clearing Members' assets. The 
latter shall include holding assets at supervised and regulated 
institutions that adhere to generally accepted accounting practices, 
maintain safekeeping procedures, and have internal controls that fully 
protect these assets. Under the Policy, Credit Risk Management and 
either the Collateral Services or Treasury department, as applicable, 
shall document the results of its evaluation in a memorandum, including 
the bank's ability to meet relevant participation standards, and report 
those results to OCC's Executive Chairman, Chief Operating Officer or 
Chief Administrative Officer, each of which shall have the authority to 
approve new and expanded relationships with asset custodians, 
settlement banks, letter of credit issuers, investment counterparties, 
and Liquidity Providers.
Liquidity Providers
    Under the Policy, OCC maintains internal procedures outlining the 
minimum standards for Commercial Banks \13\ and non-bank institutions 
acting as Liquidity Providers. OCC's Credit Risk Management and 
Treasury departments would be responsible for evaluating each Liquidity 
Provider against the minimum standards of creditworthiness and for its 
overall financial condition and operational capabilities as provided in 
the procedures. Because Liquidity Providers present both credit and 
liquidity risk to OCC, the due diligence around such institutions shall 
include a review of each lender's ability to perform their commitments 
as well as understand and manage their liquidity risks. Pursuant to the 
Policy, Credit Risk Management and Treasury shall document the results 
of its evaluation in a memorandum, including the Liquidity Provider's 
ability to meet relevant participation standards, and report those 
results to the Executive Chairman, Chief Operating Officer or Chief 
Administrative Officer, each of which shall have the authority to 
approve new and expanded relationships with Liquidity Providers.
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    \13\ Under the Policy, ``Commercial Bank'' is defined as a 
banking or depository institution that is not an operating arm of a 
Central Bank. Commercial bank relationships shall be governed by 
this Policy and all supporting bank-related procedures. Commercial 
Banks act as Liquidity Providers, asset custodians, settlement 
banks, letter of credit issuers, and investment counterparties on 
behalf of OCC.
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FMUs
    Under the Policy, OCC maintains internal procedures outlining 
minimum standards for FMUs. OCC's Business Operations and Credit Risk 
Management departments shall evaluate each FMU for its overall 
financial condition and operational capabilities as provided in the 
procedure. Pursuant to the Policy, before entering into any link 
arrangement, the Legal department shall assist the aforementioned 
business units to identify legal risks relating to rights and 
interests, collateral arrangements, settlement finality and netting 
arrangements, and financial and custody risks. The Business Operations, 
Credit Risk Management and Legal departments shall document the results 
of its evaluation in a memorandum, including the FMU's ability to meet 
relevant standards. All new and expanded FMU relationships shall be 
reviewed and approved by the Risk Committee and subsequently 
recommended for approval to the Board of Directors.
Measuring Counterparty Credit Risk
    The CCRM Policy describes various ways in which OCC measures the 
credit risk posed by different Counterparties. With respect to Clearing 
Members, the CCRM Policy provides that OCC measures its credit 
exposures to Clearing Members under normal market conditions through 
the calculation of margin requirements and its credit exposures to 
Clearing Members under extreme but plausible conditions through stress 
testing and the calculation of Clearing Fund requirements, in 
accordance with applicable OCC policies. Margin, Clearing Fund and 
stress test results may be used by OCC's Financial Risk Management 
department (``FRM'') to evaluate OCC's counterparty credit risk 
framework and inform Clearing Member surveillance processes.
    With respect to Commercial Banks, Central Banks,\14\ Liquidity 
Providers, and investment counterparties, OCC shall measure its credit 
exposures to these Counterparties by the balances generated from the 
various activities provided by these institutions in accordance with 
relevant internal procedures.
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    \14\ Under the Policy, ``Central Bank'' is defined as a bank 
serving as a bank for both depository institutions and a government, 
a regulator for financial institutions, and/or a nation's money 
manager. Central Banks act as asset custodians on behalf of OCC, and 
OCC uses access to accounts and services at a Central Bank, when 
available and where determined to be practical by the Board of 
Directors, to enhance its management of liquidity risk. Due to the 
inherently low credit risk presented by Central Banks, only limited 
monitoring activities would be performed pursuant to relevant OCC 
procedures.
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    FMUs provide a range of services to OCC, including the Depository 
Trust Company (``DTC'') as collateral custodian and provider of book 
order entry of securities transfers, Chicago Mercantile Exchange Inc. 
(``CME'') and ICE Clear U.S. as cross-margin clearing organizations, 
and the National Securities Clearing Corporation (``NSCC'') as a 
provider of securities settlement. Under the Policy, DTC credit 
exposures shall be measured by the collateral balances held and the 
value of securities lending/borrowing transactions facilitated. CME and 
ICE Clear U.S. credit exposures shall be measured by the projected 
margin impact in the event of suspension of a cross-margin program and, 
therefore, the absence of risk reducing positions cleared away from 
OCC. NSCC exposure shall be measured by the value of securities and 
cash to be settled in connection with the delivery obligations settled 
through NSCC.
Monitoring and Managing Counterparty Credit Risk
    The CCRM Policy also describes the manner in which OCC monitors and 
manages credit risk from its Counterparties. Under the Policy, OCC's 
monitoring and management of such risks is comprised of ``Watch Level 
Reporting'' processes in conjunction with other tools including margin 
adjustments, internal credit ratings, risk examinations, and monitoring 
of tiered participation arrangements and dormant Counterparties.
Watch Level Reporting Overview
    Under the Policy, Counterparties are monitored by OCC's FRM, 
Business Operations, and Treasury departments for ongoing compliance 
with the minimum participation standards described above to identify 
any trends that might signal the deterioration of a Counterparty's 
ability to timely meet its obligations. When these trends are 
identified, Credit Risk Management shall report on a Counterparty 
through OCC's Watch Level Reporting processes, which are described in 
further detail

[[Page 50722]]

below. As a Counterparty approaches or no longer meets minimum 
standards, FRM's monitoring heightens and, in the case of Commercial 
Banks and Clearing Members, increasingly rigorous protective measures 
may be imposed to limit or eliminate OCC's credit exposure.
    Pursuant to the Policy, the Watch Level Reporting process shall be 
administered by OCC's Management Committee, which maintains approval 
authority of Watch Level parameter changes. The Watch Level Reporting 
process provides each of the Executive Chairman, Chief Operating 
Officer and Chief Administrative Officer with authority to take action 
to protect OCC given the facts and circumstances of the exposure 
presented by a Clearing Member or Commercial Bank. Under the Policy, 
Credit Risk Management shall provide monthly internal reporting to FRM 
summarizing the circumstances relating to a violation, additional risks 
observed and any corrective measure taken by any Clearing Member, 
Commercial Bank, or FMU at or above Watch Level II (described below); 
and monthly reporting to OCC's Credit and Liquidity Risk Working Group, 
Management Committee and the Risk Committee of any Clearing Member or 
Commercial Bank at or above Watch Level III (described below).
Clearing Member Watch Level Reporting and Bank Watch Level Reporting
    Pursuant to the CCRM Policy, the Clearing Member Watch Level 
Reporting process and Bank Watch Level Reporting process shall support 
initial and on-going participation standards by allowing OCC's Credit 
Risk Management department, with the support of other FRM business 
units, Business Operations and Treasury, to detect business-related 
concerns and/or financial or operational deterioration of a 
Counterparty in order to protect OCC and its Clearing Members against 
the potential default of a Clearing Member or Commercial Bank. Pursuant 
to the Policy, the Clearing Member Watch Level Reporting process and 
Bank Watch Level Reporting process shall be organized into four-tiered 
surveillance structures.
    1. Watch Level I. Watch Level I is the lowest tier of severity and 
shall be used to categorize Clearing Members and Commercial Banks 
presenting minimal to very low credit risk. This level of violation 
shall be identified but not reported.
    2. Watch Level II. This tier shall be used to categorize Clearing 
Members and Commercial Banks presenting low to lower moderate credit 
risk. This level of violation shall be identified and reported to 
internal personnel pursuant to FRM procedures.
    3. Watch Level III. This tier shall be used to categorize Clearing 
Members and Commercial Banks potentially presenting upper moderate to 
substantial credit risk. Violations in this tier may indicate a 
Clearing Member or Commercial Bank that is below early warning 
participation thresholds and may soon become non-compliant with OCC's 
minimum participation standards, as specified in Article V of OCC's By-
Laws, Chapters II and III of OCC's Rules, and internal OCC procedures. 
This level of violation shall be identified and reported to the 
Executive Chairman, Chief Operating Officer or Chief Administrative 
Officer, who shall have the authority to approve the imposition or 
waiver of protective measures. The Risk Committee shall be informed of 
these violations on a monthly basis.
    4. Watch Level IV. Watch Level IV is the highest tier of severity 
and shall be used to categorize Clearing Members and Commercial Banks 
potentially presenting high to very high credit risk with a heightened 
probability of default. Violations in this tier may indicate a Clearing 
Member or Commercial Bank may imminently become or has already become 
non-compliant with OCC's minimum participation standards, as specified 
in Article V of OCC's By-Laws, Chapters II and III of OCC's Rules, and 
internal OCC procedures. This level of violation shall be identified 
and reported to OCC's Credit and Liquidity Risk Working Group, with 
subsequent reporting to the Executive Chairman, Chief Operating Officer 
or Chief Administrative Officer, who shall have the authority to 
approve the imposition or waiver of protective measures, including the 
option to restrict business of or suspend the Clearing Member or 
Commercial Bank. The Risk Committee shall be promptly informed of these 
violations and a meeting of the Risk Committee may occur to discuss the 
event.
    In addition, under the Policy, a Clearing Member reporting (1) 
aggregate uncollateralized stress test exposure under normal market 
conditions less (2) the sum of base expected shortfall and stress test 
charges as computed under OCC's margin methodology, exceeding 75% of 
the Clearing Member's excess net capital shall be identified and 
reported on Watch Level II. When this exposure exceeds 100% of net 
capital, a Clearing Member shall be identified and reported on Watch 
Level III and shall be subject to a margin call for the amount of 
exposure exceeding net capital. A margin call shall be the standard 
form of protective measures for position risk monitoring and shall not 
require officer approval or further prompt escalation. However, 
Clearing Members may be reported to the Executive Chairman, Chief 
Operating Officer or Chief Administrative officer for consideration of 
additional protective measures.
FMU Watch Level Reporting
    The FMU Watch Level Reporting process allows Credit Risk 
Management, with the support of other FRM business units and Business 
Operations, to detect business-related concerns and/or financial or 
operational deterioration of a FMU. Pursuant to the CCRM Policy, the 
FMU Watch Level Reporting process is organized into a two-tiered 
surveillance structure.
    1. Watch Level I. Watch Level I is the lowest tier of severity and 
shall be used to categorize FMUs presenting minimal to very low credit 
risk. This level of violation shall be identified but not reported.
    2. Watch Level II. Watch Level II is the highest tier of severity 
and shall be used to categorize FMUs presenting low to lower moderate 
credit risk. This level of violation shall be identified and reported.
Other Tools for Monitoring and Managing Credit Risk
    In addition to the Watch Level Reporting processes discussed above, 
the CCRM Policy discusses other tools and processes used by OCC to 
monitor and manage credit risks arising from its Counterparties. For 
example, in cases where ongoing monitoring of Clearing Members 
identifies circumstances impacting margin levels due to changing 
portfolio characteristics, market conditions, elevated Clearing Fund 
stress test results, upcoming holidays where trading is allowed but OCC 
is unable to call for additional margin deposits, and certain other 
situations, OCC shall have the authority to call for additional margin 
deposits or otherwise adjust margin requirements as further detailed in 
OCC's margin and Clearing Fund-related policies.
    Under the Policy, OCC's Credit Risk Management department also 
maintains Internal Credit Ratings (``ICRs'') which shall be 
incorporated into the Watch Level Reporting process and shall be 
designed to identify quarterly creditworthiness scores of Clearing 
Members and Commercial Banks. ICR reporting shall summarize the 
underlying cause of the ICR score, recent scoring trend and exposure 
introduced by a Clearing Member or Commercial Bank.

[[Page 50723]]

    In addition, the Policy provides that Credit Risk Management shall 
perform examinations of the risk management frameworks, policies, 
procedures and practices of each Clearing Member no less than once in a 
three calendar year period focusing on the risks posed to OCC. For 
certain exams, Credit Risk Management may coordinate with external 
parties to realize operational efficiencies for both the Clearing 
Member and OCC.
    The CCRM Policy also provides that OCC's Counterparty monitoring 
includes managing the material risks that arise from indirect 
participants through tiered participation arrangements. In particular, 
Credit Risk Management, supported by other FRM business units and 
Business Operations, shall monitor the material risks that arise from 
indirect participants through tiered participation arrangements. Credit 
Risk Management (or other FRM business units, as appropriate) shall 
identify these tiered participation arrangements through standard 
monitoring processes when they present elevated risk to the Clearing 
Member or OCC. Furthermore, Clearing Member risk examinations shall 
seek to understand how direct participants identify, measure and manage 
the risks posed to OCC from indirect participants. In this regard, the 
CCRM Policy is designed to promote compliance with Rule 17Ad-22(e)(19) 
by addressing the material risks that may arise from indirect 
participants.\15\
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    \15\ 17 CFR 240.17Ad-22(e)(19).
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    Additionally, under the CCRM Policy, OCC shall monitor Clearing 
Members, Commercial Banks and investment counterparties during 
prolonged periods of inactivity, and Clearing Members shall be allowed 
to voluntarily enter a dormant state in order to reduce credit risk 
originating from unexpected trading activity. A dormant Clearing Member 
shall continuously adhere to all operational and financial standards 
and may reactivate its membership after submitting to an operational 
and financial review. OCC shall maintain sole discretion to terminate 
inactive Commercial Banks and investment counterparties in order to 
reduce credit risk.
Counterparty Credit Risk Termination
    Finally, the CCRM Policy addresses the voluntary off-boarding of 
Counterparties. Under the Policy, voluntary off-boarding shall be 
performed in a manner designed to wind down all credit exposures in an 
orderly fashion before a relationship is terminated.\16\
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    \16\ 17 CFR 240.17Ad-22(e)(19).
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(2) Statutory Basis
    Section 17A(b)(3)(F) of the Act \17\ requires, among other things, 
that the rules of a clearing agency be designed to assure the 
safeguarding of securities and funds which are in its custody or 
control or for which it is responsible and, in general, to protect 
investors and the public interest. Through each of its respective 
sections, the CCRM Policy provides a framework that is designed to 
enable OCC to identify, evaluate, measure, monitor and manage potential 
credit risks posed by its Counterparties. In identifying these credit 
risks, the CCRM Policy details various ways in which OCC may be exposed 
to such risks. In evaluating counterparty credit risks, the CCRM Policy 
states that OCC evaluates each Counterparty against objective and risk-
based minimum standards of creditworthiness, overall financial 
condition and operational capabilities. The Policy also provides detail 
on how OCC structures its custodial relationship to ensure it has 
prompt access to its own assets and Clearing Members' assets. In 
measuring counterparty credit risk, the CCRM Policy describes various 
ways in which OCC measures credit risk posed by different 
Counterparties, as well as the three main tools for managing credit 
risk posed by Clearing Members. In monitoring and managing counterparty 
credit risk, the CCRM Policy specifies the steps taken by OCC's 
internal units to monitor Counterparties, including by conducting 
examinations of Clearing Members' risk management frameworks and 
performing monthly Watch Level Reporting. The CCRM Policy's promotion 
of each aforementioned activity ultimately inures to the protection of 
investors and the public interest, as well as the safeguarding of 
securities and funds in OCC's custody or control \18\ in a manner 
consistent with Section 17A(b)(3)(F) of the Act.\19\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ These activities, in turn, help ensure that OCC remains 
capable of continuing its operations and services in a manner that 
promotes the prompt and accurate clearance and settlement of 
securities transactions.
    \19\ 15 U.S.C. 78q-1(b)(3)(F).
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    OCC also believes that that the CCRM Policy is consistent with 
several requirements under Rule 17Ad-22. For example, Rules 17Ad-
22(e)(3) and (e)(4) \20\ require a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, among other things, maintain a sound 
risk management framework for addressing credit risk, to effectively 
identify, measure, monitor, and manage credit risks that arise in or 
are borne by the covered clearing agency, including its credit 
exposures to participants and those arising from its payment, clearing, 
and settlement processes. OCC believes that the CCRM Policy is 
consistent with Rules 17Ad-22(e)(3) and (4) \21\ because the CCRM 
Policy describes OCC's framework for comprehensively managing its 
credit risks. Specifically, the CCRM Policy describes the various 
processes by which OCC identifies, measures, monitors, and manages its 
credit exposures to participants and exposures arising from its 
payment, clearing, and settlement processes, including the Counterparty 
access and participation standards used by OCC to evaluate potential 
Counterparties, OCC's processes for measuring its Counterparty 
exposures, and OCC's processes for monitoring and managing Counterparty 
exposures (particularly through the use of its Watch Level Reporting 
processes).
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    \20\ 17 CFR 240.17Ad-22(e)(3) and (4).
    \21\ Id.
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    In addition, Rule 17Ad-22(e)(16) \22\ requires a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, among other things, safeguard 
the covered clearing agency's own and its participants' assets and 
minimize the risk of loss and delay in access to these assets. OCC 
believes that the access and participation requirements for Commercial 
and Central Banks outlined in the CCRM Policy enable it to 
appropriately evaluate each bank against relevant minimum standards of 
creditworthiness and for its overall financial condition and 
operational capabilities, and are therefore designed to minimize the 
risk of loss and delay in access to OCC's assets and its participants' 
assets in a manner consistent with Rule 17Ad-22(e)(16).\23\
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    \22\ 17 CFR 240.17Ad-22(e)(16).
    \23\ Id.
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    Rule 17Ad-22(e)(18) \24\ further requires a covered clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, among other things, establish 
objective, risk-based, and publicly disclosed criteria for 
participation, which permit fair and open access and require 
participants to have sufficient financial resources and robust 
operational capacity to meet obligations arising from participation in 
the clearing agency, and monitor

[[Page 50724]]

compliance with such participation requirements on an ongoing basis. 
OCC believes the CCRM Policy promotes compliance with Rule 17Ad-
22(e)(18) \25\ by ensuring that OCC has objective, risk-based and 
publicly disclosed criteria for participation and requiring Clearing 
Members to have sufficient financial resources to meet their 
obligations to OCC. Moreover, the Policy outlines the Watch Level 
Reporting process used by OCC to monitor compliance with such 
participation requirements on an ongoing basis.
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    \24\ 17 CFR 240.17Ad-22(e)(18).
    \25\ Id.
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    Rule 17Ad-22(e)(19) \26\ requires a covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify, monitor, and manage the 
material risks to the covered clearing agency arising from arrangements 
in which firms that are indirect participants in the covered clearing 
agency rely on the services provided by direct participants to access 
the covered clearing agency's payment, clearing, or settlement 
facilities. OCC believes the Policy is designed to comply with Rule 
17Ad-22(e)(19) \27\ because it outlines the process by which OCC 
identifies and monitors the material risks arising from indirect 
participants through tiered participation arrangements, including 
through the use of risk examinations of its Clearing Members.
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    \26\ 17 CFR 240.17Ad-22(e)(19).
    \27\ Id.
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    Finally, Rule 17Ad-22(e)(20) \28\ requires a covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, among other things, identify, 
monitor, and manage risks related to any link the covered clearing 
agency establishes with one or more other clearing agencies or FMUs. 
OCC believes that the Policy promotes compliance with Rule 17Ad-
22(e)(20) \29\ because it outlines the standards OCC uses to evaluate 
FMU Counterparties prior to entering into any link arrangement 
(including the evaluations OCC would perform relating to rights and 
interests, collateral arrangements, settlement finality and netting 
arrangements, and financial and custody risks that may arise due to 
such link arrangement) and the processes by which OCC measures and 
monitors the risks arising from such FMU Counterparties (including its 
FMU Watch Level Reporting process).
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    \28\ 17 CFR 240.17Ad-22(e)(20).
    \29\ Id.
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    The proposed rule change is not inconsistent with the existing 
rules of OCC, including any other rules proposed to be amended.

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \30\ requires that the rules of a 
clearing agency not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. OCC does not 
believe that the proposed rule change would impact or impose any burden 
on competition. The proposed rule change addresses the framework by 
which OCC manages counterparty credit risk arising from its business, 
as set forth in the CCRM Policy. Because any individual Counterparty 
under the CCRM Policy is equally subject to the aspects of the 
counterparty credit risk framework that apply to it based on the type 
of Counterparty that it represents (i.e., direct and indirect 
participants, Liquidity Providers, asset custodians, settlement banks, 
letter of credit issuers, investment counterparties, clearing agencies 
and FMUs) and the related counterparty credit risks that are posed to 
OCC by that type of Counterparty, the proposed rule change would not 
provide any Counterparty with a competitive advantage over any other 
similar Counterparty. Further, the proposed rule change would not 
affect Clearing Members' or other Counterparties' existing access to 
OCC's services or impose any new or different direct burdens on 
Clearing Members or other Counterparties.
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    \30\ 15 U.S.C. 78q-1(b)(3)(I).
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    For the foregoing reasons, OCC believes that the proposed rule 
change is in the public interest, would be consistent with the 
requirements of the Act applicable to clearing agencies, and would not 
impact or impose a burden on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self- regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-2017-009 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-2017-009. 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 proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change 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 such filing also will be available 
for inspection and copying at the principal office of OCC and on OCC's 
Web site at http://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_009.pdf.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that the Commission does not redact 
or edit personal identifying information from

[[Page 50725]]

comment submissions. You should submit only information that you wish 
to make available publicly.
    All submissions should refer to File Number SR-OCC-2017-009 and 
should be submitted on or before November 22, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated Authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23731 Filed 10-31-17; 8:45 am]
 BILLING CODE 8011-01-P