[Federal Register Volume 82, Number 230 (Friday, December 1, 2017)]
[Notices]
[Pages 57015-57019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25857]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82156; File No. SR-OCC-2017-019]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing of a Proposed Rule Change, as Modified by Amendment 
No. 1, Concerning the Adoption of a New Minimum Cash Requirement for 
the Clearing Fund

November 27, 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 November 14, 2017, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule

[[Page 57016]]

change as described in Items I, II and III below, which Items have been 
prepared primarily by OCC. On November 22, 2017, OCC filed Amendment 
No. 1 to the proposed rule change.\3\ 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.
    \3\ In Amendment No. 1, OCC modified the proposed change to 
Article VIII, Section 4(a) of the By-Laws to clarify that interest 
earned on Clearing Fund cash deposits held at a Federal Reserve Bank 
accruing to the benefit of Clearing Members would be calculated 
daily based on each Clearing Member's pro rata share of Clearing 
Fund cash deposits. OCC did not propose any other changes to the 
filing in Amendment No. 1.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    This proposed rule change by the OCC would (1) revise OCC's By-Laws 
to adopt a new minimum cash requirement for the Clearing Fund; (2) 
revise OCC's By-Laws to provide for the pass-through of interest earned 
on Clearing Fund cash held in OCC's Federal Reserve bank account; (3) 
enact changes to OCC's Fee Policy that reflect the pass-through of 
interest earned on Clearing Fund cash held in OCC's Federal Reserve 
bank account; and (4) make certain conforming changes to OCC's Rules 
and By-Laws to affect the aforementioned changes.\4\ All terms with 
initial capitalization not defined here have the same meaning set forth 
in OCC's By-Laws and Rules.\5\
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    \4\ OCC has filed an advance notice with the Commission in 
connection with this proposal. See SR-OCC-2017-808.
    \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
    OCC proposes to establish a minimum cash contribution requirement 
for its Clearing Fund in order to increase the amount of qualifying 
liquid resources available to OCC to account for extreme scenarios that 
may result in liquidity demands exceeding OCC's current Cover 1 
liquidity resources, as calculated under the current historically-based 
methodology, and provide for a more consistent level of cash resources 
in its available prefunded financial resources. The proposed rule 
change also would provide for the pass-through of interest income 
earned on such deposits to its Clearing Members. OCC's current 
practices and the proposed changes to such practices are described in 
more detail below.
Current Practice
    Presently, Article VIII, Section 3(a) of OCC's By-Laws provides 
that Clearing Fund contributions shall be in the form of cash and 
Government securities, but neither OCC's By-Laws nor Rules provides a 
minimum cash requirement for contributions in the Clearing Fund. 
Article VIII, Section 4(a) of OCC's By-Laws allows for OCC to invest 
cash contributions to the Clearing Fund, partially or wholly, in OCC's 
account in Government securities, and to the extent that such 
contributions are not so invested they shall be deposited by OCC in a 
separate account or accounts for Clearing Fund contributions in 
approved custodians. Article VIII, Section 4(a) of OCC's By-Laws, 
however, presently does not account for the treatment of interest 
earned on cash deposits held in the OCC's Federal Reserve bank account.
Proposed Change
1. Minimum Cash Clearing Fund Requirement
    OCC proposes to establish a minimum cash contribution requirement 
for its Clearing Fund in order to increase the amount of highly liquid 
resources available to OCC to account for extreme scenarios that may 
result in liquidity demands exceeding OCC's current Cover 1 liquidity 
resources, as calculated under the current historically-based 
methodology, and provide for a more consistent level of cash resources 
in its available prefunded financial resources.\6\ Specifically, the 
proposed rule change would require that Clearing Members collectively 
contribute $3 billion in cash to the Clearing Fund (``Cash Clearing 
Fund Requirement''). Each Clearing Member's proportionate share of the 
Cash Clearing Fund Requirement shall be equal in percentage to its 
proportionate share of the Clearing Fund as determined by the Clearing 
Fund allocation methodology in current Rule 1001.
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    \6\ OCC's Current Cover 1 liquidity resources are sized based on 
the liquidity needed to address exposures derived solely from 
historical results. Introducing the Cash Clearing Fund Requirement 
would increase OCC's liquidity resources to address the exposures 
observed in a stress liquidity analysis performed using proposed 
sizing stress tests for OCC's Clearing Fund.
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    OCC has historically sized its liquidity resources based on 
historically observed liquidity demands and analysis of potential large 
forecasted liquidity demands over at least the next twelve months. OCC 
forecasts its future daily settlement activity under normal market 
conditions (e.g., mark-to-market settlements, and settlements resulting 
from the expiration of derivatives contracts) and compares such demands 
to its resources to ensure that at all times it will maintain a 
positive liquidity position to meet settlement obligations.
    OCC has performed an analysis of its stress liquidity demands based 
on a 1-in-70 year hypothetical market event. OCC started its analysis 
by selecting the largest historical peak monthly settlements that 
occurred over the historical look back period of data generated by the 
stress test system. It then also selected certain large non-expiration 
days to supplement the analysis. From this it estimated the mark-to-
market and cash settled exercise and assignment obligations for the 
members driving the historical peak demand under the proposed stress 
tests scenario to determine the stressed peak demand. Through this 
analysis, OCC observed that peak stressed liquidity demands of the 
largest 1 or 2 members, which normally occur in conjunction with 
certain monthly expirations, can exceed the size OCC's committed 
liquidity facilities (which currently total $3 billion). In these 
cases, while OCC did have cash in the Clearing Fund to supplement its 
liquidity resources, and the total of credit facilities and cash in the 
Clearing Fund did cover these peak stressed liquidity demands, OCC is 
unable to rely on these cash contributions to be present at any given 
time since there is no obligation on members to maintain any amount of 
their contribution in cash. As a result, OCC believes it is necessary 
to increase or otherwise ensure the availability of highly liquid 
resources in the Clearing Fund to account for extreme scenarios that 
may result in liquidity demands exceeding OCC's Cover 1 liquidity 
resources, as calculated under the current historically-based 
methodology. The proposed Cash Clearing Fund Requirement, when taken 
together with OCC's $3 billion in committed liquidity facilities, would 
provide liquidity resources sufficient to cover 100% of

[[Page 57017]]

the peak stressed liquidity demands of the largest 1 or 2 members 
observed in OCC's analysis.
    In addition, the proposed changes would allow OCC's Executive 
Chairman, Chief Administrative Officer (``CAO''), or Chief Operating 
Officer (``COO''), upon providing notice to the Risk Committee, to 
temporarily increase the amount of cash required to be maintained in 
the Clearing Fund up to an amount that includes the size of the 
Clearing Fund as determined in accordance with Rule 1001 for the month 
in question for the protection of OCC, clearing members or the general 
public. Any determination by the Executive Chairman, CAO and/or COO to 
implement a temporary increase in Clearing Fund size would (i) be based 
upon then-existing facts and circumstances, (ii) be in furtherance of 
the integrity of OCC and the stability of the financial system, and 
(iii) take into consideration the legitimate interests of Clearing 
Members and market participants.
    The proposed rule change would require that any temporary increase 
in the Cash Clearing Fund Requirement be reviewed by the Risk Committee 
as soon as practicable, but in any event within 20 calendar days of the 
increase. In its review, the Risk Committee shall determine whether (1) 
the increase in the minimum Cash Clearing Fund Requirement is no longer 
required or (2) OCC's Clearing Fund contribution requirements and other 
related rules should be modified to ensure that OCC continues to 
maintain sufficient liquid resources to cover its largest aggregate 
payment obligations in extreme but plausible market conditions. In the 
event that the Risk Committee would determine to permanently increase 
the Cash Clearing Fund Requirement, OCC would initiate any regulatory 
approval process required to effect such a change.\7\ A Clearing Member 
will be required to satisfy any increase in its required cash 
contribution pursuant to an increase in the Cash Clearing Fund 
Requirement no later than one hour before the close of the Fedwire on 
the business day following OCC's issuance of an instruction to increase 
cash contributions.
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    \7\ However, OCC will not decrease the Cash Clearing Fund 
Requirement while the regulatory approvals for a change in the Cash 
Clearing Fund Requirement are being obtained to ensure that OCC 
continues to maintain sufficient liquid resources to cover its 
liquidity demands during that time.
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    These changes would be reflected in new paragraph (a)(i) of Section 
3 of Article VIII of OCC's By-Laws, as well as in new Interpretation 
and Policy .04 to Section 3 of Article VIII.
2. Interest Pass Through for Clearing Fund Cash Held at the Federal 
Reserve
    In connection with the proposed Cash Clearing Fund Requirement, 
substantially all of OCC's Clearing Fund deposits consisting of cash 
would be held in an account established by OCC at a Federal Reserve 
Bank.\8\ OCC proposes that it would pass the interest income earned in 
such account through to its Clearing Members. As a result, OCC proposes 
to revise Article VIII, Section 4(a) of OCC's By-Laws to include a 
sentence to provide that any interest earned on cash deposits held at a 
Federal Reserve Bank shall accrue to the benefit of Clearing Members 
(calculated daily based on each Clearing Member's pro rata share of 
Clearing Fund cash deposits), provided that such Clearing Members have 
provided OCC with all tax documentation as OCC may from time to time 
require in order to effectuate such payment.\9\
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    \8\ OCC notes that it would retain the discretion to maintain a 
small portion of Clearing Fund cash deposits in other accounts 
(e.g., accounts with commercial banks) for various reasons, 
including facilitating normal substitution activity by its Clearing 
Members.
    \9\ Article VIII, Section 4(a) currently states that all 
interest gained on cash Clearing Fund deposits belongs to OCC.
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3. Changes to the Fee Policy To Accommodate Interest Passed Through to 
Clearing Members
    In order to accommodate the pass through of interest income, OCC 
would also amend its Fee Policy to add definitions for ``Pass-Through 
Interest Revenue'' and ``Operating Expenses'' to exclude from the 
calculation of the Business Risk Buffer projected interest revenue and 
expense, respectively, related to the pass-through of earned interest 
from OCC to Clearing Members.\10\ OCC also proposes to add a new 
example of the Business Risk Buffer calculation reflecting this change 
and make clarifying changes throughout the Policy to incorporate the 
use of the new defined terms. In addition, OCC proposes to amend the 
Fee Policy to remove references to ``Proposed Rule 17Ad-22(e)(15)'' to 
reflect the adoption of the Commission's Covered Clearing Agency 
Standards.
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    \10\ While interest income earned by OCC from its Federal 
Reserve bank account would be passed on to its Clearing Members, OCC 
anticipates that it would charge a cash management fee to cover 
associated costs (i.e., administrative and similar costs). OCC would 
file a separate proposed rule change with the Commission, subject to 
receiving all necessary regulatory approvals for the proposed 
changes described herein, prior to implementing any cash management 
fee.
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4. Conforming Changes
    In conjunction with the aforementioned changes, OCC is also 
proposing to make four related conforming changes. First, OCC proposes 
to revise Interpretation and Policy .01 of Rule 1001 to reflect that 
the new minimum Clearing Fund size is $3 billion (instead of $1 
billion) plus 110% of the size of OCC's committed liquidity facilities, 
which conforms to the proposed new minimum cash requirement for the 
Clearing Fund. Second, OCC proposes to amend the definition of 
``Approved Custodian'' in Article I, Section 1 of the By-Laws to 
clarify that the Federal Reserve Bank may also be an Approved 
Custodian, to the extent it is available to OCC. Third, OCC is 
proposing to delete existing Article VIII, Section 4(b), regarding the 
establishment of a segregated funds account for cash contributions to 
the Clearing Fund. The segregated funds account allows a Clearing 
Member to contribute cash to a bank or trust company account maintained 
in the name of OCC, subject to OCC's exclusive control, but the account 
also includes the name of the Clearing Member and any interest accrues 
to the Clearing Member rather than OCC. OCC proposes to eliminate the 
account type because Clearing Members have not expressed interest in 
using such an account, no such accounts are in use today, and moving 
forward, substantially all cash Clearing Fund contributions will be 
held in OCC's account at the Federal Reserve Bank. Fourth, OCC proposes 
to introduce new language to Article VIII, Section 4(a) to clarify that 
cash contributions to the Clearing Fund that are deposited at approved 
custodians may be commingled with the Clearing Fund contributions of 
different Clearing Members.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act,\11\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions and, 
in general, to protect investors and the public interest. The proposed 
rule change is designed to improve the resiliency of OCC's liquidity 
resources by establishing a new $3 billion minimum cash requirement for 
the Clearing Fund and by providing OCC authority to temporarily 
increase the Cash Clearing Fund Requirement from $3 billion up to an 
amount that includes the size of the

[[Page 57018]]

Clearing Fund as determined in accordance with Rule 1001 for the month 
in question. The proposed rule change also is designed to improve the 
position of OCC's Clearing Members by permitting OCC to pass through 
interest earned on Clearing Fund cash deposits held at OCC's account 
with the Federal Reserve. In this regard, OCC believes the proposed 
rule change is designed to promote the prompt and accurate clearance 
and settlement of securities transactions and to protect investors and 
the public interest, in accordance with the requirements of Section 
17A(b)(3)(F) of the Act.\12\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ Id.
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    Additionally, Rule 17Ad-22(e)(7) \13\ requires that a covered 
clearing agency (``CCA'') establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor and manage liquidity risk that arises in or is borne 
by the CCA. Rule 17Ad-22(e)(7)(i) \14\ requires CCAs to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to effectively measure, monitor, and manage the 
liquidity risk that arises in or is borne by OCC by maintaining 
sufficient liquid resources at the minimum in all relevant currencies 
to effect same-day settlement, and where appropriate, intraday and 
multiday settlement of payment obligations with a high degree of 
confidence under a wide range of stress scenarios, that includes but is 
not limited to, the default of the participant family that would 
generate the largest aggregate payment obligation for OCC in extreme 
but plausible market conditions. As explained above, OCC has performed 
an analysis of its stress liquidity demands using proposed sizing 
stress tests for the Clearing Fund and has observed that peak stressed 
liquidity demands of the largest 1 or 2 members, which normally occur 
in conjunction with certain monthly expirations, can exceed the size of 
OCC's committed liquidity facilities (which currently total $3 
billion). OCC believes that the proposed minimum $3 billion Cash 
Clearing Fund Requirement will adjust OCC's available liquidity 
resources to account for extreme scenarios that may result in liquidity 
demands exceeding OCC's Cover 1 liquidity resources. In this regard, 
OCC believes the proposed Cash Clearing Fund Requirement is designed to 
satisfy the requirements of Rule 17Ad-22(e)(7)(i).\15\
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    \13\ 17 CFR 240.17Ad-22(e)(7).
    \14\ 17 CFR 240.17Ad-22(e)(7)(i).
    \15\ 17 CFR 240.17Ad-22(e)(7)(i).
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    Further, Rule 17Ad-22(e)(7)(viii) \16\ requires that a CCA address 
foreseeable liquidity shortfalls that would not be covered by its 
liquid resources and Rule 17Ad-22(e)(7)(ix) \17\ requires that a CCA 
describe its process to replenish any liquid resources that it may 
employ during a stress event. OCC believes that the proposed authority 
to temporarily increase the minimum cash requirement from $3 billion up 
to an amount that includes the size of the Clearing Fund (as determined 
in accordance with Rule 1001 for the month in question) would provide 
OCC with an additional means of addressing liquidity shortfalls that 
otherwise would not be covered by OCC's liquid resources. Further, 
because the Clearing Fund is a resource that is replenished in 
accordance with Section 6 of Article VIII of OCC's By-Laws, to the 
extent that Clearing Members are required to replenish their required 
contributions--in whole or in part--with cash following a proportionate 
charge during, the proposed change would provide a form of 
replenishment of OCC's liquid resources. In this regard, OCC believes 
the proposed authority to require up to an all cash Clearing Fund 
requirement is designed to satisfy the requirements of Rules 17Ad-
22(e)(7)(viii) and (ix).\18\
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    \16\ 17 CFR 240.17Ad-22(e)(7)(viii).
    \17\ 17 CFR 240.17Ad-22(e)(7)(ix).
    \18\ 17 CFR 240.17Ad-22(e)(7)(viii) and (ix).
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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 \19\ 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 the proposed rule change would have any impact or impose any 
burden on competition. The primary purpose of the proposed rule change 
is to enhance OCC's liquidity resources by establishing a $3 billion 
Cash Clearing Fund Requirement, which requirement could be temporarily 
increased up to an amount that includes the size of the Clearing Fund 
as determined in accordance with Rule 1001 for the month in question. 
Further, the proposed rule change is designed to revise Article VIII, 
Section 4(a) of OCC's By-Laws and the Fee Policy to enable OCC to pass 
through interest earned on Clearing Fund cash held in OCC's Federal 
Reserve bank account. The proposed rule change would apply equally to 
all Clearing Members and would not affect Clearing Members' access to 
OCC's services or disadvantage or favor any particular user in 
relationship to another user. As such, OCC believes that the proposed 
changes would not have any impact or impose any burden on competition.
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    \19\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments 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-2017-019 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-OCC-2017-019. 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

[[Page 57019]]

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 
https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_019.pdf.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-OCC-2017-019 and should be 
submitted on or before December 22, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
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    \20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-25857 Filed 11-30-17; 8:45 am]
 BILLING CODE 8011-01-P