[Federal Register Volume 83, Number 168 (Wednesday, August 29, 2018)]
[Notices]
[Pages 44083-44091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18655]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83927; File No. SR-OCC-2017-809]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of No Objection to Advance Notice, as Modified by Amendment No.
2, Concerning Enhanced and New Tools for Recovery Scenarios
August 23, 2018.
I. Introduction
On December 8, 2017, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-OCC-2017-809 (``Advance Notice'') pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled Payment, Clearing and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule
19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934
(``Exchange Act'') \3\ to propose changes to OCC's Rules and By-Laws to
enhance OCC's existing tools to address the risks of liquidity
shortfalls and credit losses and to establish new tools by which OCC
could re-establish a matched book and, if necessary, allocate uncovered
losses following a default as well as provide for additional financial
resources. The Advance Notice was published for public comment in the
Federal Register
[[Page 44084]]
on January 23, 2018.\4\ On January 23, 2018, the Commission requested
OCC provide it with additional information regarding the Advance
Notice.\5\ OCC responded to the request, and the Commission received
the information on July 13, 2018.\6\
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ Exchange Act Release No. 82513 (Jan. 17, 2018), 83 FR 3244
(Jan. 23, 2018) (SR-2017-809) (``Notice of Filing''). On December
18, 2017, OCC also filed a related proposed rule change (SR-OCC-
2017-020) 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 (``Proposed
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively. The Proposed Rule Change was published in the Federal
Register on December 26, 2017. Exchange Act Release No. 82531 (Dec.
19, 2017), 82 FR 61107 (Dec. 26, 2017).
\5\ See Memorandum from Office of Clearance and Settlement,
Division of Trading and Markets, dated January 23, 2018, available
at https://www.sec.gov/comments/sr-occ-2017-809/occ2017809-2948229-161855.pdf.
\6\ See Memorandum from Office of Clearance and Settlement,
Division of Trading and Markets, dated July 17, 2018, available at
https://www.sec.gov/comments/sr-occ-2017-809/occ2017809-04062512-169148.pdf.
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On July 11, 2018, OCC filed Amendment Nos. 1 and 2 to the Advance
Notice to make certain changes to clarify the use of the recovery tools
and to improve the overall transparency regarding the use of the
recovery tools.\7\ Notice of the Amendments to the Advance Notice was
published for public comment in the Federal Register on August 7,
2018.\8\ Comments received on the proposal contained in the Advance
Notice are discussed below.\9\
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\7\ Amendment No. 2 was filed to supersede and replace Amendment
No. 1 in its entirety due to technical defects in Amendment No. 1.
\8\ See Exchange Act Release No. 83761 (Aug. 1, 2018), 83 FR
38738 (Aug. 7, 2018) (``Notice of Amendment'').
\9\ The letters are available at: https://www.sec.gov/comments/sr-occ-2017-022/occ2017020.htm.
Since the proposal contained in the Advance Notice was also
filed as a proposed rule change, all comments received on the
proposal are considered regardless of whether the comments are
submitted on the proposed rule change or the Advance Notice.
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This publication serves as notice that the Commission does not
object to the changes set forth in the Advance Notice, as amended by
Amendment No. 2 (``Amended Advance Notice'').
II. Background [bds1][bds0]
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\10\ Capitalized terms used but not defined herein have the
meanings specified in OCC's Rules and By-Laws, available at https://www.theocc.com/about/publications/bylaws.jsp.
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The Amended Advance Notice concerns proposed changes to OCC's Rules
and By-Laws to enhance OCC's existing tools to address the risks of
liquidity shortfalls and credit losses and to establish new tools by
which OCC could re-establish a matched book and, if necessary, allocate
uncovered losses following the default of a Clearing Member as well as
provide for additional financial resources. Each of the proposed tools
is contemplated to be deployed by OCC in an extreme stress event that
has placed OCC into a recovery or orderly wind-down scenario. The
proposed changes include modifying OCC's powers of assessment,
introducing a framework for requesting voluntary payments to the
Clearing Fund, and establishing OCC's authority to extinguish open
positons (i.e., conduct tear-ups) as well as authorizing OCC's Board to
re-allocate losses from tear-ups.
A. Proposed Changes to OCC's Powers of Assessment
OCC maintains a Clearing Fund comprised of required contributions
from Clearing Members, and OCC has authority to use the Clearing Fund,
by a proportionate charge or otherwise, to cover certain losses
suffered by OCC.\11\ When an amount is paid out of a Clearing Member's
required contribution to the Clearing Fund, the Clearing Member is
generally required to promptly make good any deficiency in its required
contribution to the Clearing Fund from such payment.\12\ Generally,
this requirement to promptly make good on any deficiency arising from
the default of a Clearing Member has been referred to as an
``assessment'' by OCC against a Clearing Member; however, as further
described below, OCC is making clarifying changes to a Clearing
Member's obligation to contribute to the Clearing Fund, including
defining and delineating between a Clearing Member's obligation to
answer ``assessments'' charged by OCC under certain circumstances
described further below and a Clearing Member's obligations where OCC
seeks to effect a ``replenishment'' of the Clearing Fund.
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\11\ See OCC By-Laws, Article VIII. For example, under Section 5
of Article VIII of the OCC By-Laws, when a Clearing Member defaults,
OCC will pay for the resulting losses or expenses by first applying
other funds available to OCC in the accounts of the defaulting
Clearing Member and then applying the defaulting Clearing Member's
required contribution to the Clearing Fund. If the losses and
expenses exceed those amounts, then OCC will charge the amount of
the remaining deficiency on a proportionate basis against all non-
defaulting Clearing Members' required contributions to the Clearing
Fund.
\12\ See OCC By-Laws, Article VIII, Section 6.
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Currently, a Clearing Member's obligation to make good its required
contribution to the Clearing Fund is not subject to any pre-determined
limit. However, a Clearing Member may limit the amount of its liability
to contribute to the Clearing Fund by winding-down its clearing
activities and terminating its membership. To do so, a Clearing Member
must provide written notice to OCC that it is terminating its
membership by no later than the fifth business day after application of
the proportionate charge.\13\ This termination would limit the Clearing
Member's obligation to meet a future assessment to an additional 100
percent of the amount of its then-required Clearing Fund contribution.
Thus, terminating clearing membership is the only means by which a
Clearing Member can currently limit its liability for amounts due to
the Clearing Fund. OCC proposed three changes to modify its existing
authority to assess proportionate charges against Clearing Members'
required contributions to the Clearing Fund: (1) A cooling-off period
and cap on assessments; (2) termination of clearing membership during a
cooling-off period; and (3) replenishment of resources following a
cooling-off period.
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\13\ In addition to providing the written notice, to effectively
terminate membership, a Clearing Member must satisfy two other
conditions. First, after submitting the written notice, the Clearing
Member cannot submit for clearance any opening purchase transaction
or opening written transaction or initiate a Stock Loan through any
of the Clearing Member's accounts. Second, the Clearing Member has
to close out or transfer all of its open positions with OCC, in each
case as promptly as practicable after giving written notice. See OCC
By-Laws, Article VIII, Section 6.
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1. Cooling-Off Period and Cap on Assessments
The proposal would introduce a minimum fifteen calendar day
``cooling-off'' period that automatically begins when OCC imposes a
proportionate charge related to the default of a Clearing Member
against non-defaulting Clearing Members' Clearing Fund contributions.
During a cooling-off period, the aggregate liability for a Clearing
Member would be capped at 200 percent of its then-required contribution
to the Clearing Fund. The cooling-off period would be extended if one
or more specific events related to the default of a Clearing Member (as
set forth in OCC's By-laws) \14\ occur(s)
[[Page 44085]]
during that fifteen calendar day period and results in one or more
proportionate charges against the Clearing Fund. Such an extension
would run until the earlier of (i) the fifteenth calendar day from the
date of the most recent proportionate charge resulting from that
subsequent event, or (ii) the twentieth day from the date of the
proportionate charge that initiated the cooling-off period.
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\14\ Specifically, a cooling-off period would automatically
begin after a proportionate charge arises in response to: (i) Any
Clearing Member failure to discharge duly any obligation on or
arising from any confirmed trade accepted by OCC, (ii) any Clearing
Member (including any Appointed Clearing Member) failure to perform
any obligations (including its obligations to the correspondent
clearing corporation) under or arising from any exercised or
assigned option contract or any other contract or obligation issued
or guaranteed by OCC or in respect of which it is otherwise liable,
(iii) any Clearing Member failure to perform any obligation to OCC
in respect of the stock loan and borrow positions of such Clearing
Member, or (iv) OCC suffered any loss or expense upon any
liquidation of a Clearing Member's open positions. See OCC By-Laws,
Article VIII, Section 5(a)(i)-(iv).
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Once the cooling-off period ends, each remaining Clearing Member
would be required to replenish the Clearing Fund in the amount
necessary to meet its then-required contribution. Any remaining losses
or expenses suffered by OCC as a result of any events that occurred
during that cooling-off period could not be charged against the amounts
Clearing Members have contributed to replenish the Clearing Fund upon
the expiration of the cooling-off period. However, after the end of a
cooling-off period, the occurrence of another specified event that
results in a proportionate charge against the Clearing Fund would
trigger a new cooling-off period.
2. Membership Termination During a Cooling-Off Period
As noted above, to limit its liability to replenish the Clearing
Fund, a Clearing Member currently must provide written notice of its
intent to terminate its clearing membership by no later than the fifth
business day after a proportionate charge. OCC's proposal would extend
the time frame for a Clearing Member to provide such notice of
termination, which would allow the terminating Clearing Member to avoid
liability to replenish the Clearing Fund after the cooling-off period.
Specifically, to terminate its status as a Clearing Member and not be
liable for replenishment at the end of a cooling-off period, a Clearing
Member would be required to: (i) Notify OCC in writing of its intent to
terminate by no later than the last day of the cooling-off period, (ii)
not initiate any opening purchase or opening writing transaction, and,
if the Clearing Member is a Market Loan Clearing Member or a Hedge
Clearing Member, not initiate any Stock Loan transaction through any of
its accounts, and (iii) close-out or transfer all open positions by no
later than the last day of the cooling-off period. If a Clearing Member
fails to satisfy all of these conditions by the end of a cooling-off
period, it would not have completed all of the requirements necessary
to terminate its status as a Clearing Member, and therefore, it would
remain subject to its obligation to replenish the Clearing Fund after
the cooling-off period ends.
Given the products cleared by OCC and the composition of its
clearing membership, OCC determined that a minimum 15-calendar day
cooling-off period, rolling up to a maximum of 20 calendar days, is
likely to be a sufficient amount of time for OCC to manage the ongoing
default(s) and take necessary steps in furtherance of stabilizing the
clearing system. Further, based on its conversations with Clearing
Members, OCC believes that the proposed cooling-off period is likely to
be a sufficient amount of time for Clearing Members (and their
customers) to orderly reduce or rebalance their positions, in an
attempt to mitigate stress losses and exposure to potential initial
margin increases during the stress event.\15\ OCC also believes the
proposed cooling-off period, coupled with the other proposed changes to
OCC's assessment powers, is likely to provide Clearing Members with an
adequate measure of stability and predictability as to the potential
use of Clearing Fund resources, which would, according to OCC, remove
the existing incentive for Clearing Members to withdraw following a
proportionate charge (i.e., to avoid facing potentially unlimited
liability for replenishing the Clearing Fund).
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\15\ See Notice of Amendment, 83 FR at 38746.
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3. Replenishment and Assessment
The proposal would clarify the distinction between
``replenishment'' of the Clearing Fund and a Clearing Member's
obligation to answer ``assessments'' charged by OCC. In this context,
the term ``replenish'' (and its variations) would refer to a Clearing
Member's standing duty, following any proportionate charge against the
Clearing Fund, to return its Clearing Fund contribution to the amount
required from such Clearing Member for the month in question. The term
``assessment'' (and its variations) would refer to the amount, during
any cooling-off period, that a Clearing Member would be required to
contribute to the Clearing Fund in excess of the amount of the Clearing
Member's pre-funded required Clearing Fund contribution.
B. Proposed Authority To Request Voluntary Payments
OCC proposed new Rule 1011 to provide a framework for receipt of
voluntary payments in a circumstance where a Clearing Member has
defaulted and OCC has determined that it may not have sufficient
resources to satisfy its obligations and liabilities resulting from
such default.\16\ OCC would initiate a call for voluntary payments by
issuing a notice inviting all non-defaulting Clearing Members to make
payments to the Clearing Fund in addition to any amounts they are
otherwise required to contribute pursuant to Rule 1001 (``Voluntary
Payment Notice''). The Voluntary Payment Notice would specify the terms
applicable to any voluntary payment, including but not limited to, that
any voluntary payment may not be withdrawn once made, that no Clearing
Member shall be obligated to make a voluntary payment, and that OCC
shall retain full discretion to accept or reject any voluntary payment.
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\16\ OCC's determination would be made notwithstanding
availability of remaining resources under Rules 707 (addressing the
treatment of funds in a Clearing Member's X-M accounts); 1001
(addressing the size of OCC's Clearing Fund and the amount of a
Clearing Member's contribution); 1104-1107 (concerning the treatment
of the portfolio of a defaulted Clearing Member); and 2210 and 2211
(concerning the treatment of Stock Loan positions of a defaulted
Clearing Member).
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In the event that OCC eventually obtains additional financial
resources from the defaulting Clearing Member, OCC would give priority
to repayment of Clearing Members that made Voluntary Payments.
Specifically, if OCC subsequently recovers from the defaulted Clearing
Member or the estate of the defaulted Clearing Member, OCC would seek
to first compensate all non-defaulting Clearing Members that made
voluntary payments.\17\ If the amount recovered from the defaulted
Clearing Member were less than the aggregate amount of voluntary
payments, non-defaulting Clearing Members that made voluntary payments
each would receive a percentage of the amount recovered that
corresponds to that Clearing Member's percentage of the total amount of
voluntary payments received.
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\17\ As discussed further in Section II.C.1 below, OCC's
proposed authority with respect to Voluntary Payments and Voluntary
Payments would work together to establish a hierarchy of repayment
in the event that OCC subsequently recovers from the defaulted
Clearing Member. Under proposed rules 1011(b) and 1111(a)(ii), OCC
would first seek to compensate those non-defaulting Clearing Members
who had submitted Voluntary Payments and, thereafter, to the extent
funds remained, OCC would then seek to compensation those non-
defaulting Clearing Members who had participated in the Voluntary
Tear-Up.
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C. Proposed Authority To Conduct Voluntary Tear-Ups and Partial Tear-
Ups
OCC proposed new Rule 1111 to establish a framework to extinguish
positions of a suspended or defaulted Clearing Member on a voluntary
basis (``Voluntary Tear-Up'') or on a mandatory basis (``Partial-Tear
Up'') and, in certain extreme circumstances, to allocate any uncovered
losses in the event that OCC does not have sufficient financial
resources to conduct the tear-
[[Page 44086]]
up. A Voluntary Tear-Up, if provided, would precede a Partial-Tear Up,
and any Partial Tear-Up would take into account any positions
extinguished as part of a Voluntary Tear-Up. Further, Rule 1111(h)
would provide that no action or omission by OCC pursuant to, and in
accordance with, Rule 1111 shall constitute a default by OCC, provided
that Rule 1111(h) would not apply in the event that OCC pays Clearing
Members a pro rata amount of the applicable Tear-Up price because OCC
does not have adequate resources to pay the full Tear-Up price.
OCC's use of both Voluntary and Partial Tear-Up would be subject to
certain prerequisites. First, any tear-up would occur after one or more
failed auctions pursuant to Rule 1104 or 1106. Second, any tear-up
would occur after OCC has determined that it may not have sufficient
resources to satisfy its obligations and liabilities resulting from
such default.\18\
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\18\ As with Voluntary Payments, this determination would be
made notwithstanding availability of remaining resources under Rules
707, 1001, 1104-1107, 2210, and 2211. See note 16 supra.
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OCC represented that it would initiate its tear-up process on a
date sufficiently in advance of the exhaustion of its financial
resources such that OCC would expect to have adequate remaining
resources to cover the amount it must pay to extinguish the positions
of Clearing Members and customers.\19\ The holders of torn-up positions
would be assigned a price, and OCC would draw on its remaining
financial resources to extinguish the torn-up positions at the assigned
price. Although OCC does not intend, in the first instance, for its
tear-up process to serve as a means of loss allocation, OCC recognizes
that circumstances may arise such that, despite its best efforts, OCC
may not have adequate remaining financial resources to extinguish torn-
up positions at the full assigned price, resulting in the allocation of
uncovered losses by the tear-up process. As further described below, a
Clearing Member allocated an uncovered loss would then have an
unsecured claim against OCC for the value of the difference between the
pro rata amount paid to the Clearing Member and the full amount the
Clearing Member should have received.
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\19\ Specifically, OCC stated that it anticipated that it would
determine the date on which to initiate Partial Tear-Ups by
monitoring its remaining financial resources against the potential
exposure of the remaining unauctioned positions from the
portfolio(s) of the defaulted Clearing Member(s).
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1. Voluntary Tear-Up
As noted above, a Voluntary Tear-Up would provide an opportunity to
holders of certain positions opposite a defaulting Clearing Member to
voluntarily extinguish those positions. Although the Risk Committee of
OCC's Board of Directors (``Risk Committee'') approval is not necessary
to commence a Voluntary Tear-Up, the Risk Committee would be
responsible for determining the scope of a Voluntary Tear-Up. Proposed
Rule 1111(c) would provide discretion to the Risk Committee when
determining the appropriate scope, but the discretion would be subject
to, and limited by, certain conditions, i.e., that the determination
should be: (i) Based on 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.
Once the Risk Committee has determined the scope, OCC would
initiate the call for Voluntary Tear-Ups by issuing a notice
(``Voluntary Tear-Up Notice'') to inform all non-defaulting Clearing
Members of the opportunity to participate in a Voluntary Tear-Up.\20\
The Voluntary Tear-Up Notice would specify the terms applicable to any
Voluntary Tear-Up, including, but not limited to, that no Clearing
Member or customers of a Clearing Member shall be obligated to
participate in a Voluntary Tear-Up, and that OCC shall retain full
discretion to accept or reject any Voluntary Tear-Up.
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\20\ Because OCC does not know the identities of Clearing
Members' customers, OCC would depend on each Clearing Member to
notify its customers with positions in scope of the Voluntary Tear-
Up of the opportunity to participate in such tear-up.
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Clearing Members and their customers that participated in a
Voluntary Tear-Up and incurred losses would have a claim to amounts
subsequently recovered from a defaulted Clearing Member (or the estate
of the defaulted Clearing Member). The claim would be junior to
Clearing Members who made a voluntary payment to the Clearing Fund, and
OCC would satisfy the claims on a pro-rata basis.
2. Partial Tear-Up
Under proposed Rule 1111(b), OCC's Board would be responsible for
the decision to conduct a mandatory Partial Tear-Up. The Risk Committee
would then be responsible for determining the appropriate scope of the
Partial Tear-Up, subject to the conditions in Rule 1111(c) discussed
above.
The proposed rule would also provide the Board with the discretion
to conduct a mandatory Partial Tear-Up to extinguish the remaining open
positions of any defaulted Clearing Member or customer of such
defaulted Clearing Member(s) (``Remaining Open Positions'') and/or any
related open positions necessary to mitigate further disruptions to the
markets affected by the Remaining Open Positions (``Related Open
Positions''). The open positions subject to tear-up opposite to the
Remaining Open Positions and the Related Open Positions would be
designated in accordance with the methodology in Rule 1111(e).
Specifically, for Remaining Open Positions, the aggregate amount in the
identical Cleared Contracts and Cleared Securities would be designated
on a pro-rata basis to non-defaulting Clearing Members that have an
open position in such Cleared Contract or Cleared Security. For
Remaining Open Positions, all open positions in Cleared Contracts and
Cleared Securities identified in the scope of the Partial Tear-Up would
be extinguished.
After the scope of the Partial Tear-Up is determined, OCC would
initiate the Partial Tear-Up process by issuing a notice (``Partial
Tear-Up Notice''). The Partial Tear-Up Notice would: (i) Identify the
Remaining Open Positions and Related Open Positions designated for
tear-up; (ii) identify the Tear-Up Positions; (iii) specify the
termination price (``Partial Tear-Up Price'') for each position to be
torn-up; and (iv) list the date and time, as determined by the Risk
Committee, that the Partial Tear-Up will occur (``Partial Tear-Up
Time'').
Rule 1111(f) would provide that, to determine the Partial Tear-Up
Price, OCC would use its discretion, acting in good faith and in a
commercially reasonable manner, to adopt methods of valuation expected
to produce reasonably accurate substitutes for the values that would
have been obtained from the relevant market if it were operating
normally, including but not limited to the use of pricing models that
use the market price of the underlying interest or the market prices of
its components. Rule 1111(f) further specifies that OCC may consider
the same information set forth in subpart (c) of Section 27, Article VI
of OCC's By-Laws.\21\ OCC stated that it is likely to
[[Page 44087]]
use the last established end-of-day settlement price, in accordance
with its existing practices concerning pricing and valuation. However,
given that it is not possible to know in advance the precise
circumstances that would cause OCC to conduct a tear-up, Rule 1111(f)
would allow OCC to exercise discretion, if necessary, in establishing
the Partial Tear-Up Price by some means other than its existing
practices concerning pricing and valuation. For example, OCC
represented that it has observed certain rare circumstances in which a
closing price for an underlying security of an option may be stale or
unavailable. A stale or unavailable closing price could be the result
of a halt on trading in the underlying security, a corporate action
resulting in a cash-out or conversion of the underlying security (but
that has not yet been finalized), or the result of an ADR whose
underlying security is being impacted by certain provisions under
foreign laws. OCC stated it would consider these circumstances in
determining whether use of the discretion that would be afforded under
proposed Rule 1111(f) might be warranted.\22\
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\21\ Section 27, Article VI addresses the valuation of positions
that may be subject to close-out netting in the event of OCC's
insolvency or default. Specifically, it states that in determining a
close-out amount, OCC may consider any information that it deems
relevant, including, but not limited to, any of the following
factors: (i) Prices for underlying interests in recent transactions,
as reported by the market or markets for such interests; (ii)
quotations from leading dealers in the underlying interest, setting
forth the price (which may be a dealing price or an indicative
price) that the quoting dealer would charge or pay for a specified
quantity of the underlying interest; (iii) relevant historical and
current market data for the relevant market, provided by reputable
outside sources or generated internally; and (iv) values derived
from theoretical pricing models using available prices for the
underlying interest or a related interest and other relevant data.
\22\ See Letter from Joseph P. Kamnik, Sr. Vice President and
CRO, OCC, to Brent Fields, Secretary, Commission, at 5 (Jul. 9,
2018) (``OCC Letter'').
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Every Partial Tear-Up position would be automatically terminated at
the Partial Tear-Up Time, without the need for any further step by any
party to the position. Upon termination, either OCC or the relevant
Clearing Member would be obligated to pay to the other party the
applicable Partial Tear-Up Price. The corresponding open position would
be deemed terminated at the Partial Tear-Up Price. In the event that,
given the amount of remaining resources, OCC would not be able to pay
the full Partial Tear-Up Price, OCC would pay each torn-up Clearing
Member a pro-rata amount of the applicable Partial Tear-Up Price based
on the amounts of such resources remaining. Those Clearing Members
would then have an unsecured claim against OCC for the value of the
difference between the pro rata amount and the Partial Tear-Up Price.
3. Re-Allocating Losses From Tear-Up
The proposed changes would provide OCC with means to re-allocate
losses, costs, and expenses associated with the tear-up process. First,
the proposal would amend Article VIII of the By-Laws to provide OCC
discretion to use remaining Clearing Fund contributions to re-allocate
losses imposed on non-defaulting Clearing Members and customers from a
tear-up. Second, in connection with a Partial Tear-Up, proposed Rule
1111(g) would provide the Board with discretion to re-allocate losses,
costs, and fees imposed upon non-defaulting Clearing Members and their
customers among all non-defaulting Clearing Members to the extent that
such losses, costs, and fees can be reasonably determined by OCC
(``Special Charge''). The Special Charge would correspond to each non-
defaulting Clearing Member's proportionate share of the variable amount
of the Clearing Fund at the time of the Partial Tear-Up. The Special
Charge would be distinct and separate from a Clearing Member's
obligation to satisfy Clearing Fund assessments during a cooling-off
period and, therefore, not subject to the cap on assessments.
III. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: 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 (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\23\
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\23\ See 12 U.S.C. 5461(b).
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Section 805(a)(2) of the Clearing Supervision Act \24\ authorizes
the Commission to prescribe regulations containing risk-management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency. Section 805(b) of the
Clearing Supervision Act \25\ provides the following objectives and
principles for the Commission's risk-management standards prescribed
under Section 805(a):
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\24\ 12 U.S.C. 5464(a)(2).
\25\ 12 U.S.C. 5464(b).
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To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and
default policies and procedures, among others areas.\26\
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\26\ 12 U.S.C. 5464(c).
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The Commission has adopted risk-management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\27\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk-management practices on an
ongoing basis.\28\ As such, it is appropriate for the Commission to
review advance notices against the objectives and principles of these
risk management standards as described in Section 805(b) of the
Clearing Supervision Act and the Clearing Agency Rules. As discussed
below, the Commission believes the proposal in the Amended Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\29\ and in the Clearing
Agency Rules, in particular Rules 17Ad-22(e)(2)(i), (iii), and (v),
(e)(4)(viii) and (ix), (e)(13), and (e)(23)(i) and (ii).\30\
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\27\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). The Commission established an effective date of
December 12, 2016, and a compliance date of April 11, 2017, for the
Covered Clearing Agency Standards. OCC is a ``covered clearing
agency'' as defined in Rule 17Ad-22(a)(5).
\28\ 17 CFR 240.17Ad-22.
\29\ 12 U.S.C. 5464(b).
\30\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v), (e)(4)(viii)
and (ix), (e)(13), and (e)(23)(i) and (ii).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the proposal contained in OCC's
Amended Advance Notice is consistent with the stated objectives and
principles of Section 805(b) of the Clearing Supervision Act.
Specifically, as discussed below, the Commission believes that the
changes proposed in the Amended Advance Notice are consistent with
promoting robust risk management in the area of credit risk, promoting
safety and soundness, reducing system risks, and supporting the
stability of the broader financial system.\31\
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\31\ 12 U.S.C. 5464(b).
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First, the proposed rule changes would provide OCC with additional
tools to address risks it may confront in an extreme stress event that
places OCC in a recovery scenario. The Commission
[[Page 44088]]
believes that the new and amended authority granted to OCC and
described in the Amended Advance Notice should provide OCC with the
ability to re-establish a matched book, allocate uncovered losses if
necessary, and limit OCC's potential exposure to losses from an extreme
loss event, all of which would be essential to OCC's ability to
continue to provide its critical clearing services in the event that an
extreme market event places OCC in a recovery scenario. In general, OCC
maintains equal and opposite obligations on cleared positions. In an
extreme loss event caused by a Clearing Member default, re-establishing
this matched book as quickly as possible is essential because it would
allow OCC to close out the defaulting Clearing Member's portfolio,
define the potential scope of losses, and avoid additional losses to
non-defaulting Clearing Members or OCC. In addition, allocating
uncovered losses is important in an extreme loss event because it would
allow OCC to provide further certainty to Clearing Members, their
customers, and other stakeholders about how it addresses such losses
and avoid a disorderly resolution to such an event. Thus, taken
together, the Commission believes that, by providing OCC with these new
and amended tools specific to the context of extreme loss events that
may heighten the need for recovery, the proposed changes should improve
OCC's ability to recover in the event that an extreme market event
places OCC in a recovery scenario, and therefore are reasonably
designed to enhance OCC's ability to address an extreme loss event and
continue to operate in a safe and sound manner during such an event.
In addition, the Commission believes that the proposed changes
would provide a reasonable amount of clarity and specificity to
Clearing Members, their customers, and other stakeholders about the
potential tools that would be expected to be available to OCC if such
an event occurred, and the consequences that might arise from OCC's
application of such tools. Because of this increased clarity and
specificity, OCC's Clearing Members, their customers, and other
stakeholders should have more information regarding their potential
exposure and liability to OCC in an extreme loss event. Accordingly,
the Commission believes that the proposed changes should allow Clearing
Members, their customers, and other stakeholders to better evaluate the
risks and benefits of clearing transactions at OCC because the proposed
changes result in those parties having more information and specificity
regarding the actions that OCC could take in response to an extreme
loss event. Further, to the extent that Clearing Members, their
customers, and other stakeholders are able to use this increased
clarity and specificity to better manage their potential exposure and
liability in clearing transactions at OCC, such parties should be able
to mitigate the likelihood that such tools could surprise or otherwise
destabilize them and, by extension, the broader financial system. For
these reasons, the Commission believes that the proposed changes are
consistent with promoting robust risk management, promoting safety and
soundness, and supporting the stability of the broader financial
system.
Second, the Commission believes that the proposed changes are
consistent with reducing systemic risks and supporting the stability of
the broader financial system. OCC is the sole registered clearing
agency for the U.S. listed options markets and a SIFMU. It is therefore
important for OCC to implement measures that enhance its ability to
address losses and avoid threatening the stability of the U.S. listed
options markets and the broader financial system, including measures
reflected in the proposed changes that are designed to facilitate OCC's
ability to address risks and obligations arising in the specific
context of extreme loss events that may heighten the need for recovery.
Therefore, and for the reasons discussed above with respect to OCC's
ability to re-establish a matched book, allocate uncovered losses if
necessary, and limit OCC's potential exposure to losses from an extreme
loss event, the Commission believes that, as a result of the new and
amended authority granted to OCC to implement such measures, the
proposed changes are reasonably designed to facilitate OCC's ability to
fully allocate, and ultimately extinguish, any losses arising from an
extreme market event, thereby enhancing OCC's ability to continue to
provide its critical clearing services. Relatedly, the Commission also
believes that the proposed changes should reduce the potential risk
that OCC's handling of an extreme loss event results in additional
financial stress or instability passing on to Clearing Members, their
customers, other stakeholders and the broader financial system
generally during such events. As such, the Commission believes the
proposed change is consistent with reducing systemic risks and
supporting the stability of the broader financial system.
Third, OCC's proposed modified assessment powers would impose a cap
on a Clearing Member's potential liability to replenish the Clearing
Fund following a particular default event and extend the timeframe
during which a Clearing Member must determine whether to terminate its
membership and avoid further losses. In addition, the new authority to
seek Voluntary Payments would provide an additional tool by which OCC
may increase its financial resources. Taken together, the Commission
believes that these tools are reasonably designed to provide OCC with
sufficient financial resources to cover default losses and ensure that
OCC can take timely actions to contain losses and continue meeting its
obligations in the event of a Clearing Member default. Similarly, the
Commission believes that these changes would provide Clearing Members
and their customers with greater certainty and predictability regarding
the amount of losses they must bear as a result of a Clearing Member
default. For these reasons, the Commission believes that these tools
should enhance OCC's ability to address the issues arising from a
Clearing Member default, thereby promoting robust risk management and
safety and soundness.
Fourth, OCC's proposed authority to conduct tear-ups would provide
OCC with a mechanism for restoring a matched book and, in the event
that OCC did not have sufficient financial resources to pay the full
Partial Tear-Up Price, allocate losses to the non-defaulting Clearing
Members. The Commission recognizes that a tear-up would result in
termination of positions of non-defaulting Clearing Members. However,
because under the proposed rules OCC would only be able to use its
tear-up authority after it has conducted an auction pursuant to its
Rules and when OCC has determined that it may not have sufficient
financial resources to meet its obligations, a tear-up would only arise
in an extreme stress scenario. Use of tear-up in such circumstances
could potentially return OCC to a matched book quickly, thereby
containing its losses and avoiding OCC's and its Clearing Members'
exposure to additional losses, as discussed further above. OCC's
proposal would also address the determination of the Partial Tear-Up
Price. Specifically, OCC would determine a Partial Tear-Up Price by
using its discretion, acting in good faith and a commercially
reasonable manner, to adopt methods of valuation expected to produce
reasonably accurate substitutes for the values that would have been
obtained from the relevant market if it were operating normally,
including but not limited to the use of pricing models that use the
market price
[[Page 44089]]
of the underlying interest or the market prices of its components. The
Commission believes that OCC's proposed authority to conduct tear-ups,
and therefore its ability to return to a matched book quickly and, in
an extreme event, allocate losses, could facilitate the timely
containment of default losses and liquidity pressures, thereby helping
to prevent OCC from failing in such an event, and is therefore
consistent with promoting robust risk management and safety and
soundness. Further, the Commission believes that, to the extent that
OCC's ability to conduct tear-ups could limit contagion to the broader
financial system, this ability is also consistent with supporting the
stability of the broader financial system.
One commenter states that the Partial Tear-Up Price should be
determined objectively and not on a discretionary basis.\32\ In the OCC
Letter, OCC states that, in the event that it has to determine a
Partial Tear-Up Price, OCC anticipates that it is likely to use the
last established end-of-day settlement price, in accordance with its
existing practices concerning pricing and valuation, but notes that
discretion may be necessary in the circumstances likely to be
associated with an extreme loss event necessitating a tear-up where the
end-of-day closing price may be stale or unavailable.\33\ Further, the
Commission notes that, under OCC's proposed rule, OCC would not have
unfettered discretion to determine the appropriate price. Rather, OCC's
discretion would be limited by two conditions. Specifically, in the
event that OCC uses its discretion to determine a Partial Tear-Up
Price, it will be required under OCC's proposed rule to do so (i) in
good faith and (ii) in a commercially reasonable manner.\34\ The
Commission believes that this discretion, as limited by the two
specified conditions, is appropriate given that it is not possible to
know the precise circumstances likely to be associated with an extreme
loss event necessitating a tear-up, and, therefore, the limited
discretion provided for in the proposed rule may be appropriate in such
circumstances. The Commission also notes that, in the event that OCC is
using its authority to conduct a Partial Tear-Up, OCC would provide
notification to the Commission and other regulators.\35\ Accordingly,
the Commission does not believe that this aspect of the proposal is
inconsistent with the Clearing Supervision Act.
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\32\ See Letter from Jacqueline H. Mesa, Sr. Vice President of
Global Policy, Futures Industry Association, to Brent Fields,
Secretary, Commission, at 2 available at https://www.sec.gov/comments/sr-occ-2017-022/occ2017020.htm (Jan. 16, 2018) (``FIA
Letter'').
\33\ See OCC Letter at 5. According to OCC, a stale or
unavailable closing price could be the result of a halt on trading
in the underlying security, a corporate action resulting in a cash-
out or conversion of the underlying security (but that has not yet
been finalized), or the result of an ADR whose underlying security
is being impacted by certain provisions under foreign laws. See id.
\34\ See also id. at 5.
\35\ See Securities Exchange Act Release No. 83928 (Aug. 23,
2018 at note 19).
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Finally, OCC's proposal would also introduce methods of re-
allocating losses after a tear-up. First, the revised By-Laws would
allow OCC discretion to use remaining Clearing Fund contributions to
re-allocate losses imposed on non-defaulting Clearing Members and their
customers from a tear-up. Second, the revised Rules would provide the
Board with the discretion to re-allocate losses among all non-
defaulting members via a Special Charge, to the extent that such losses
can be reasonably determined. As such, the Commission believes that
these tools, and the associated governance, are reasonably designed to
give OCC the ability to re-allocate the losses in a fair and equitable
manner after an extreme market event, thereby promoting safety and
soundness and supporting the stability of the broader financial system.
One commenter states that the power to impose the Special Charge in
connection with a Partial Tear-Up potentially could impose costs onto
non-defaulting Clearing Members that did not have an opposing position
from a defaulting Clearing Member. According to the commenter, the
Special Charge could, in effect, be another assessment against all
Clearing Members, which could create unquantifiable and unmanageable
risks to Clearing Members. Moreover, the commenter states that the
discretion afforded the Board may result in the Special Charge being
capriciously applied. For these reasons, the commenter believes that
the costs associated with a Partial Tear-Up should not be transferrable
to unaffected Clearing Members.\36\
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\36\ See FIA Letter at 2.
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Under the terms of the proposed rule, the Special Charge could only
be used when the losses, costs, and fees imposed upon non-defaulting
Clearing Members and their customers directly resulting from a Partial
Tear-Up reasonably can be determined by OCC. Further, if it were used,
the Special Charge would correspond to each non-defaulting Clearing
Member's proportionate share of the Clearing Fund at the time of the
Partial Tear-Up. Thus, the Commission does not believe that OCC would
be permitted under the proposed rule to engage in unlimited assessments
because the amount of the Special Charge must be subject to a
reasonable determination, and the Special Charge would then correspond
to the non-defaulting Clearing Member's proportionate share of the
Clearing Fund. These aspects of the Special Charge should help ensure
that OCC does not apply the tool capriciously and that the Board would
use the Special Charge in these delineated circumstances, i.e., when
the amount of the losses was reasonably determinable. For these
reasons, the Commission does not believe that the Special Charge is
inconsistent with the Clearing Supervision Act.
Accordingly, and for the reasons stated, the Commission believes
the changes proposed in the Amended Advance Notice are consistent with
Section 805(b) of the Clearing Supervision Act.\37\
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\37\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad0-22(e)(2)(i), (iii), and (v), Rule 17Ad-
22(e)(4)(viii) and (ix), Rule 17Ad-22(e)(13), and Rule 17Ad-
22(e)(23)(i) and (ii) Under the Exchange Act
1. Governance
Rule 17Ad-22(e)(2) requires, in relevant part, that OCC establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to provide for governance arrangements that are
clear and transparent; support the public interest requirements of
Section 17A of the Exchange Act applicable to clearing agencies, and
the objectives of owners and participants; and specify clear and direct
lines of responsibility.\38\
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\38\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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The proposal, taken together with existing OCC Rules, specifies the
governance that would apply to use of each of the recovery tools.
Specifically, with respect to the modified powers of assessment, the
cooling-off period would commence automatically upon a number of events
specified in the By-Laws. The use of Voluntary Payments and either
Voluntary or Partial Tear-Up cannot occur unless OCC has determined
that it may not have sufficient resources available to satisfy its
obligations after a default. In addition, the proposal specifies the
applicable decision-making body that would be responsible for
determining whether to conduct a tear-up. Specifically, for a Voluntary
Tear-Up, OCC would be able to make that determination, and for a
Partial Tear-
[[Page 44090]]
Up, which is mandatory, Board action is required. The Risk Committee
would be responsible for determining the scope of the tear-ups, and any
such determinations must take into account certain considerations. Only
the Board may elect to impose a Special Charge to reallocate losses,
costs, and fees from a Partial Tear-Up.
Thus, key decisions by OCC in connection with the use of its
proposed recovery tools are subject to specific governance processes.
These requirements include the involvement of the Risk Committee in
determining the scope and pricing for any Partial Tear-up and
specifically require Board approval with respect to instituting Partial
Tear-Up and authorizing the Special Charge. Accordingly, the Commission
believes that the governance process for using the recovery tools is
clear and transparent and provides clear and direct lines of
responsibility by addressing decision making in the use of recovery
tools, thereby supporting the public interest requirements of Section
17A of the Exchange Act applicable to clearing agencies, and the
objectives of owners and participants, and therefore the Commission
believes that the proposed rule change is consistent with Rule 17Ad-
22(e)(2)(i), (iii), and (v).\39\
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\39\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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2. Allocation of Credit Losses Exceeding Available Resources
Rule 17Ad-22(e)(4)(viii) requires, in relevant part, that OCC
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to address allocation of credit losses
OCC may face if its collateral and other resources are insufficient to
fully cover its credit exposures.\40\ OCC's proposal includes three new
recovery tools addressing the allocation of credit losses in the event
that OCC determined that, notwithstanding the availability of any
remaining resources under the Other Resource Rules, OCC may not have
sufficient resources to satisfy its obligations and liabilities
following a default. First, Rule 1009 would provide a framework for OCC
to receive Voluntary Payments in addition to their required
contribution to the Clearing Fund to address a shortfall. Second, Rule
1111 would provide a framework for Clearing Members and their customers
to participate in a Voluntary Tear-Up. Third, Rule 1111 would provide
the Board with the discretion to conduct a mandatory Partial Tear-Up.
This tool could be used, if necessary in the event that OCC determines
that its resources are inadequate to pay the applicable Partial Tear-Up
Price, to allocate losses by allowing OCC to pay each relevant Clearing
Member a pro rata amount of the applicable Partial Tear-Up Price based
on the amount of such resources remaining. In addition, the modified
powers of assessment would continue to allow OCC to use the Clearing
Fund to address credit losses in the event of a member default.
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\40\ 17 CFR 240.17Ad-22(e)(4)(viii).
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Thus, the Commission believes that these additional recovery tools
are reasonably designed to provide OCC with means to address allocation
of credit losses that it may face if its collateral and other resources
are insufficient to fully cover its credit exposures. Further, the
Commission believes that these tools should address fully any credit
losses that OCC may face as a result of any individual or combined
default among its Clearing Members. Therefore, the Commission believes
that these aspects of the proposed changes are consistent with Rule
17Ad-22(e)(4)(viii).\41\
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\41\ 17 CFR 240.17Ad-22(e)(4)(viii).
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3. Replenishment of Financial Resources Following a Default
Rule 17Ad-22(e)(4)(ix) requires, in relevant part, that OCC
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to describe OCC's process to replenish
any financial resources it may use following a default or other event
in which use of resources is contemplated.\42\
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\42\ 17 CFR 240.17Ad-22(e)(4)(ix).
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The proposed changes to OCC's assessment powers would include the
addition of a minimum fifteen-day cooling-off period that would be
automatically triggered by a proportionate charge to the Clearing Fund
arising from a Clearing Member default. At the end of the cooling-off
period, a remaining Clearing Member (i.e., a Clearing Member that did
not choose to terminate its membership during the cooling-off period)
would be obligated to replenish the Clearing Fund.
The Commission recognizes that by placing a cap on its assessment
power during the cooling-off period, these revisions would effectively
limit the amount of financial resources available to OCC from its
Clearing Fund during that period. However, the Commission believes that
these proposals would provide greater certainty and predictability
regarding Clearing Members' maximum liability to the Clearing Fund,
which could potentially limit loss contagion in the broader financial
system. Moreover, in light of the proposed cap on OCC's assessment
powers during the cooling-off period, OCC has authority under Rule 603
to call for additional initial margin from Clearing Members to ensure
that OCC maintains sufficient financial resources to meet its
requirements under Rule 17Ad-22(e)(4)(iii). Finally, at the end of a
cooling-off period, a Clearing Member would be required to replenish
the Clearing Fund in the amount necessary to meet its then-required
contribution.
In light of the foregoing discussion, the Commission believes that
the provisions related to OCC's assessment powers, taken together with
the other components of OCC's default management procedures and
recovery rules, which are reasonably designed to allow OCC to replenish
its financial resources following a default or other event in which use
of such resources is contemplated, are consistent with Rule 17Ad-
22(e)(4)(ix).\43\
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\43\ 17 CFR 240.17Ad-22(e)(4)(ix).
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One commenter states that OCC should provide an explanation of its
determination to set the cap on the powers of assessment at 200 percent
during a cooling-off period.\44\ In the OCC Letter, OCC provided an
explanation of the internal analysis that it conducted to reach the 200
percent determination.\45\ Specifically, OCC stated that it considered
its ability to have sufficient financial resources inclusive of its
proposed assessment powers to withstand extreme market conditions on a
``Cover-2'' basis under various scenarios, and that OCC determined
that, under such scenarios, it would be able to meet its clearing
obligations so long as it was able to use (1) the financial resources
on hand in the Clearing Fund, and (2) the full funding of two
assessments (i.e., 200 percent) from non-defaulting Clearing
Members.\46\ Moreover, OCC stated that it reviewed the caps that other
CCPs impose upon their own assessment powers and determined that the
200 percent cap is generally aligned with other assessment caps.\47\
Based on review of the analysis provided by OCC and the caps of other
CCPs,\48\ the
[[Page 44091]]
Commission believes that the 200 percent cap in the proposed changes is
consistent with Rule 17Ad-22(e)(4)(ix).
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\44\ See FIA Letter at 1-2.
\45\ See OCC Letter at 2-3.
\46\ See id.
\47\ See id. at 3.
\48\ See, e.g., Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Filing Amendment No. 1 and Order Granting Accelerated
Approval of Proposed Rule Change to Amend the ICE Clear Credit
Clearing Rules, as Modified by Amendment No. 1, Relating to Default
Management, Clearing House Recovery and Wind-Down, Exchange Act
Release No. 79750 (Jan. 6, 2017), 82 FR 3831 (Jan. 12, 2017) (SR-
ICC-2016-013) (approving a proposed rule change including, among
other things, a 300 percent cap on non-defaulting participants'
liability during a cooling-off period).
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5. Authority To Take Timely Action To Contain Losses and Liquidity
Demands and Continue To Meet Obligations
Rule 17Ad-22(e)(13) requires, in relevant part, that OCC establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to ensure that it has the authority and operational
capacity to take timely action to contain losses and liquidity demands
and continue to meet its obligations.\49\ As described above, OCC's
proposal would provide OCC with modified assessment powers and new
tools of Voluntary Payments, Voluntary Tear-Ups, and Partial Tear-Ups.
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\49\ 17 CFR 240.17Ad-22(e)(13).
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As discussed above, the Commission recognizes that a tear-up would
result in termination of positions of non-defaulting Clearing Members.
However, because OCC would only be able to use its tear-up authority
after it has conducted an auction pursuant to its Rules and when OCC
has determined that it may not have sufficient financial resources to
meet its obligations, a tear-up would only arise in an extreme stress
scenario. Further, use of tear-up in such circumstances could
potentially return OCC to a matched book quickly, thereby containing
its losses.
The Commission believes that these tools are designed to provide
greater certainty to Clearing Members seeking to estimate the potential
risks and losses arising from their use of OCC, while enabling OCC to
promptly return to a matched book. The Commission believes that
returning to a matched book pursuant to these provisions in the context
of OCC's default management and recovery facilitates OCC's operational
capacity to timely contain losses and liquidity demands while
continuing to meet its obligations. Thus, the Commission believes that
the proposed changes are consistent with Rule 17Ad-22(e)(13).\50\
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\50\ Id.
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6. Public Disclosure of Key Aspects of Default Rules
Rules 17Ad-22(e)(23)(i) and (ii) require, in relevant part, that
OCC establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for the public disclosure of
all relevant rules and material procedures, including key aspects of
default rules and procedures, as well as sufficient information to
enable participants to identify and evaluate the risks, fees and other
material costs they incur by participating in OCC.\51\ The Commission
believes that the proposed changes address key aspects of OCC's default
rules and procedures, thereby providing Clearing Members with a better
understanding of the potential risks and costs they might face in an
extreme event where OCC may use its proposed recovery tools, including
the potential use of the Special Charge. Accordingly, the Commission
believes that OCC has disclosed these key aspects of its default rules
and procedures, consistent with Rule 17Ad-22(e)(23)(i) and (ii).\52\
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\51\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
\52\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
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IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\53\ that the Commission does not object to
Advance Notice (SR-OCC-2017-809), as modified by Amendment No. 2, and
that OCC is authorized to implement the proposed change as of the date
of this notice or the date of an order by the Commission approving
proposed rule change SR-OCC-2017-020, as modified by Amendment No. 2,
whichever is later.
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\53\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18655 Filed 8-28-18; 8:45 am]
BILLING CODE 8011-01-P