[Federal Register Volume 84, Number 125 (Friday, June 28, 2019)]
[Notices]
[Pages 31128-31131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13776]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86182; File No. SR-OCC-2019-803]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection To Advance Notice Concerning The Options 
Clearing Corporation's Proposal To Enter Into a New Credit Facility 
Agreement

June 24, 2019.

I. Introduction

    On April 26, 2019, The Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2019-803 (``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

[[Page 31129]]

(``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under 
the Securities Exchange Act of 1934 (``Exchange Act'') \3\ to propose 
to replace the 364-day term revolving credit facility that OCC 
currently maintains, which is due to expire on June 27, 2019.\4\ The 
Advance Notice was published for public comment in the Federal Register 
on May 30, 2019,\5\ and the Commission received no comments regarding 
the proposal contained in the Advance Notice. This publication serves 
as notice of no objection to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ See Notice of Filing infra note 5, at 83 FR 25089.
    \5\ Securities Exchange Act Release No. 85924 (May 23, 2019), 83 
FR 25089 (May 30, 2019) (SR-OCC-2019-803) (``Notice of Filing'').
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II. Background

    OCC maintains a $2 billion revolving credit facility to provide 
access to liquid resources in certain circumstances, including the 
default of a Clearing Member.\6\ The current revolving credit facility 
(``Existing Facility'') was implemented on June 28, 2018 for a 364-day 
term, and will terminate on June 27, 2019. To maintain access to the 
liquid resources provided by the Existing Facility, OCC proposes to 
implement a replacement credit facility (``New Facility'') on 
substantially similar terms as the Existing Facility with one 
exception: OCC proposes to expand the types of collateral that OCC 
would be permitted to pledge under the New Facility.
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    \6\ See Securities Exchange Act Release No. 83529 (Jun. 27, 
2018), 83 FR 31237 (Jul. 3, 2018) (Notice of Filing of Advance 
Notice of and No Objection to OCC's Proposal To Enter Into a New 
Credit Facility Agreement) (SR-OCC-2018-802).
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    OCC currently has conditional authority to borrow from the Existing 
Facility, using Clearing Member margin deposits or Clearing Fund 
contributions as collateral, (i) in anticipation of a potential default 
by or suspension of a Clearing Member; (ii) to meet obligations arising 
out of the default or suspension of a Clearing Member; (iii) to meet 
reasonably anticipated liquidity needs for same-day settlement as a 
result of the failure of any bank or securities or commodities clearing 
organization to achieve daily settlement; or (iv) to meet obligations 
arising out of the failure of a bank or securities or commodities 
clearing organization to perform its obligations due to its bankruptcy, 
insolvency, receivership or suspension of operations (``Permitted Use 
Circumstances''). The exact same Permitted Use Circumstances will be 
present in the New Facility as are present in the Existing Facility.
    To obtain a loan under the Existing Facility, OCC must pledge 
collateral. The collateral permitted under the Existing Facility 
includes U.S. dollars, securities issued or guaranteed by the U.S. 
Government or the Government of Canada,\7\ S&P 500 Market Index 
equities, Exchange-Traded Funds, American Depositary Receipts, or 
certain government-sponsored enterprise debt securities. As noted 
above, the New Facility would permit OCC to pledge a wider range of 
collateral than what is contemplated by the Existing Facility. Under 
the New Facility, OCC would be permitted to pledge the same collateral 
permissible under the Existing Facility as well as debt securities 
issued by the Federal Republic of Germany, the Republic of France, 
Japan, or the United Kingdom (``Additional G7 Governments''), but only 
to the extent that Clearing Members are permitted to pledge such 
collateral as margin deposits or Clearing Fund contributions at the 
time that OCC obtains a loan under the New Facility.\8\ In that event, 
under the proposed terms of the New Facility, debt securities of 
Additional G7 Governments would be subject to haircuts and would be 
permissible collateral for a loan from the New Facility only if they 
have minimum credit ratings of A (by Standard & Poor's) and A2 (by 
Moody's).
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    \7\ In 2013, OCC expanded the permissible collateral in an 
earlier iteration of the current revolving credit facility (``2013 
Facility''). See Securities Exchange Release No. 70596 (Oct. 2, 
2013), 78 FR 62719 (Oct. 22, 2013). In assessing the anticipated 
effects on and management of risk related to the 2013 Facility, OCC 
noted that the inclusion of Canadian Government securities as 
eligible collateral would increase the amount of OCC collateral that 
can be pledged to support borrowings under the 2013 Facility, 
resulting in increased availability of loans. Id. at 62721.
    \8\ OCC currently does not permit Clearing Members to pledge as 
margin deposits or clearing fund contributions debt securities 
issued by the Additional G7 Governments. As OCC clarified in its 
proposal, permitting Clearing Members to pledge such securities to 
OCC would require OCC to address certain governance requirements, 
including making any necessary filings with the Commission. See 
Notice of Filing, 84 FR at 25090.
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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.\9\
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    \9\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \10\ 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 \11\ provides the following objectives and 
principles for the Commission's risk-management standards prescribed 
under Section 805(a):
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    \10\ 12 U.S.C. 5464(a)(2).
    \11\ 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 other areas.\12\
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    \12\ 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'').\13\ 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.\14\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of the risk management standards as described 
in Section 805(b) of the Clearing Supervision Act. As discussed below, 
the Commission believes the proposal in the Advance Notice is 
consistent with the objectives and principles described in Section 
805(b) of the Clearing Supervision Act,\15\ and in the Clearing

[[Page 31130]]

Agency Rules, in particular Rule 17Ad-22(e)(7)(ii).\16\
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    \13\ 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).
    \14\ 17 CFR 240.17Ad-22.
    \15\ 12 U.S.C. 5464(b).
    \16\ 17 CFR 240.17Ad-22(e)(7)(ii).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the Advance Notice is consistent with 
the stated objectives and principles of Section 805(b) of the Clearing 
Supervision Act. The Commission believes that the changes proposed in 
the Advance Notice are consistent with promoting robust risk 
management, in particular management of liquidity risk presented to 
OCC. Renewing and maintaining a credit facility for this purpose and in 
the manner proposed by OCC would diversify the liquidity resources that 
OCC may use to resolve a Member default.\17\ Additionally, the 
Commission believes that the terms of the New Facility providing for an 
expanded range of eligible collateral would promote robust risk 
management by giving OCC more flexibility to use assets it may already 
hold as a means of accessing liquidity under the New Facility. At the 
same time, the expansion of collateral would be limited to only those 
assets that Clearing Members are permitted to pledge as collateral to 
OCC (as margin or clearing fund contributions) at the time of the loan, 
which the Commission believes would further promote robust risk 
management by aligning the collateral necessary to access the New 
Facility with the actual collateral that OCC has available at that 
time.\18\ As such, the Commission believes that the proposal would 
promote robust risk management practices at OCC, consistent with 
Section 805(b) of the Clearing Supervision Act.\19\
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    \17\ OCC also maintains a minimum amount of cash in its Clearing 
Fund as well as a non-bank liquidity facility. See Securities 
Exchange Act Release No. 82501 (Jan. 12, 2018), 83 FR 2843 (Jan. 19, 
2018) (Notice of No Objection to Advance Notice, as Modified by 
Amendment No. 1, Concerning the Adoption of a New Minimum Cash 
Requirement for the Clearing Fund) (SR-OCC-2017-808) and Securities 
Exchange Act Release No. 76821 (Jan. 4, 2016), 81 FR 3208 (Jan. 20, 
2016) (Notice of No Objection to Advance Notice Filing, as Modified 
by Amendment Nos. 1, 2 and 3, Concerning The Options Clearing 
Corporation's Non-Bank Liquidity Facility) (SR-OCC-2015-805), 
respectively.
    \18\ The Commission is not, at this time, expressing a view 
regarding the specific collateral or the haircuts applicable under 
the New Facility as they would apply to Clearing Member margin 
deposits or Clearing Fund contributions. As noted, OCC currently 
does not permit Clearing Members to pledge as margin deposits or 
clearing fund contributions debt securities of Additional G7 
Governments, and OCC would not be able to do so without first making 
any necessary filings with the Commission. See supra note 8. The 
Commission believes that an analysis of the specific collateral or 
haircuts that would apply to clearing member margin deposits or 
clearing fund contributions would be more appropriate at the time 
and in the context of any such future filings.
    \19\ 12 U.S.C. 5464(b).
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    The Commission also believes that the changes proposed in the 
Advance Notice are consistent with promoting safety and soundness. As 
described above, the New Facility would provide OCC with an additional 
liquidity resource in the event of a Clearing Member default. This 
would promote safety and soundness for Clearing Members because it 
would provide OCC with a readily available liquidity resource that 
could enable OCC to continue to meet its obligations in a timely 
fashion in the event of a Clearing Member default, thereby helping to 
contain losses and liquidity pressures from that default. As discussed 
above, the expansion of the range of eligible collateral under the New 
Facility would further promote safety and soundness because it 
increases OCC's ability to access such a liquidity resource. As such, 
the Commission believes it is consistent with promoting safety and 
soundness as contemplated in Section 805(b) of the Act.\20\
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    \20\ Id.
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    In addition, the Commission believes that the proposed changes set 
forth in the Advance Notice are consistent with reducing systemic risks 
and promoting the stability of the broader financial system. As 
mentioned above, allowing OCC to enter into the New Facility would 
enable OCC to maintain an additional liquidity resource that OCC may 
access to help manage a Clearing Member default. Further, aligning the 
collateral that OCC would be permitted to pledge under the New Facility 
with the collateral that Clearing Members are permitted to pledge to 
OCC at the time that OCC accesses credit under the New Facility would 
give OCC flexibility to access credit under the New Facility, thereby 
reducing the risk that OCC would lack sufficient collateral to access 
the New Facility. his flexibility would, in turn, enable OCC to access 
additional liquidity to help manage a Clearing Member default.
    Accordingly, and for the reasons stated, the Commission believes 
the changes proposed in the Advance Notice are consistent with Section 
805(b) of the Clearing Supervision Act.\21\
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    \21\ 12 U.S.C. 5464(b).
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B. Consistency With Rule 17Ad-22(e)(7)(ii) of the Exchange Act

    Rule 17Ad-22(e)(7)(ii) requires, in part, OCC to 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 OCC, including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
and timely basis, and its use of intraday liquidity by, at a minimum, 
holding qualifying liquid resources sufficient to meet the minimum 
liquidity resource requirement under Rule 17Ad-22(e)(7)(i) \22\ in each 
relevant currency for which the covered clearing agency has payment 
obligations owed to Clearing Members.\23\ Rule 17Ad-22(a)(14) of the 
Exchange Act defines ``qualifying liquid resources'' to include, among 
other things, lines of credit without material adverse change 
provisions, that are readily available and convertible into cash.\24\
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    \22\ Rule 17Ad-22(e)(7)(i) requires OCC to 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 OCC, including measuring, monitoring, 
and managing its settlement and funding flows on an ongoing and 
timely basis, and its use of intraday liquidity by, at a minimum, 
maintaining sufficient liquid resources at the minimum in all 
relevant currencies to effect same-day settlement of payment 
obligations with a high degree of confidence under a wide range of 
foreseeable stress scenarios that includes, but is not limited to, 
the default of the participant family that would generate the 
largest aggregate payment of obligation for the covered clearing 
agency in extreme but plausible conditions. 17 CFR 240.17Ad-
22(e)(7)(i).
    \23\ 17 CFR 240.17Ad-22(e)(7)(ii).
    \24\ 17 CFR 240.17Ad-22(a)(14).
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    As described above, the implementation of the New Facility would 
provide OCC with continued access to a $2 billion revolving credit 
facility on substantially similar terms to the Existing Facility. As 
the Commission noted previously, the Existing Facility provides OCC 
with access to a single credit facility designed to help ensure that 
OCC has sufficient, readily-available qualifying liquid resources to 
meet the cash settlement obligations of its largest family of 
affiliated members.\25\ Implementation of the New Facility on 
substantially similar terms to the Existing Facility would ensure that 
OCC maintains continued access to such a credit facility. Further, as 
noted above, by aligning the collateral that OCC would be permitted to 
pledge under the New Facility with the collateral that Clearing Members 
are permitted pledge to OCC at the time that OCC needs to access the 
New Facility, the proposed expansion of permissible collateral that OCC 
could pledge under the New Facility would give OCC increased 
flexibility to access credit under the New Facility.

[[Page 31131]]

Therefore, the Commission believes that the proposal is consistent with 
Rule 17Ad-22(e)(7)(ii).
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    \25\ Securities Exchange Act Release No. 83529 (Jun. 27, 2018), 
83 FR 31237, 31241 (Jul. 3, 2018) (SR-OCC-2018-802).
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IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-OCC-2019-803) and that OCC is authorized to 
implement the proposed change as of the date of this notice.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-13776 Filed 6-27-19; 8:45 am]
 BILLING CODE 8011-01-P