[Federal Register Volume 84, Number 246 (Monday, December 23, 2019)]
[Notices]
[Pages 70602-70605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27589]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87774; File No. SR-OCC-2019-011]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Concerning an Agreement for Clearing and Settlement Services Between 
The Options Clearing Corporation and Small Exchange, Inc.

December 17, 2019.
    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 December 6, 2019, the Options Clearing Corporation (``OCC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by OCC. OCC filed the proposed rule change 
pursuant to Section 19(b)(3)(A) \3\ of the Act and Rule 19b-4(f)(4)(ii) 
\4\ thereunder so that the proposal was effective upon filing with the 
Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    OCC is proposing to execute an Agreement for Clearing and 
Settlement Services (``Clearing Agreement'') between OCC and Small 
Exchange, Inc. (``Small'') in connection with Small's intention to 
operate as a designated contract market (``DCM'') regulated by the 
Commodity Futures Trading

[[Page 70603]]

Commission (``CFTC''). There are no proposed changes to OCC's By-Laws 
or Rules.

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 is proposing to provide clearance and settlement services to 
Small pursuant to the terms set forth in the Clearing Agreement. Small 
has applied for designation as a DCM by the CFTC.\5\ The purpose of 
this proposed rule change is to adopt a new Clearing Agreement so that 
OCC may begin providing clearing and settlement services for Small 
after Small has received the requisite regulatory approvals.
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    \5\ See https://www.cftc.gov/filings/documents/2018/orgsmfecoverletter181212.pdf.
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Clearing Agreement Proposal
    On December 4, 2018, Small applied for designation as a DCM by the 
CFTC.\6\ Contingent on the CFTC approving Small's application, OCC is 
now proposing to provide the clearance and settlement services as 
described in the Clearing Agreement.
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    \6\ Id.
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    The terms of the Clearing Agreement are based on the terms of the 
Agreement for Clearing and Settlement Services entered into with Nasdaq 
Futures, Inc. (``NFX Clearing Agreement''), which has been approved by 
the Commission.\7\ The Clearing Agreement is substantially similar to 
the NFX Clearing Agreement with several differences discussed in more 
detail below.
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    \7\ See Securities Exchange Act Release No. 74747 (April 16, 
2015), 80 FR 22591 (April 22, 2015) (SR-OCC-2015-03).
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    The Clearing Agreement includes new provisions that are designed to 
protect OCC and the holders of outstanding contracts listed on Small. 
These new provisions would enable OCC to better manage the risks 
associated with a clearing relationship with a DCM such as the one OCC 
proposes to enter into with Small. More specifically, the following 
provisions would be added:
     Section 12 of the Clearing Agreement, ``Information 
Sharing by Market,'' would be revised to require Small to provide OCC 
with audited financial statements (i) on an annual basis and (ii) upon 
request by OCC. OCC believes this reporting will enable OCC to better 
monitor the financial resources of Small.\8\
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    \8\ Section 12 of the NFX Clearing Agreement provided that the 
rights and obligations of purchasers and sellers of contracts 
subject to that agreement are as set forth in the By-Laws and Rules 
of OCC. This is a reiteration of provisions that already exist in 
OCC's By-Laws and OCC therefore determined to replace it with the 
provision noted above in the proposed Clearing Agreement. See, e.g., 
Article XII, Section 2(a).
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     Section 18(d) of the Clearing Agreement, ``Financial 
Resources or Agreement with Another Exchange,'' would be added to 
require that Small either (i) maintain at all times at least one year 
of projected operating expenses, as updated on an annual basis \9\ or 
(ii) maintain an arrangement with another DCM to provide a listing and 
trading venue for contracts that would be listed by Small and cleared 
by OCC in the event Small becomes unavailable to provide a trading 
venue for its contracts.\10\ OCC believes this will better enable it to 
manage the potential risk of Small not being available to provide a 
trading venue for contracts listed on the exchange.
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    \9\ OCC notes that 17 CFR 38.1101(a) requires a DCM to maintain 
minimum financial resources ``equal to a total amount that would 
enable the designated contract market, or applicant for designation 
as such, to cover its operating costs for a period of at least one 
year, calculated on a rolling basis.''
    \10\ It is anticipated that any such DCM would be cleared by 
OCC.
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    In addition to the above, the Clearing Agreement would include 
several other differences from the NFX Clearing Agreement, which 
include:
     Section 3 ``Selection of Underlying Interests; Classes and 
Series of Commodity Contracts'' would be revised to clearly reflect 
that security futures would not be cleared by OCC pursuant to the 
Clearing Agreement, as Small is not planning to list such contracts.
     Section 3 would also be revised to: (i) Add the condition 
that OCC be satisfied that it is able to appropriately process 
contracts proposed for clearing by Small using commercially reasonable 
efforts, (ii) describe the manner in which Small initially would notify 
OCC of proposed new products, (iii) require Small to submit a 
certificate to OCC detailing certain information on a new product as 
specified in Section 3(c) no later than ten trading days before Small 
plans to commence trading the product, and (iv) specify expectations 
around the clearance and settlement of a contract with a new maturity 
or expiration date not set forth in the certificate described in 
Section 3(c).
     Section 5(a) of the Clearing Agreement, ``Confirmed Trade 
Reports,'' would be amended to eliminate the reference to exchange-for-
physical transactions, as the exchange is not planning to provide for 
such transactions in its rules. Section 26 from NFX Clearing Agreement 
also would be deleted for this reason as well as the fact that Article 
XII, Section VII of OCC's By-Laws already contains provisions regarding 
block trades that mirror what was in Section 26.
     Section 10 of the Clearing Agreement, ``Margin 
Requirements of Corporation,'' would be revised to clarify that OCC 
maintains the exclusive right to enforce its margin requirements with 
respect to its Clearing Members, but will maintain good faith 
communications with Small concerning OCC's establishment and 
communication of margin requirements. Section 10 also would be revised 
to remove a provision that would have required the exchange's consent 
prior to a listed product being made fungible with other products.
     Section 11 of the Clearing Agreement, ``Financial 
Requirements for Clearing Members,'' would be revised to provide that 
OCC would have the exclusive authority to establish in its By-Laws and 
Rules financial responsibility standards with which its Clearing 
Members must comply.
     Section 13 of the Clearing Agreement, ``Fees for Clearing 
Services and Changes Related to Commodity Contracts,'' would be revised 
to clarify that in the future, OCC would have the ability to charge 
Small fees reasonably related to OCC's costs to make any change(s) 
necessary to clear a product for Small, with the condition that prior 
to imposing any such fee, OCC would provide Small with advance written 
notice of the fee.\11\
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    \11\ If OCC ever made a decision to charge Small fees reasonably 
related to OCC's costs to make any change(s) necessary to clear a 
product for Small, OCC would provide Small ample prior written 
notice (e.g., 30 days) of any such fees. It is also anticipated that 
OCC would make a determination as to whether a proposed rule change 
would be needed in connection with any such fee.
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     Section 15(c) of the Clearing Agreement, ``Indemnification 
in Respect of Intellectual Property,'' would be amended to provide that 
only Small would indemnify OCC if Small were alleged to have violated 
the patent or

[[Page 70604]]

other intellectual property rights of others.
     Section 18(b) of the Clearing Agreement, ``Other Grounds 
for Termination,'' would be amended to provide that there would be a 
365-day period in which to transfer contracts to another DCO if either 
party to the Clearing Agreement voluntarily terminated it. Under this 
amended provision, OCC also would have the right to terminate the 
agreement earlier if such a transfer were accomplished prior to this 
365-day period.
    In addition to the foregoing, various minor and administrative 
changes have been made throughout the document including, but not 
limited to, updated references to the names of the parties and clean-up 
of outdated terms.
(2) Statutory Basis
    OCC believes the proposed rule change is consistent with Section 
17A of the Act \12\ and the rules thereunder applicable to OCC. Section 
17A(b)(3)(F) of the Act \13\ 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, to 
the extent applicable, derivative agreements, contracts, and 
transactions, to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible, and, in general, to protect investors and the public 
interest. The proposed rule change is designed to promote the prompt 
and accurate clearance and settlement of derivatives contracts traded 
on Small by providing that such contracts will be cleared through OCC's 
existing clearance and settlement processes for futures contracts, 
which have functioned efficiently for many years with regard to other 
futures markets for which OCC provides clearance and settlement 
services. Similarly, OCC believes that the proposed rule change is 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency by bringing contracts 
traded on Small and funds associated with those contracts within the 
scope of OCC's existing custody and control arrangements, which have 
effectively served OCC's Clearing Members and their customers for many 
years. Finally, OCC believes the proposed rule change is designed to 
the protect investors and the public interest. By providing that 
futures contracts traded on Small and cleared by OCC are risk managed 
under OCC's risk management framework, which is designed to provide 
protections to customers and other market participants in the event of 
a Clearing Member default, OCC believes the proposed rule change 
contributes to the protection of investors and the public interest.
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    \12\ 15 U.S.C. 78q-1.
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(e)(20) \14\ requires that a covered clearing agency 
``establish, implement, maintain and enforce written policies and 
procedures reasonably designed to . . . [i]dentify, monitor, and manage 
risks related to any link the covered clearing agency establishes with 
one or more other clearing agencies, financial market utilities, or 
trading markets.'' OCC believes that the proposed rule change is also 
consistent with Rule 17Ad-22(e)(20) \15\ because the proposed Clearing 
Agreement is designed to help OCC identify, monitor, and manage the 
risks associated with providing clearance and settlement services for 
Small, which is a trading market. For example, the Clearing Agreement 
would require Small to report financial information to OCC, which would 
enable OCC to monitor for changes in Small's financial condition. It 
also would require Small to maintain sufficient financial resources or 
arrangements with another DCM to mitigate the impact to the marketplace 
should Small become unavailable as a trading venue for its contracts.
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    \14\ 17 CFR 240.17Ad-22(e)(20).
    \15\ Id.
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B. Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act \16\ 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 impose any burden on 
competition. The purpose of the proposed rule change is to adopt a 
Clearing Agreement between OCC and Small. The adoption of such an 
agreement would not affect Clearing Members' access to OCC's services, 
nor would it disadvantage or favor any particular user in relationship 
to another user. As such, OCC believes that the proposed rule change 
would not impose any burden on competition.
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    \16\ 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 on the proposed rule change were not and are not 
intended to be solicited with respect to the proposed rule change and 
none have been received.

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

    Pursuant to Section 19(b)(3)(A) of the Act,\17\ and Rule 19b-
4(f)(4)(ii) thereunder,\18\ the proposed rule change is filed for 
immediate effectiveness because it effects a change in an existing 
service of OCC that (i) primarily affects the clearing operations of 
OCC with respect to products that are not securities, i.e., options on 
futures that are not security futures, and (ii) does not significantly 
affect any securities clearing operations of OCC or any rights or 
obligations of OCC with respect to securities clearing or persons using 
such securities clearing services.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(4)(ii).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\19\
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    \19\ Notwithstanding its immediate effectiveness, implementation 
of this rule change will be delayed until this change is deemed 
certified under CFTC Rule 40.6.
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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 Exchange 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-2019-011 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OCC-2019-011. 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 website (http://www.sec.gov/

[[Page 70605]]

rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for website 
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 website at https://www.theocc.com/about/publications/bylaws.jsp.
    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-2019-011 and 
should be submitted on or before January 13, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27589 Filed 12-20-19; 8:45 am]
 BILLING CODE 8011-01-P