[Federal Register Volume 85, Number 250 (Wednesday, December 30, 2020)]
[Notices]
[Pages 86592-86595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28895]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90797; File No. SR-OCC-2020-014]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Order Approving Proposed Rule Change To Adopt the OCC Third-Party Risk 
Management Framework and Retire the OCC Counterparty Credit Risk 
Management Framework

December 23, 2020.

I. Introduction

    On November 4, 2020, the Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-OCC-2020-014 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to adopt a 
proposed Third-Party Risk Management Framework (``TPRMF'') and retire 
OCC's current Counterparty Credit Risk Management Policy 
(``CCRMP'').\3\ The Proposed Rule Change was published for public 
comment in the Federal Register on November 18, 2020.\4\ The Commission 
has received no comments regarding the Proposed Rule Change. This order 
approves the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, 85 FR at 73582.
    \4\ Securities Exchange Act Release No. 90406 (Nov. 12, 2020), 
85 FR 73582 (Nov. 18, 2020) (File No. SR-OCC-2020-014) (``Notice of 
Filing'').
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II. Background

    In 2017, OCC adopted the CCRMP, which outlines the key components 
of OCC's framework for identifying, measuring, monitoring, and managing 
OCC's exposures to its counterparties.\5\ OCC requested confidential 
treatment of the CCRMP when it was proposed.\6\

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OCC proposes to remove the confidential CCRMP from its rules and 
replace it with the proposed TPRMF, which OCC would make publically 
available. As described in more detail below, the proposed TPRMF 
includes some, but not all of the substance of the existing CCRMP. OCC 
represents that the details not carried forward into the proposed TPRMF 
reside in OCC's procedures, and that removing such procedural details 
from OCC's rules would eliminate redundancy that could lead to 
confusion.\7\ The proposed TPRMF includes information about the risk 
management lifecycle for Clearing Members, Financial Institutions,\8\ 
and Financial Market Utilities (``FMUs'') \9\--all of which are 
currently addressed in the existing CCRMP--as well as information about 
the risk management lifecycle for Exchanges \10\ and vendors. OCC also 
proposes to make conforming changes to its Risk Management Framework 
Policy, Liquidity Risk Management Framework, Margin Policy, and 
Collateral Risk Management Policy, all of which reference the CCRMP.
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    \5\ See Securities Exchange Act Release No. 82312 (Dec. 13, 
2017), 82 FR 60242 (Dec. 19, 2017) (File No. SR-OCC-2017-009) 
(``CCRMP Approval Order'').
    \6\ See Securities Exchange Act Release No. 81949 (Oct. 26, 
2017), 82 FR 50719 (Nov. 1, 2017) (File No. SR-OCC-2017-009).
    \7\ See Notice of Filing, 85 FR at 73586. In proposing the 
replacement of the CCRMP with the TPRMF, OCC provided certain 
internal procedures related to third-party risk management, for 
which OCC requested confidential treatment. See id. at 73582.
    \8\ In the context of the proposed TPRMF, ``Financial 
Institutions'' include clearing banks, custodians, liquidity 
providers, and investment counterparties. See Notice of Filing, 85 
FR at 73582-83.
    \9\ Under the proposed TPRMF, FMUs may include any person that 
manages or operates a multilateral system for the purpose of 
transferring, clearing, or settling payments, securities, or other 
financial transactions among Financial Institutions or between 
Financial Institutions and the person. See Notice of Filing, 85 FR 
at 73583, n. 12.
    \10\ Under the proposed TPRMF, Exchange relationships may 
include options exchanges, futures markets, OTC Trade Sources or 
Loan Markets. See Notice of Filing, 85 FR at 73583, n. 13.
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    Removal of redundancies. As noted above, the proposed TPRMF does 
not include procedural details, found in the existing CCRMP, that are 
addressed elsewhere in OCC's rules, policies, and procedures. With 
regard to access and participation, for example, OCC's approach to risk 
management for Clearing Members, Financial Institutions and FMUs would 
not change under the proposed TPRMF, but the requirement that OCC 
monitor for a low probability of defaulting on obligations and 
assessing potential risks presented by indirect participants would 
reside in OCC's procedures, not the proposed TPRMF. Additionally, 
specific information related to the qualification and approval of 
Clearing Members and Financial Institutions is publicly available in 
the OCC By-Laws and Rulebook.\11\ Similarly, with regard to 
counterparty credit risk, OCC's procedures require the measurement and 
reporting of credit risk as part of OCC's ongoing monitoring processes. 
In terms of managing counterparty credit risk, OCC proposes to describe 
the utilization of its Watch Level reporting in the proposed TPRMF, but 
to retain flexibility to respond to unforeseen circumstances by 
defining the details of its Watch Level tiers in procedure documents.
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    \11\ See e.g. OCC By-Laws, Art. V (Clearing Members), available 
at https://www.theocc.com/getmedia/3309eceb-56cf-48fc-b3b3-498669a24572/occ_bylaws.pdf (last visited November 25, 2020); OCC 
Rules, Ch. III (Financial Requirements), available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf (last visited November 25, 2020).
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    Overall third-party risk management. The proposed TPRMF defines the 
set of risks that OCC faces from third-party relationships, including 
financial, operational, information technology, security, legal, and 
regulatory risks. In the context of the proposed TPRMF, financial risks 
would include the failure of Clearing Members to meet obligations to 
OCC as well as the failure of third-parties supporting daily settlement 
processes and OCC's access to collateral and liquidity. The proposed 
TPRMF describes OCC's processes for identifying, measuring, monitoring, 
and managing risks from third-parties at on-boarding, through ongoing 
monitoring, and finally, at off-boarding. The proposed TPRMF describes 
OCC's processes for managing risks presented by Clearing Members, 
Financial Institutions, and vendors as well as risks presented through 
OCC's links to FMUs and Exchanges.
    The proposed TPRMF also describes OCC's processes regarding the 
escalation of identified risks through working groups that have defined 
decision-making authorities, functions, and responsibilities. 
Specifically, the proposed TPRMF describes the roles of the Credit and 
Liquidity Risk Working Group (``CLRWG''), the Exchange Working Group 
(``EWG''), and the Vendor Risk Working Group (``VRWG'') in managing 
risks presented by third-parties. Under the proposed TPRMF, each 
working group would be responsible for escalating matters to OCC's 
Management Committee (``MC''), which, in specific circumstances, would 
be responsible for escalating matters to the Risk Committee of OCC's 
Board of Directors (``RC'').
    Further, the proposed TPRMF defines certain authorities relating to 
the management of Clearing Member, Financial Institution, and vendor 
relationships. For example, the proposed TPRMF states that OCC's Chief 
Executive Officer and Chief Operating Officer each has authority to 
approve the onboarding of Financial Institutions and FMUs. Similarly, 
the proposed TPRMF states that vendor agreements are executed by OCC 
officers (i.e., a Vice President or above).
    Risks posed by Clearing Members, Financial Institutions, and 
vendors. The proposed TPRMF describes OCC's framework for managing risk 
throughout the relationship lifecycle (i.e., at on-boarding, 
monitoring, and off-boarding) for Clearing Members, Financial 
Institutions, and vendors. The proposed TPRMF defines the teams 
responsible for managing the risks posed by Clearing Members, Financial 
Institutions, and vendors at the various lifecycle stages. For example, 
OCC's Financial Risk Management team would be responsible for 
monitoring and reporting financial and operational risks posed by 
Clearing Members.
    The proposed TPRMF also describes the basis for OCC's evaluation of 
Clearing Members, Financial Institutions, and vendors with which it has 
relationships. For example, the proposed TPRMF states that OCC's 
evaluation of Clearing Member relationships is based on financial 
resources, operational capacity, personnel, and facilities pursuant to 
OCC's membership standards. Similarly, the proposed TPRMF states that 
OCC's evaluation of Financial Institution relationships is based on 
financial resources and operational capacity, such as whether a 
relationship is structured to allow prompt access to assets and whether 
a custodian is a supervised and regulated institution that adheres to 
generally accepted accounting practices, maintains safekeeping 
procedures, and has controls that fully protect these assets. Further, 
the proposed TPRMF states that OCC's evaluation of vendor relationships 
is based on a vendor's financial health and operational capacity, and 
that the level of due diligence and monitoring of a specific vendor is 
based on the inherent risk posed by OCC's relationship with the vendor.
    Link-specific risk management. Similar to the management of risks 
posed by Clearing Members, Financial Institutions, and vendors, the 
proposed TPRMF describes OCC's framework for managing risk for FMUs and 
Exchanges throughout the relationship lifecycle. The proposed TPRMF 
defines the teams responsible for managing the risks posed by FMUs and 
Exchanges at the various lifecycle stages. For example, OCC's Business 
Operations, Financial

[[Page 86594]]

Risk Management, Legal, and Third-party Risk Management teams are 
responsible for evaluating FMU relationships at on-boarding while OCC's 
Product and Business Development team is responsible for evaluating 
Exchange relationships at on-boarding.
    The proposed TPRMF also describes the basis for OCC's evaluation of 
FMUs and Exchanges with which it has relationships. For example, the 
proposed TPRMF states that OCC's evaluation of FMU relationships is 
based on financial condition, operational capabilities, and any legal 
or regulatory risks associated with the relationship. The proposed 
TPRMF states that OCC's review of Exchange relationships on an ongoing 
basis includes the assessment of an Exchange's operational performance, 
overall financial condition, and ability to meet contractual 
obligations.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to such organization.\12\ After carefully 
considering the Proposed Rule Change, the Commission finds that the 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to OCC. More 
specifically, the Commission finds that the proposal is consistent with 
Section 17A(b)(3)(F) of the Exchange Act \13\ as well as Rules 17Ad-
22(e)(3)(i) and (20) \14\ thereunder, as described in detail below.
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    \12\ 15 U.S.C. 78s(b)(2)(C).
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(3)(i) and (20).
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A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency be designed 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 to 
promote the prompt and accurate clearance and settlement of securities 
transactions and, to the extent applicable, derivative agreements.\15\ 
Based on its review of the record, and for the reasons described below, 
the Commission believes that replacing the existing CCRMP with the 
proposed TPRMF as described above is consistent with assuring the 
safeguarding of securities and funds as well as promoting prompt and 
accurate clearance and settlement.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    The CCRMP outlines OCC's framework for: (1) The identification of 
credit risk, (2) counterparty access and participation standards, (3) 
the measurement of counterparty exposures, (4) the monitoring and 
managing of counterparty exposures, and (5) voluntary termination of 
counterparty relationships.\16\ The Commission continues to believe 
that the formalization of the components captured in the existing CCRMP 
is consistent with the requirement that OCC's rules be designed to 
assure the safeguarding of securities and funds which are in OCC's 
custody or control or for which it is responsible.\17\ As described 
above, the proposed TPRMF carries forward the substance of the existing 
CCRMP with the exception of certain procedural details already 
addressed elsewhere in OCC's rules, policies, and procedures. The 
proposed TPRMF also includes components that are not part of the 
existing CCRMP, such as the management of operational risk posed by 
relationships with Financial Institutions--namely, whether a 
relationship is structured to allow prompt access to assets and whether 
a custodian is a supervised and regulated institution that adheres to 
generally accepted accounting practices, maintains safekeeping 
procedures, and has controls that fully protect these assets. The 
Commission believes that the addition of such components to OCC's rules 
is consistent with the assurance of safeguarding of securities and 
funds in OCC's custody or control or for which it is responsible.
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    \16\ See CCRMP Approval Order, 82 FR at 60245.
    \17\ See id.
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    While the existing CCRMP provides a framework for addressing credit 
risk specifically,\18\ the proposed TPRMF addresses financial risk more 
broadly, which includes risks related to daily settlement. Further, the 
proposed TPRMF specifically addresses risk posed by OCC's relationships 
with entities more directly involved in the clearance and settlement of 
securities transactions. For example, the proposed TPRMF addresses 
risks posed by OCC's relationship with other FMUs. One such 
relationship is OCC's reliance on the National Securities Clearing 
Corporation to effect delivery of, and payment for, securities 
underlying certain physically settled stock options and single stock 
futures cleared by OCC.\19\ The Commission believes that replacement of 
the narrowly focused CCRMP with the broader proposed TPRMF that 
includes specific rules addressing risks related to OCC's relationship 
with other FMUs is consistent with the promotion of prompt and accurate 
clearance and settlement.
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    \18\ See id.
    \19\ See Securities Exchange Act Release No. 81266 (Jul. 31, 
2017), 82 FR 36484 (Aug. 4, 2017) (File No. SR-OCC-2017-013).
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    Based on the foregoing, the Commission believes that the Proposed 
Rule Change is consistent with the requirements of Section 17A(b)(3)(F) 
of the Exchange Act.\20\
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(3)(i) Under the Exchange Act

    Rule 17Ad-22(e)(3)(i) requires each covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit risk, liquidity, 
operational, general business, investment, custody, and other risks 
that arise or are borne by the covered clearing agency, which includes 
risk management policies, procedures, and systems designed to identify, 
monitor, and manage the range of risks that arise in or are borne by 
the covered clearing agency, that are subject to review on a specified 
periodic basis and approved by the board of directors annually.\21\
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    \21\ 17 CFR 240.17Ad-22(e)(3)(i).
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    As noted above, the existing CCRMP provides a framework for 
addressing credit risk specifically,\22\ but the proposed TPRMF 
addresses a broader range of risks. Specifically, the proposed TPRMF 
outlines OCC's approach to identifying, measuring, monitoring, and 
managing financial, operational, information technology, security, 
legal, and regulatory risks posed by Clearing Members, Financial 
Institutions, FMUs, Exchanges, and vendors. The proposed TPRMF 
describes, among other things, OCC's processes regarding the escalation 
of identified risks through working groups all the way up to the RC as 
appropriate. Further, the proposed TPRMF defines which teams within OCC 
are responsible for managing risks posed by specific types of third 
parties as well as the basis for evaluating relationships with such 
third parties. The Commission believes, therefore, that the replacement 
of the existing CCRMP with the proposed TPRMF is consistent with the 
requirements of Rule

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17Ad-22(e)(3)(i) under the Exchange Act.\23\
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    \22\ See CCRMP Approval Order, 82 FR at 60245.
    \23\ 17 CFR 240.17Ad-22(e)(3)(i).
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C. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act

    Rule 17Ad-22(e)(20) requires each covered clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify, monitor, and manage risks 
related to any link the covered clearing agency establishes with one or 
more other clearing agencies, financial market utilities (``FMUs''), or 
trading markets.\24\ As described above, the proposed TPRMF outlines 
OCC's approach to identify, measure, monitor, and manage risks arising 
from relationships with FMUs and Exchanges. Just as with the management 
of risks from third parties more broadly, the proposed TPRMF defines 
which teams within OCC are responsible for managing risks posed by FMUs 
and Exchanges. Further, the proposed TPRMF describes the basis for 
OCC's evaluation of FMUs and Exchanges with which it has relationships. 
The proposed TPRMF also states that OCC's Chief Executive Officer and 
Chief Operating Officer each has authority to approve the onboarding of 
FMUs. The Commission believes, therefore, that the proposed adoption of 
the proposed TPRMF is consistent with the requirements of Rule 17Ad-
22(e)(20) under the Exchange Act.\25\
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    \24\ 17 CFR 240.17Ad-22(e)(20).
    \25\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \26\ and the rules and regulations thereunder.
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    \26\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\27\ that the Proposed Rule Change (SR-OCC-2020-014) be, 
and hereby is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-28895 Filed 12-29-20; 8:45 am]
BILLING CODE 8011-01-P